🔒 WEBINAR: Barclays dumped; Global portfolio upside 30% annualised growth

The big move this month saw Barclays PLC dumped from the Biznews Global portfolio. The reason; the board disappointed on the honesty and integrity scale of the Warren Buffett scoreboard of investing. And while the intention of the portfolio is to hold onto stocks forever, such events as described below can’t go unpunished. Barclays is the second stock the portfolio has sold off, following last year’s sale of Novo Nordisk shares. The move hasn’t detracted from the portfolio’s progress, having produced returns of 30 percent on an annualised basis, as Amazon continues to outperform. The full webinar is transcribed below. – Stuart Lowman

Welcome all to another exciting monthly update on the Global Share Portfolio. Alec is in London, giving us the outside view and I’m in South Africa, so over to you Alec, let’s get cracking.

You can see how excited I am because we’ve gone to 30% annualised growth now over the last 28 months, which is quite an astonishing performance by our portfolio. Remembering that we always have viewed this as a long-term portfolio but let’s get straight into it. The big news of this month is that we’ve dumped Barclays PLC. Why so? Well, as you know, those of you who have managed to read my book on investing like Warren Buffett that you take an assumption that the management of a company is honest and integrous as when you first invest in it. But if they give you any reason to believe differently, you act quickly and sharply. Well, I believe that Barclays PLC have disappointed us significantly on that score. In the past month what happened was that the Chief Executive of the company was found to have tried to hunt down a whistleblower.
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Now, the whistleblower is somebody who sent a letter, in fact two letters, about one of the Chief Executives close associates, one of his friends, and that’s fair enough as the CEO, you can look at it and you can decide not to do anything about it or in fact, to investigate it further. That’s up to you and nobody would, from that perspective, if he decided to keep this colleague of his still in his position – no problem but where the problem does come in is that the Chief Executive then launched a witch-hunt. First of all he got his own people at Barclays to try and track down the whistleblower and when they were unable to do it, he then commissioned a US company to try and do the same thing. Now that is out of bounds behaviour.

When the board was notified of this, what the board did was almost just as bad by giving him a little wrap on the knuckles, relieving him of his bonus for this year, which is hardly something that that chief executive requires, and said ‘carry on as before.’ Well, if that’s the kind of culture that you have in a company, I don’t want to be a co-owner of it, so as a consequence we have sold the Barclays shares. You can see on the screen there that theoretically it has done okay in the past year, the Barclay share price. It’s gone from just £180 to around £220, but the impact of this is not as positive as that looks and that is as a consequence of the decline in the Pound after Brexit.

If you just go back onto your screen, you’ll see around July last year, in fact it was the 23rd June that the Brits voted to go out of them European Union. That had a big impact on banking share prices and on the Pound, itself, and you can see how Barclays’ share price fell way below what we paid for it. Despite the fact that the Rand has appreciated against the Pound in that past year, quite significantly. Fortunately, Barclays has gone up to above 220p, so we are exiting on a tiny profit and we’ll show you those figures in just a little while.

Looking into the major portfolio overall though, and as you can see the portfolio has done extremely well. The cash holding has been expanded by around $21,000, which is what we had tied up in Barclays. We are now sitting at $27,000 overall. It’s a big share of the portfolio, a 10% share. I was quite keen to make an investment into Microsoft, which is a stock that I’ve been watching quite carefully but Microsoft share prices run away from us. We’ve got quarterly results coming out from a lot of companies in the next little while and the way we do our trades, if you recall, is that we make an investigation into the stock. We then want to be sure that we have a margin of safety, and then we buy the share over a three-month period. Now, as things are standing with Microsoft at the moment, I’m finding it very difficult to see any margin of safety with the share price getting to a new high, so I’m stepping back away from Microsoft for the moment, and we’ll have that money in cash and start looking elsewhere.

So, around 10% of the portfolio in cash, which doesn’t say or should not be interpreted as we’re worrying about the markets. We are holding onto our cash to right to make sure that we make the right kind of investment. Remember the way that this works, this portfolio works, is the shares that we buy we expect to hold forever. The only reason we would sell any of the shares is because something happened as it has happened now with the integrity of the Barclays top team, which I don’t trust anymore. Similarly we had one, only one other share that we sold in this portfolio and that was Novo Nordisk and they had a similar situation where the executive team was lorded around the world. Just shows you, be careful of these teams that win international awards. In fact, Harvard Business review made its chief executive, Novo Nordisk’s chief executive the top CEO in the world. Then of course, the next year it was found out that well, he hadn’t been playing everything absolutely accurately. In fact, a long way from absolutely accurately, so we dumped our stock.

Just having a look at this overall portfolio you will see there, if you look at it carefully, that the portfolio itself is now $278,000. We started with $200,000, and that was on the 5th December 2014. So, the increase in the portfolio has gone from $200,000 to $278,000. The two big winners that we’ve had in our stock selection have been Alphabet, which is the old Google, which has added $20.000 of that $78.000 and Amazon, which has added $30.000 of that amount. So, between the two of them they’ve accounted for almost two-thirds in US Dollar terms of our increase. When you then translate it into Rand’s the figures look quite spectacular. The Rand growth in this portfolio has gone from a figure of about R2.25m to R3.6m, so we’ve added R1.4m to an original investment of just over R2m, which has seen 71% growth, over two-and-a-bit years.

 

It’s interesting to unpack that because as mentioned earlier, both Alphabet and Amazon have been big winners there, but a significant slug of that also came from a Rand appreciation. So that was R372,000, so of the R1.4m that the portfolio has appreciated by, around, call it R400,000 of that has come from the Rand’s weakening and the other R1m has come from stock picking. We really weren’t anticipating that our stock selection was going to be as good as this. The intention, when we launched the portfolio, back in December 2014, was a view on the South African or the management of the South African economy and our view then was that the South African economy was being poorly managed and, as a consequence of that, we wanted to get money offshore or to make our investments outside of the country.

As you can see that view has held firm. The Rand depreciating from R11.27 to the US Dollar to R13.13 today, and I want to spend a little bit of time on the Rand just in a moment but that will give you the next graph that you can look at there. It gives you an understanding of the performance that we’ve seen. Amazon.com has been an absolute winner for us. The Rand cost price from R3.500, roughly, to nearly R12.000, 222% growth in its value. If only we could get more of those. As you can see, Alphabet has nearly doubled in price in the last two years, and there’s our big-big winner of recent times, Tesla, Elon Musk a Pretoria boy doing the goods for us, and that’s already jumped by 51% in Rand terms since we’ve purchased it.

 

In fact, this is a very interesting graph overall because the Rand over this period has depreciated by 17%, so the profit we’ve made on the currency has been 17% and all but three of our picks have done better than the currency appreciation and that shows that the share selections have been fortuitous. That also gives you a picture of it, when you have a look at this graph. You’ll see the Rand/Dollar, 17% there, and that is in the overall period. I’ve put Tesla, Facebook, and Metro Bank in blue because they were only bought last year, so we haven’t really had a chance to see them perform yet. Everything else, barring IBM, have performed above expectations. There’s the dividend receipts that have come through in this period.

IBM have just announced the dividend going up, as you can see on that table, $1.40 is what they’ve paid every quarter in the past year. They’re going to be paying $1.50 every quarter in this coming year, or at least the very first dividend has come through at that level, which shows you that maybe market is getting that one wrong. We’ve been saying that for a long time, so has Warren Buffett being saying that for a long time. Maybe one day we’ll be correct.

The Rand, and this is interesting, the Rand since the inception of the portfolio, as you can see, we had the blowout in in January 2016, well that was just after Nenegate in December, and you can see that spike. Then the blowout there to over R16, against the US Dollar, and it’s come all the way back to R13.30. Now, why is this? Is it all of a sudden that we are seeing an economy that’s well managed? Not so, it’s all to do with money flows into emerging markets and I pulled this out to give you an understanding of it.

Brazil has had an impeachment of its president. It’s had a very big scandal on corruption that has erupted there and there it is, despite all of the issues it’s had, like South Africa, very poor economic growth. The Brazilian Real has virtually followed the Rand right, if you take it over the last 2.5 years. The Real is the light blue and the dark blue is the South African’s performance and both of these are against the US Dollar. So, it’s all about a weight of money argument when international investors say they want money in emerging markets, they’ll put that money into the Rand or they’ll put it into the Brazilian Real, the Turkish currency, and so on.

When you have a look at the most recent picture, between the Rand and the Real, there it is, over three months, you can see a very interesting picture emerging. As you know, going back there, and again, I’m just going to show you this once more. Go back to the beginning of the year and you can see that there’s been a very close correlation between the Rand and the Brazilian currency for the last year. When you look at the last three months, since the beginning of this year, you can see the major impact that happened to the Rand, with the firing of Pravin Gordhan or first the recall and then the firing, when the Rand significantly, first of all was starting to appreciate better against the Brazilian Real. Then it blew out completely, as you can see on the 10th April, hitting its lowest point but since then it’s come straight back into line. So, it isn’t a reflection of anything more than, at the moment, the weight of money is completely superseding any other thing that happens for the currency here in South Africa. So it’s almost like Jacob Zuma has done his homework, or certainly his advisors would have, and have said the firing of Pravin Gordhan would have a temporary impact but it’s unlikely to have a longer term one, given the state of the international community at the moment. My goodness, doesn’t that just tell the whole story?

Moving onto the individual participants or constituents of our portfolio. From the time that we began we put a big chunk of the portfolio into the S&P 500 Index, the intention there being almost as a defensive play and it’s worked out quite well for us. The S&P 500 Index has appreciated. It hadn’t been our best stock selection but it’s gone in the right direction. You add overlay a Rand depreciation and you can get into a situation where you’re making reasonable money. We still think that the US Stock Market, which is what the Vanguard S&P 500 Index reflects, is going to continue steady as she goes and we have no reason to be concerned about that, at the moment.

I guess, Stuart, we’re going to be getting into the individual share picks now. Is there anything from your side yet?

No questions yet Alec. Just a reminder to listeners on the right-hand toolbar you can click the ‘questions toolbar’, open it and send them through to us but nothing yet though.

Indeed, what we’ll do is, as the questions come through, we’ll stop the presentation and then go straight onto them. There’s a lovely picture of the two guys who formed, who started Google, Sergey Brin and Larry Page, and here has been the amazing performance. Now, what I’ve done is just taken the past year of the share price. We’ve had Google shares, which are now called Alphabet shares, since we began the portfolio and as you saw a little earlier, the share price has almost doubled in that period. Google has had a good run over this last week or so, taking it to a new record. The NASDAQ, which is the stock market on which Google is listed has hit a new high, gone through $6.000, so having a big chunk of our portfolio invested in technology shares, has certainly helped us a whole lot.

The reason we’re invested there is not because we think we’re smart at tech but because this is an area where you unpack each of the companies, you will see that these are massive mega beneficiaries of the transformation of the world to the Fourth Industrial Revolution. One company I do know pretty well is this one, Alphabet, having being for 20-years involved in the digital publishing space. So, in the last week the improvement in the Alphabet share price is in anticipation of the quarterly earnings result for the first quarter of this year which comes out tomorrow. You might recall that Ruth Porat, the financial director of Alphabet, knows exactly how to manage the market. She used to be the head of the financial department at Morgan Stanley, a Wall Street firm, and she’ll be giving the presentation or rather, at least, driving most of it when that comes out with the earnings results tomorrow, after the US Markets close.

There are a couple of issues that you need to watch out for that. The analysts are expecting earnings of $8.5 ($8.57 if you want to be specific) per share from Alphabet and they’re also expecting revenue to be around $20bn, in fact $19.8bn is the specific figure. A year ago it was a $16.5, so it can show you that Google or Alphabet is continuing to grow and it has done so continuously over the last few years, so we’ll be anticipating another improvement in the share price, when the actual numbers come out. Although this time around, it does look like investors have got ahead of the game and started buying the shares before tomorrow night’s actual results.

Alec, there’s a few questions this side. Richard James says, with regards to your cash holding, would it be an idea to rather park it in the Vanguard ETF until a buy-in opportunity presents itself?

A good point Richard. The thought here though was that we were going to be allocating that money quite quickly, so put I into Vanguard ETF and take some costs on it, it didn’t seem like a smart idea. If next month we haven’t found a suitable investment or one that offers the right kind of margin of safety.

I’m sorry, Alec has just switched connectivity and he should be back in the next minute and we’ll get back to where we were, apologies. 

Hey, I’m back Stuart, can you hear me?

Yes, thanks Alec, we’re all waiting. Sorry about that.

Apologies about that, I suppose that’s one of the things of a live broadcast and being based in London. Okay, shall we get cracking on? Were there any other questions, Stu?

Alec, I’ll get them to you now. I’ve just got a lot of lost and sound issues, so I’m just trying to get through them first.

Perfect, let’s continue then. My humblest apologies about this but let’s get cracking. In fact, in 28 of these webinars this is the first time that we’ve had a connectivity problem over that period, well let’s crack on.

Amazon.com, our star performer, as you well know, has been a fantastic performer over this period of time. If you just have a look at the I’m trying to get… My apologies, let me just put this back on the screen. Someone was saying to me that Apple is starting to give trouble, so please don’t think this is an Apple story. There we go, can you see us all loud and clear there, Stu?

Sorry, I’ve got the Amazon, Jeff Bezos’ picture is in front of us, thanks.

Okay, great, thank you. Right, there’s the Jeff Bezos’ picture and let’s just move onto the next one and there you can see the Amazon share price. Now, Amazon has been a fantastic performer for us. It’s up 222% and in the last week it cracked $900 a share. Again, we’re going to have earnings from the company coming up soon. They will be disclosed on Thursday, just like Alphabet, so for those of you who are invested, like we are in this portfolio. Thursday night is going to be a late one or get up nice and early on Friday morning.

The focus here as far as Wall Street is concerned is on Amazon Web Services. It’s a very big part of the business now. The concerns that some have is that the rate of growth, the year-on-year rate of growth is slowing. Three-quarters ago it was 58% year-on-year. Last quarter it was 55% year-on-year, and now the most recent quarter was at 47% year-on-year. The concern is that’s even going to fall further to in the early 40’s. Now if you’re coming off a much bigger base, which they are now at $3.5bn per quarter, it’s only obvious that the numbers would be falling in a period of time but the market has really been pricing Amazon for perfection. So, as a consequence, any little misstep at the moment, is going to be probably punished. Expect earnings from Amazon of just over $1.00 a share. Earnings don’t really mean much. The number that everybody follows though is the revenues and here they’re looking at revenues, ‘The Street’ is expecting revenues of $35.5bn as against $29bn a year ago.

A couple of things that could surprise on the upside, what Amazon tends to do is that when it invests heavily in capital expenditure a year to 18 months later that works through into the revenues and that’s what Wall Street has been watching with this company. It invested hugely in 2016. Capex was up 47%, it should start working now perhaps even as early as now in the first quarter. The second thing is Amazon has just done a deal with PayPal, so it brings in a whole new payment system. Now, lots of people only use PayPal, so that’s the anticipation that it could give Amazon a nice little kick. If not in the first quarter but in the second quarter. This is a stock that you’ve got to have in your portfolio. Just put it away and forget about it.

Hi, Alec, sorry to jump in but your screen has disappeared.

My screen has disappeared, thank you.

So we can’t see the slides.

That doesn’t help us much, does it. Okay, let’s get back into…

Alec, I’ve got a few questions. I think maybe we should just get on with that and just move on. I’m not sure whether we’re going to be able to fix this little gremlin. I don’t know what you think.

Carry on, yes.

Just from Ronnie Singh he says the returns are all good in the bubble but what happens when the bubble bursts?

What bubble is he talking about?

I’m sure he’s talking about the NASDAQ hitting record highs and stuff like that.

Okay, let’s just go back a little bit. Everything that we’ve done on this portfolio has been based on a bottom-up approach, so if you understand exponentiality, which is something that we, as human beings really battle to know about. Then from an exponentiality perspective you will be finding companies that are going to be growing at a lot faster than the general economy because they are taking market share and they’re moving into new areas. A very good example of this is Naspers. People have been calling Naspers a bubble now for something like 10-years. The reason they call it a bubble is because it’s been growing at an excess in what the human mind can kind of get its head around and that is something we call exponentiality.

I was introduced to this concept about four years ago, when the guys came over to South Africa from the United States, to explain to us it’s a Singularity University, which was a university started in Silicon Valley, was actually brought here by Stephen van Coller for Barclays Africa. Stephen has subsequently moved onto MTN, which might tell you something. But they explain why exponentiality was the thing that was changing the world and why we shouldn’t be fearful of those companies that are growing like Amazon, 40% – 50% a year, as long as they are taking away market share from old economy companies. So, from where I’m standing there’s no bubble in NASDAQ. I’m very happy with the portfolio that we have. I’m very happy to be invested in those companies because the rate of growth that they’re showing in their underlying businesses. The share price is something that somebody else can go and look at.

My view is that when you invest in a company you should start off by buying cheap or buying with a big margin of safety, and in all these investments that we’ve made, we’ve had that margin of safety. If ytesou’re coming into the portfolio today, for the first time, remember that the holding period in this portfolio is forever. If you had come in 6-months ago you would have maybe looked at Elon Musk’s company, Tesla, and said you might be a little concerned about what Tesla was going to be showing or the share price was at that time. It has now gone up, in fact, 50% subsequent to that. So trying to understand or trying to play the market is not something that I can do but what I do understand is an ability to be able to get into value a company, at a particular point in time, and then to be sure that we have it as a margin of safety.

Thanks, and I think off the back on that there’s a question from Des on the Tesla side. He said with the recall of the Tesla cars, do you think it will affect the next quarter earnings?

No, that’s old news, that’s very old news. What’s happened with Tesla is that the latest thing stimulating them was the Model-3. Let’s talk about Tesla now and in fact that’s probably the right way to do this. I do apologise that we don’t have all of our graphs coming through here but we will be putting it on in the recording of this webinar. Tesla has got its earnings next week, that’s next Thursday, 3rd May. The focus there is on the Model-3. Now, those of you who have been following Tesla for a while, they’ve got a Model-S and a Model-X, and Elon Musk joked that maybe the next one should have been Model-E, but h didn’t think anybody else was going to catch the joke, or certainly they didn’t. So he decided to bring it out as the Model-3 and the Model-3 is the reason why the market has got terribly excited about this company and pushed up the share price 50% in the last very short period, well since the beginning of the year, certainly since we bought in to the stock, which we finished our buy in there in December.

So, from that perspective, the real story is it’s a $35.000 car, in other words, mid-market, all electric car. They’re expecting that they’ll be able to be produce 500 thousand of these a year, by the end of next year, so big stretch. When the results come out next Thursday, the thought is that Elon Musk and his team are going to try and hedge a little bit because that 500 thousand production is a huge ask for anybody. Of course it will give them a big market share and it’s given the share price a nice kicker but they’re likely to, and to under say to hedge a little bit on that 500 thousand. But even if they get to 400 thousand, it’s a huge boost from Tesla’s perspective, so that’s the thing to watch. The thing to watch on Tesla is the Model-3.

As far as Amazon is concerned, just to finish up on that one. The thing to watch there is whether the revenues can beat $35.5bn. If they do, expect that share price to go higher. Going through the portfolio, Stuart are there any other particular questions otherwise I’ll just take us through quickly, for the rest of the portfolio?

There’s quite a few, Alec. There’s a nice one from Hans, who just wants to ask in terms of the overall holdings within the portfolio, which ones can you buy now with a reasonable margin of safety?

Well one, you can definitely buy is Berkshire and let me tell you a little bit about that one. In the last period, this is Warren Buffett’s company. Berkshire has been a stock that has performed reasonably well for us but under performed relative to some of our big ones and Berkshire is, in the last little while, we’ve seen the share price come under a little bit of pressure. It’s been interesting to notice that happening because there’s a similar thing with IBM, which I’m going to refer to in a moment. But as far as Berkshire is concerned, that is now trading comfortably below its margin of safety. In its last period the share price came down from around $180 to below $170, so you’re getting good value there.

What Berkshire will be doing, the big news there is it’s going to be selling out, well it’s already sold more than seven million of its shares in Wells Fargo, the banking stock, and it’s going to be selling about another two million of those. They put an announcement out on the 12th April. The reason for that is because of share buy-backs by Wells Fargo, Berkshire’s stake in the company has gone above 10%, and that brings it into some kind of a conflict with the US authority. So, rather than to have more than 10% shareholding in the company, it’s decided to pull it back to below 10%. One of the issues there that you could see a bit of a bounce on Berkshire is when the whole United Airlines saga calms down. That has been in the news all over the world, United Airlines went and pulled a passenger off the plane – he didn’t want to leave. The video went viral and United Airline share price came under pressure. Of course, not such good news for Warren Buffett, who’s the biggest shareholder in United Airlines and has been buying it recently but Berkshire is one certainly that you can be very happy to hold onto.

I’m going to just move onto the next stock that is well below its margin of safety and that’s Apple. Apple reports as well next Tuesday. Although Apple – we’ve had kind of an up and down ride on Apple. It is now showing a good return for us. We bought it in the $120’s and it is now over $140. The most recent quarterly results has showed that the Apple iPhone sales are starting to rebound. The anticipation is in 2017 they’ll get close to the 2015 level, iPhones are a big part, over half of the revenue for Apple but the big story here is the next Apple iPhone, the next version, the Apple iPhone 8. Which already analysts are very excited about and the anticipation is that that’s going to push sales next year, in 2018, to 250 million iPhones, from 225 expected this year. So, when you have a look at the Apple results coming out on Tuesday, the thing to watch is will they get to that 225 million iPhone sales in 2017? My view on Apple is it has much more appeal than just iPhones. If you consider the eco-system, Apple has got more than a billion installed handsets or computers, then you have to be aware of the kind of opportunity or revenue generating opportunity that that eco-system has for us.

The other stock that is very well within the margin of safety is IBM. IBM has come back to $160, which is around where we bought it and Warren Buffett paid over $170 for the share. So, it has come back very sharply in the last few days. In fact, it tanked from over $170 by $10 after the results were released. These are the quarterly results, one of the first of the quarterlies for the first three months of this year to be released and the reason why the market has punished the share is because revenues came in, get this, at $18.2bn rather than what Wall Street had been estimating it at $18.4bn. So, they just knocked a $10 off the share price. The good news, for those of you who are long term shareholders is that IBM is jacking up its quarterly dividend for the next year, from $1.40 to $1.50 and, also the earnings actually beat what Wall Street was anticipating. It came in at $2.38 for the quarter, as against $2.35. So you make of that what you will. It appears to me that the IBM story is still very much on track, that rejuvenation or the rebound of IBM, so that’s another one that I’d be very happy to hold.

Just as we continue with the portfolio, Facebook – they will be coming out with their results next Wednesday. The share price is at a record high. It’s been a wonderful acquisition for us, we’ve owned it since October last year and at that time the shares were around $120 a share, it’s now approaching $145, so it’s done very well for us. The user base is over two billion. They’ve got problems on fake news and over stating numbers on the videos but this is a company, for the moment anyway, and certainly in the immediate future, that you can be quite comfortable with.

Tesla, I’ve spoken about that story and then Metro Bank, just to close off the portfolio or a commentary on the portfolio. Metro Bank has now pushed above the Rand price that we paid, when buying in. We’ve owned it since November last year and this is the UK’s version of Capitec. They came out with pretty strong quarterly results for the first quarter of 2017. Lending up 11% year-on-year, and their deposits were up 13% year-on-year, so getting more money in than they’re lending out, which is always a healthy thing. Seventy-two thousand new customers in the quarter – that sounds like Capitec type numbers. Just under a million customers in total now, for Metro Bank. They made a profit and they’re anticipating that they’ll make a full-year profit again for 2017.

The story here is it’s another Capitec in the making. They’re reinvesting but they’re doing so profitably and when you walk around in the UK you can see that the High-Street banks, not least Barclays, are certainly available for some disruption. Stuart.

Thanks, Alec. Two similar questions from Dennis and Gavin. Dennis wants to know how do we get involved in the portfolio and then Gavin sort of follows that with; would you consider establishing a fund for retail investors holding any investments you could identify?

The way to get involved in this portfolio is by literally just replicating it on Standard Bank Webtrader. They’re our sponsors of the portfolio and we don’t have a facility where you can invest directly into this portfolio but you have to replicate it. Perhaps, given its performance and given the amount of interest that there is now in this portfolio, perhaps Standard Bank will maybe put something together but that’s very much in Standard Bank’s own remit and, of course, when you do have that kind of thing you have to jump through quite a few hoops with the regulators, etcetera.

The best advice I would have is that you replicate this portfolio by going through Webtrader. I gives you access to all of the stocks and the good thing about this is that we actually give you an update every month. Most of the time, in the other 27 months, we actually give you the graphs to show you as well but oh well, the gremlin decided to visit us today.

Yes, Alec, like we said, we’ll put those graphs in the recording when we publish it, hopefully later today or tomorrow, so it shouldn’t be a problem. From Johan he wants to know with the dividend receipts do they take the 30% US withholding tax into account?

No they don’t. We’re trying to keep it very gross and that withholding tax is not being applied. So, I’ve probably slipped up there, my apologies, but dividends are a very small part of the portfolio as you can well see.

Just quickly from François. He wants to know what’s the difference between an index fund and an ETF. Should one consider ETFs rather than, for example, the Vanguard Index Fund?

No, the reason we’ve gone for Vanguard is because it does replicate the US market and it is very cheap. It’s only five basis points costs, which is 1 20th of 1%. That’s why Vanguard is the second biggest asset management company in the world, behind BlackRock with trillions under management because it’s focussed on keeping costs lower. You can’t beat Vanguard when you’re talking about the US market. It really is the best option.

Just one from Shane. There’s a spotlight on fees in the savings investment industry. He asks how do Webtrader costs compare with the Vanguard directly, which is famous for low costs?

That’s a Standard Bank question and I think if you just drop us an email we can send that over to Stuart Shady or Brett and the team at Standard Bank and they’ll be able to get back to you on that. It isn’t something that I’ve kept a close focus on.

Thanks Alec. Just one from Siphiso. He wants to know if it’s a good time to start investing in energy stocks, oil, and gas?

Siphiso, no, I don’t like energy stocks at all. I don’t like any commodity stocks and the reason for that is because of the investment philosophy that we follow and the one that Warren Buffett follows as well. You can trade them if you know the company well enough but there are two issues that I would propose that you bear in mind. First of all, when you invest in equities or in shares, what you’re doing is you’re investing in human potential. So, you’re trying to leverage the ‘smarts,’ if you like, or the human brains that are behind a particular company. Amazon being a good example, Google being another one, Facebook as well. They employ very smart people, who then apply their brains to the capital that is there to ensure that the capital allocations are exaggerated or will give you exaggerated returns.

When you invest in commodities or in oil and gas, which is the same kind of thing, you are then actually investing in an inanimate object. So, you’re taking away your biggest advantage and the biggest advantage is the human brain. That’s what we believe in. As far as oil and gas is concerned the markets have changed dramatically there, since fracking came in, in the United States, around 2009. If you’re even vaguely thinking of investing in an oil and gas company, do read books on the subject. There’s a very good book by, I can’t remember his name right now, but it’s called ‘The Frackers,’ which goes through the whole history of fracking in the US. What it’s done is it’s made the United States independent of importing oil from other parts of the world and it also has put a cap on the oil price. Now, why so because there’s so much shale gas available, shale gas which then gets converted into liquid fuels. There’s so much of that available in the United States but it can only come out at a certain price. The cost price of shale gas was around $70 a barrel but after the oil price fell below that, again using the human initiative, the people who are working on it, through their innovations, have managed to bring that cost down and now it’s running at about $50 a barrel, perhaps even less, on average that is.

So, what would happen is that a shale gas well that had been capped, when the oil price fell below $70, because it was producing shale at that price, at $70. When the oil price, first of all they work on it to get the prices down, so they can reopen the well but if the oil price were to go above that again then they just simply reopen the well. So with the reduction or the increase inefficiencies in the extraction of shale gas, you’re seeing that the price of these operations is now falling or the cost price is falling, and that puts a cap on the oil price. Even if demand rises for oil the immediate thing that will happen is you’ll get a lot of new shale gas wells coming into play and that price is coming down continuously. So for me, oil and gas is not an area to be putting your money in to, unless you have some spectacular El Dorado, or equivalent of an El Dorado discovery somewhere.

Thanks Alec, just a final question from Gerard. He says healthcare seems to be approaching a disruption phase, if you think of things like Elon Musk’s NeuroLex. He asks if there any shares we should be watching?

Yes, NeuroLex is a long way down the line but it is a very good example of what can be done. Google has also put a lot of money into Smart Healthcare. I don’t know. I’m not close enough to it yet. I haven’t spotted anything that has jumped out me as a big potential but in cases like that often-what works is when you, particularly if you understand the area and you’re doing your homework on it, is to take a selection of stocks, biochemistry socks. People have done very well out of those, by taking the 10 best topped by those analysts who cover it, and then just spreading your risk. Almost like a private equity portfolio. It’s not something that I know. I’m also trying to keep this portfolio simple, understandable and within areas that I’m very comfortable with but I guess, if you want to have a be on that are, there are lots of exchange traded funds that you can do. In fact, it reminds me of what happened in the beginning of last year, where India started re-emerging as a very good investment potential. I didn’t know enough about the Indian market to recommend any purchases but what we should have done with hindsight is we should have taken an investment in an Indian ETF or an Indian stock market ETF, which has the same impact as you would with the Vanguard. So, perhaps if you look around you might find something in that area, as it is an area that is likely to do well in the future and buy the ETF.

Thanks Alec, that’s all from my side.

From me, apologies about our graphs not coming through to you and my dropping off the line, I’ve got fibre, it’s supposed to work beautifully but I suppose, as with all these things, occasionally it doesn’t. Thank you for joining us. We will have the portfolio up on the Biznews Premium site in the next day or so. Thank you for being with us and I look forward to next month. Cheers, Stu.

Thanks Alec, talk soon.

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