🔒 WEBINAR: A tech giant drafted in as Global Portfolio maintains 30%+ run

LONDON — In compiling the Biznews Global Share portfolio, I’ve drawn on advice from some of the investment giants. But the most important comes from the savviest of them all, Warren E. Buffett. The Oracle of Omaha tells us that when buying a stock, always aim for an average holding period of “forever”. That forces you to really do your homework before clicking the “buy” button. It is also rational: the less you trade, the lower the costs. It doesn’t mean you never switch holdings in your portfolio. To paraphrase another wise man, Winston Churchill, when circumstances change so should your mind. But if you take a long-term approach and reflect before making any purchases, you’ll also make fewer mistakes. Having said all that, making changes to the Biznews Global Share portfolio is a bit of an event for us. And as you’ll see in this month’s portfolio update, we’ve done just that. – Alec Hogg

Well it’s a warm welcome to you. This is the August edition of our global share portfolio webinar. I’m in London, as always. My name is Alec Hogg and, of course, in Johannesburg, BizNews’ managing editor.
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Thanks, Alec. It’s Stuart Lowman this side. It’s Spring Day tomorrow so very excited in the Jo’burg area. Not that the weather’s been bad but it will only get better.

Yesterday we were freezing here well not freezing, but we’re in summer or coming to the end of summer, and we were around 16 degrees. I spoke with my in-laws last night where Johannesburg was a cool, 26 degrees so it just shows you – different things for different folks. I also want to show you that I do exist. This is not a cardboard cut-out. In fact, there we are, I’m still wearing short sleeves so that you can see that one does go through different types of pain when you live in the Northern Hemisphere, particularly as we go into winter. But it really is a pleasure to be with you today and we’ve got a lot of interesting stuff coming up in the webinar, in the next little while. I wear these so that I can hear what Stuart is saying, otherwise we get feedback. That’s the reason for it but let’s get straight into the presentation. I hope that you find at the end of this presentation that the way that we are running this portfolio, which I know many of you are also invested in, is going to your satisfaction.

The big news this month is that we’ve decided to allocate that $20,000 in cash that we’ve been sitting on and I’ll tell you about that in just a moment. There it is. The purchase of Microsoft Corporation. Microsoft is the latest stock to be added to our portfolio. We were sitting on about 7% of the portfolio in cash, $20,000, and we do have a particular way of allocating our purchases. I think it’s important that we dwell a little bit on this point and that is you try being a SA investor and investing in Rands, you need to try and take the Rand issue out of the question as much as possible.

So the intention here is to stagger the purchases over 3 months and, also in that way you also reduce the volatility of a share price. You’ve got to be really unlucky to get three peaks in the share price in succession and, also pretty unlucky if you’re going to get three problems or troughs in the Rand, in succession. So, we do that. We take one-third of the amount that we want to allocate we purchase now. Another third in a month’s time, and the final third the month thereafter. It is just to try and get out of the system a problem of potentially buying at the wrong time and then having to wait for your long-term to be justified. Stuart, before we carry on. Let’s just make sure that everybody is there, I know you’ve got a trick of raised hands.

Yes, I see we’ve got a raised hand immediately Alec so everyone is listening live and clear. Just another quick thing on the questions. There’s a little question toolbar on the right-hand side. If you pop your question in there I’ll throw it at Alec, and we’ll get you some answers to that as we go along so please, don’t hold back. Just throw them as they come to you.

Yes, and please do that. We had a webinar earlier this week with 70 odd questions and we didn’t get around to a third of them so the sooner you get the questions through the better it’s going to be. Stuart will stop me, and I see there’s already 7 questions up there.

Okay, there’s the portfolio overall, in US Dollars. Remember, the intention of the portfolio was that we took money out of SA. We used the amount of R2m, sorry it was $200 thousand was the amount we started with and we invested that into the US market. It’s now sitting at a fraction under R300 thousand so, in the three years, since we invested there, the portfolio has risen in US Dollar terms by 50%.

The intention always, was to make it a Rand hedge because we believe that the management of the SA economy is such and the risk is such that you need insurance by investing offshore and that’s the reason why we think that you should have at least, a slice of your portfolio invested overseas. As you can see there, the portfolio has changed somewhat over the period. This has been primarily, the result of fantastic performance by a couple of stocks, Amazon, and Alphabet and, also by Tesla. Tesla, we only bought in October so, we haven’t even had it for a year, it’s already up 78%. That, by the way, was a three-month staggered purchase so, it just shows you sometimes you can, by putting it over three months, you can actually get your stock in at the right time. There was a good reason when we bought into Tesla. That was because the market had been downgrading the stock and there’s still many bears out there but we’re big Elon Musk fans and we’re very happy to be in Tesla as well. Stu, just jump in when the questions come.

Thanks Alec, I’ve got a question here from Daniel. He says Metro Bank has been relatively flat for 6 months despite a full year earnings profit. What do you think it will take for the share price to start climbing?

Daniel, the reason for Metro Bank’s recent disappointment, and it is very recent, only in the last month or so, is the fund raising. What happens in banking is that as you grow fast, if you grow quickly, and Metro Bank has been growing very quickly. Their lending is up 67% year on year, and their deposits are up 49%. Now, the difference between that means you’ve got to get additional capital when you’re a fast-growing bank and they had to do that. They went to the market and issues about 10% more in new equity. Raised about R5bn, if you want to put it into Rand terms, the £278m. They did it at a price of £34.65 and the CEO said they will be going back into the market in due course to raise more capital. A year ago, Metro Bank had a lot of capital. Their tier-one capital was sitting at 21%. That’s down to 13.5% so, they needed… If they’re going to continue growing at the rate that they’re growing then they need to raise more capital. Now, when you go into the marketplace and raise equity capital. What happens is that the people who would want to support you in that are certainly not going to want to buy it at the highest share price so, they will keep the share price, or keep their powder dry, waiting for the next rights issue or the fund-raising issue.

How long is this going to affect the company? I don’t know but what I can tell you is that we bought this stock on the basis that it’s another Capitec and we know how Capitec has done in SA, in fact, the CEO of Capitec, Gerrie Fourie, said to me that he wouldn’t be bringing his company to the UK because there’s already Metro Bank here. I was talking to another friend of mine in the past week. He switched his account to Metro Bank and all of the stories that one hears about excellent service, a revolutionary approach towards banking, certainly from a UK perspective, are true and they are continuing to flourish. But, as far as the share price is concerned, when you are growing a bank to the degree they’re growing and you’re going to the market progressively, for capital it’s probable that those who are going to give you the capital are going to want to give it to you as cheaply as possible.

So, at the moment, Metro Bank has come back a little bit, after their most recent fund raise. But you’ve got to take a long-term view on these kind of stocks, and it is one that I’m still very happy with. Their net margin, they did make a profit for the first 6 months of this year, a small profit £6m but last year they lost money, £14m so, they’ve turned around but as long as this rapid growth continues you can expect that there will be these counterbalancing forces on Metro Bank.

Thanks, Alec. I know we had a lot of questions around BitCoin early in the week but Shane doesn’t want a detailed answer. He just wants to know do you own BitCoin and if not, do you intend to own BitCoin?

At this point in time, I’m going to fall back on a recommendation that I heard from Charles Savage earlier this week. He was asked a similar question and I like his answer, Charles from Purple Capital. He says that BitCoin, at this point, is still too high risk to look at it as an investment. What we have here is a Buffett portfolio. These are long-term stocks. If the Stock Market closed for 5 years I’d be very happy with all of these shares being in my portfolio because in 5 years’ time, when the Stock Market reopen, I’m sure that all of these companies will be thriving. BitCoin I don’t know. I really have got no visibility whatsoever on BitCoin. Would there be many other cyber currencies in 5 years’ time? Would BitCoin itself, even exist in 5 years’ time? That’s the way one has to approach a long-term investment portfolio from that perspective.

Buffett says, “Imagine the Stock Market is closed and you come back sometime into the future, would you still be happily invested?” As a consequence of that, BitCoin to me at this point, is probably a smart thing to do for some insurance and who knows. It’s worth $4 thousand at the moment, and it could go to $40,000, it could do anything but the visibility is not good enough, certainly not for someone with my limited circle of competence to be able to make an informed decision on whether or not to acquire the currency.

Thanks Alec. Deon says the portfolio is very tech heavy and now, with the addition of another tech stock, are you not concerned that you have all your eggs in one basket, surely Mr Buffett wouldn’t approve? Then Lawrence with a follow-up on that says would you buy any of the techs on the list right now?

Oh, my goodness. Warren would approve because he says, “Keep all your eggs in one basket but just watch that basket very carefully.” Deon, let me tell you my philosophy on investing, and the philosophy on the world, generally. We often talk about the Fourth Industrial Revolution. I’ve had the incredible good fortune to be in the digital publishing area or arena for the last 20 years, which has given me a unique insight into, certainly my industry, the media industry and how the world works or how the world is being transformed digitally.

If you get the internet and if you get or believe that we are in the Fourth Industrial Revolution. If you believe that we’re in an area now where the old systems are breaking down and new systems will be replacing them. That was whether you start at politics, at business structures, at education, at medicine – everywhere I look I see this. As a consequence of the freeing of data and the freeing of information. Information is so much freer everywhere in the world and there is a Revolution happening. We just sometimes find it difficult because it’s happening in so many areas to absorb this. In that kind of a scenario you have to take a bet on who the winners of the Revolution are going to be. If you were betting on the Russian Revolution in 1917, you would have, if you were a winner, you would have gone with Lenin. If you had to back the Tsar, you would have lost the lot.

To me, it’s something like this at the moment that the Lenin of today, if you want to put it into that context, are these massive gorillas, the tech gorillas, and it’s not just tech where they’re winning. Amazon is not a tech stock. It’s a retailer. Microsoft is a whole lot more than a text stock. It’s probably the closest of the tech stocks, if you want to look at it that way because it’s appeal is due to the business model that it is transforming from where you would go into the shop and buy Microsoft Office. Now, you’ll get Office 365 for instance. It’s taken them a long time to implement this new strategy and they’ve got some fantastic bets in areas that are expanding, like gaming, the whole leisure industry, the cloud, and now augmented reality, etcetera. Wherever I look at Microsoft I think they’re really getting it right now. In the past, I was a little bit concerned that they would make some bad bets. If you remember the Nokia story, where they spent $7bn in 2009, and made a right hash of that and they had to write the whole thing off.

But when you look at the world and you say, ‘what would I invest in?’ I’m investing in an ecosystem that Apple has got. I’m investing in social media, where Facebook is dominant. I’m investing in electric cars with this portfolio, with Tesla Motors. There again, there’s a revolution happening, from internal combustion engines to electric engines. When this society transforms it doesn’t transform overnight. Tomorrow you won’t wake up and see everybody driving in electric cars but the capital will flow towards electric cars. It will flow away from internal combustion engines.

Tencent is an equivalent of Apple, Microsoft, and Amazon in China because Tencent is the operating system for people in China, 900 million who use the WeChat platform or app to do everything on it. Alphabet or Google, is a diversified investment but primarily, at the moment with online advertising, where they and Facebook have got about 85% now of the US market, and online is growing and killing television and radio advertising, etcetera. When you look at it in that way it’s not tech that we’re investing in. It’s a new era, it’s a belief that the business world is transforming. If you’re sceptical about this, all I can point you towards is to remember whenever Amazon moves into a new market the impact on the existent, on the incumbence in that market is dramatic – on the share prices of the incumbents in that market.

We saw this in numerous areas but just watch it closely. When they bought Whole Foods, and they’ve just concluded that transaction recently, the other businesses that were in that market where Whole Foods operates, suddenly their share prices took a hammering. One of the big opportunities that exists here as well is by looking at areas where Amazon has entered and the share prices have fallen. Those companies in that area, which are not going to be affected by Amazon, because Amazon is not taking over the whole world. I use the example on our premium platform the other day of Steinhoff, the SA company, which is now a global business. Steinhoff’s biggest acquisition was a company called Mattress Firm in the US, they’re the biggest supplier of beds in America, which is to be market leadership in anything in the US, makes it a substantial business.

But one of the areas where Amazon will not be able to compete because of its business model is in big, bulk items, like beds. So, they’re pretty immune on that side. Also, where Amazon won’t compete is on the low-cost area, the very low-cost area. Of course, Steinhoff owns Poundland, and so on and so forth. So, in a transitional market, in a transitional economy you need to be aware of where the opportunities lie. You need to be aware of the big picture so, you’ve got your zooming out, if you like, of the big picture and then zoom in to see who the beneficiaries are going to be. I hope that helps.

Thanks Alec. Staying with Amazon, Bob Skinstad says Amazon has had a few Trumpisms as he calls them, losing 3% here and a couple of percent there. He aks are these good little pockets to buy the share or something which speaks of a greater worry for Amazon?

Howzit Bob. Unquestionably, buy on the dips. To me, Amazon is the best company in the world and that is through personal experience and through having invested in the company, when we did here, and more recently and they get it. Bezos just gets it. I’m going to play a little game here quickly. Let’s just go back to the screen – okay, Alexa, play some John Denver. ‘Shuffling songs by John Denver.’ Alexa, volume 7 and ‘music.’ I just had to do that because that’s how clever this artificial intelligence has become. It’s an extraordinary world that one lives in. That’s a little artificial intelligence item. In fact, I’d love to know, hands raised those of you who are using Alexa at the moment, about 11%…

It looks like a UK phenomenon Alec because it hasn’t quite hit here yet.

It’s going to hit. Now, remembering all of you who are participating in this webinar are at the cutting edge of technology. It’s not the people who haven’t absorbed technology yet. But what Alexa does, apart from playing John Denver, and Mozart and beautiful music. Alexa also gives us an opportunity into the world. She does your shopping for you. She tells you what the news is. She tells you what’s going on in your environment. She even tells you how many times West Ham have lost this season, etcetera, which is every game so far, but we do know that that’s going to turn around, don’t we? But the reality is Alexa, this artificial intelligence becomes very much part of your environment. If you want to order something as small as a whiteboard marker, which I did the other day. ‘Alexa order me…’ I better not say it because just now she’s going to wake up… ‘Did you want me to find dot?’ Alexa off, thank you. So, you would get it and it would arrive on your doorstep probably tomorrow and your card would have been debited for whatever it is, £2, and away you go.

Now, how do you compete with that? How do you, as a retailer, compete with something that is sitting in my office that I can talk to continuously. I don’t have to get in my car. I don’t have to go and buy branded goods because I know exactly what they are. It is a phenomenon and where Amazon is so clever is not only is it expanding into areas but it knows how to partner. The first big deal in this field actually happened just in the past week and that was a deal between Microsoft and Amazon on their artificial intelligence vehicles. That in the future Microsoft Cortana will speak to Alexa. I don’t want to say it too loud otherwise she’s going to come back to life, and vice versa. So, there’s cooperation because Bezos and Nadella, the CEO of Microsoft, have realised that they will compete elsewhere but if they can have cooperation rather than competition everybody wins.

It’s an extraordinary world we’re going into where the old box against your competitor until you kill him philosophy is being thrown out the door. Where the old world of some super paid boss who knows all, who makes all the rules is the one that will tell you what to do is out. Jack Welch, from General Electric, the way he used to operate and Immelt, his successor, that approach is gone and done. There’s a new approach. There’s a collaborative approach. There’s a coopetition approach, as they call it so, when you get into this new world and start understanding it and read more and expand your circle of excellence or competence into it. Things start making a lot of sense and that’s why, Bob, I think Amazon, (a long story) is the best company in the world. They have got an advantage on retailing. Even Buffett said at the Berkshire Hathaway AGM, this year, he said that him and Charlie were discussing Amazon and it’s amazing business model and I think it was Charlie Munger that said, “Jeff Bezos is a different breed. He is something we haven’t seen in this world before.” Remember, he’s been running Amazon from day one. He’s been running that business and he’s focussed on customers, and a consequence of that you just can’t go wrong.

So, yes, if you have a look in a South African situation you should be happy having 25% of your equity tied up in Naspers because you’ve really got a huge bet there on Tencent in China, and Tencent is a phenomenon in China. I’m edging towards, when I look at Amazon at 16% of our portfolio, I wonder if we’ve got enough of it. At these levels, and it has been getting a little bump here and there from Trump, I would in the same way, as that wall between Mexico and the US is never going to built, I would certainly not take the blustering of a property developer very seriously, when he’s looking at a world that he just doesn’t understand, and that’s been made pretty clear. Now, all my American friends who do like Trump are going to be sending me nasty emails, so I had better stop right there.

Let’s move into the portfolio itself and just to give you some updates. This is amazing technology, however, sometimes you do need to make allowances for the operator (me) so, please forgive me while I get this back up and we can go forward, as we do now.

In the past month the Rand’s performance was, as you can see, the Rand was stronger as both the Dollar and the Pound. It has been an interesting period for ZAR. Why it is so strong is anybody’s bet. You might have seen the story on BizNews this week about money leaving the country through BitCoin, through cyber currencies. There’s got to be a contra to it, and if you’re going to use Rands to buy cyber currencies, you’ve got to get the Rands in…I don’t know and this is far too complicated for me. When you have a look at the political turbulence and everything else that’s going on in SA, at the moment. You’ve got to wonder whether the current strength of the Rand is sustainable. I doubt it, just on a pure basis.

Just take it against the Pound. The UK has got 4.5% unemployment. It has a very strong functioning economy. It hasn’t got such good politicians, SA hasn’t got good politicians with 36% unemployment, and a very flatlining economy. So, why would the ZAR, in longer term, outperform the Pound? It makes no sense and, as a consequence of that, I’m very happy to be in a situation where we are invested in a Rand hedge portfolio.

I was talking to Jannie Mouton this morning. What a privilege that was. He’s just given away R1bn to charity and he’s going to be taking his whole wealth, which is around R12bn, (his value of his PSG shares). He’s going to be putting that into charitable trusts. He said he was watching a TV interview with Warren Buffett where Buffett spoke about giving 99% of his money away and he started smiling. Jannie said he looked at this and he walked around on his farm and he said, but why is Buffett smiling? It’s the right thing to do so, he’s doing that as well. Anyway, that interview will be on BizNews in due course, once it’s been transcribed.

What he did say that I find very interesting, I asked him about investing offshore and the way he put it, was if you’ve got a house, you have to take insurance against your house being burnt down. He said when you’re in SA, you have to take insurance against things that might happen and with the Zuma and the Guptas and all of the other well documented issues going on at the moment, it doesn’t hurt to take some insurance. So, he’s proudly South African. He’s putting all his money in through the philanthropic trust and it will go to South Africans and help to build the country but he is still realistic enough and that’s one of the great entrepreneurs to come out of the country, to say that it makes sense to take that insurance.

The portfolio in Rand, as you can see there the annualised return and we did start this in December 2014, and the increases in the shares are relative to what’s happened in the US markets, over that period of time. That actually illustrates it a little bit better.

Our star performer has been Amazon.com and it’s still not too late to buy the shares. If you’d bought Amazon shares just before the .com crash in 2000, and gone through the crash where they lost, I think, it was 90% of their value and held onto them today you would have still made 10 times your money. These are the kind of long-term plays that are worth investing in and just holding and away you go.

Alphabet – I’m a little less bullish on that from a longer-term perspective. Being in the internet business we see a lot of alternatives coming now to the Google model but Google does own Search so, as long as it owns Search it’s going to be able to generate the lion’s share of any advertising that comes from Search. But it is interesting, incidentally, that with Amazon and Microsoft now starting to play together and not just on their voice recognition devices but also, Amazon is using Bing. If you ask Alexa about something she will immediately refer to Bing and then give you the result from that. Again, a competitor to Microsoft. Interesting stuff this, it’s a fascinating world that we’re going into.

Tesla, well Elon Musk has done a huge turn there. The reason why we bought that was Wall Street went right off Musk during the time of the proposed merger with SolarCity. I thought it was crazy because SolarCity, which is the business that Elon funded, and was run by his cousins, the Rive brothers. The family is very close. His name is Elon Rive-Musk, which probably gives you a little bit of an insight into how they holiday today and get on together. There was never going to be, as in most mergers, some problem in that deal, given the way that the managers and owners were that close. Also, SolarCity was 7% of Tesla so, it was always going to be absorbed in there.

Why they wanted to do the deal was that both of them, the Rive brothers and Musk, saw that the real focus now has to be on batteries and that was batteries and storage systems. If you’re going to have solar power, which SolarCity does, and if you’re going to have Tesla motor vehicles both of them are charged and needs improvements in battery technology, which of course is going ahead at a huge pace. Wall Street didn’t like this. There were concerns about nepotism. There were concerns about the pricing and over that 3-month period we managed to buy into Tesla at a very attractive price. However, Wall Street still doesn’t like Elon Musk. The biggest short positions by the traders of Wall Street is in Tesla. There’s something like $10bn. Remember, Tesla’s market cap is around $60bn. There’s $10bn in short positions on Tesla. Right, now that’s number one.

I’ve described this to people with different views. They clearly don’t buy the Fourth Industrial Revolution. They clearly don’t buy the view that capital will be flowing towards these earlier adopters and probably they think that Elon is going to blow it in his next strategy, which is the mass marketing of his cars. The Model-3 is the new car. It will come to the market at about $30,000, which for an electric car is very cheap. Remember the running costs are very low. This week, in the last month Tesla did raise a bond of $1.8bn – the first time it had gone in and raised a bond rather than, as Metro Bank did, raise capital through equity. It is interesting that in our portfolio we have Tesla doing a bond. We have Amazon, which did a $16bn bond, and we have Microsoft, which did a $17bn bond.

Now, what that tells you is when a company goes into the market, if it needs capital or wants to raise capital, it will always raise capital where it believes it is cheapest. If Microsoft, Tesla, and Amazon’s executives felt that their shares were overvalued, they would have raised that capital by selling shares into the market but in this case, they instead went into the bond market. As a consequence, for instance with Tesla, they’ve got an 8-year bond at a 5.3% interest rate, and that’s going to help that $1.8bn. It will help them in the rolling out of the Model-3. One other thing on cash flow, and those of you who are in business will know cash flow is critically important. If you want a Model-3 car, you’ve got to put $1 thousand down, as a deposit, and there are 100’s of thousands of people have done. Well, I’m hoping that Tesla continues to perform the way that it has. No longer is Elon Musk as close to, in fact, he was the first person to resign off Donald Trump’s various committees. It turned into a wave, he resigned on the 2nd June. On the 1st June, you’ll remember Donald Trump at the Paris Climate Talks said, “There’s no such thing as climate change,” and stepped away from the whole thing. Elon Musk resigned immediately off his various corporate boards, and so have many other executives. I think we’re backing the right horse there.

Thanks Alec just on Trump. Daniel wants to know with the administration falling apart. It seems less and less likely that the tax holiday will become a reality. How is this likely to affect the likes of the Apple share price with the anticipation of this relief already partially priced into the current price?

That’s interesting. I don’t think it is priced into it. I don’t think anything to do with Trump. We had what you call the Trump Rally after 8th November, and you can see it, it’s pretty direct. In fact, as we go forward we can see that here because the S&P 500 Index is a proxy for it. If you have a look at this graph, the S&P 500 Index, or the Vanguard VOO, if you have a look in November and you see how that has performed since November. It was just over $190, it’s now $225 so, between November and March was the Trump rally. Since then investors have really looked through what Donald Trump has promised because he hasn’t been able to deliver much at all. Now that he’s lost his former campaign manager, Steve Bannon, some of those crazy ideas, like building the wall with Mexico. Like banning all Muslims travelling to the US, quite a lot of those are likely to fall off the table. As a consequence, that will almost certainly see some kind of checks and balances coming back to the party.

In fact, if you have a look at the difference between SA and the USA, there are many differences but in the leadership, there’s not that much difference. You’ve got very controversial leaders who tend to do things that economically speaking, look totally irrational. Like fighting free trade and like state capture on the other hand. But the difference between the two countries, is that the USA the checks and balances kick in very strongly, and despite the fact that Donald Trump has been trying to do things he hasn’t been able to get away with any of it. He hasn’t been able to push it through. The most obvious example is with Medicare, where he was trying to get rid of Obama Care and his own congress, where his own party dominates, won’t let him. In SA, on the other hand, it’s a much smaller country and it seems to have been a much easier way for those in power to get away with a lot of stuff. But the checks and balances are holding but not without damage being done. In the US, the checks and balances are holding without much damage being done.

When it comes to the specific question of the tax, in other words, allowing companies to bring their cash back from abroad into the USA, without a tax penalty. That would something that would benefit the country. It’s not necessarily something that Trump alone is the champion of, the Republican Party, which does dominate the House and the Senate, or does have the majority of the House in the Senate, is surely going to be in favour of that. Whether that’s priced into the share prices of Apple, etcetera, I’m not sure but what I can tell you about Apple is that most of what’s going on there at the moment is anticipation of the iPhone 8, the new smartphone.

The anticipation there is that Apple’s share of the Chinese market has been falling because its most recent models have looked pretty similar. An iPhone 7 and an iPhone 6 don’t look very different. The iPhone 8, which is due to be launched in September next month, is very different. That’s extremely important in the Chinese market because they don’t use the operating system of the phones. The android and the Apple operating system are pretty much, if you’ve got it you’ve got it but no one really looks at that because what they use there is WeChat. They use Tencent’s operating system. If you can imagine when you switch on a phone if it’s a Samsung, a Huawei, or an Apple, it doesn’t really matter because you’re using WeChat anyway. Whereas in the West the different phones are a lot more important, the android or IOS. I hope that explains the whole thing on that side.

Apple’s share price has been moving really smartly. First of all, Warren Buffett made a huge bet there. Secondly, at the AGM in early May he said that he made a mess of IBM but he’s pretty confident he’ll be one out of two in his tech bets, the other bet of course being Apple, and the anticipation of the iPhone 8, which Wall Street is predicting is going to be revolutionary, and pick up the sales. Not only in the main markets where it is at the moment, in the West but in that swing market, which is in China.

Thanks Alec a question on the lack of exposure in emerging markets, it’s quite minimal. Why not buy something like the iShares, MSCI emerging markets ETFs?

Yes, it is minimal but we get it through the companies. Not all of them but if you have a look at Microsoft it has a huge, emerging market exposure. Alphabet/Google, has a huge emerging market and so does Facebook, and Apple. So, to go and buy emerging market shares just because they’re listed in emerging markets doesn’t make a lot of sense. If you travel to the US and you have a look at the science of business in the US, and you compare that with the practices of businesses elsewhere. You will see that there is still a chasm between it and a good example in this regard is when you have a look at the American universities and the students that goes to American universities. Of course, there are Americans but for many of the colleges and the best colleges indeed, most applicants come from emerging markets. So, what’s happening is you’re getting many people from India and China, who are going into the US. Learning their crafts there, and often ending up staying there and working for some of the companies that are on our list here. A few of them will go back to their home countries, having had exposure, well not a few (people do go back to their home country), and they sometimes get caught up in the problems.

Look at India, when Warren Buffett went to India, and Ajit Jain, one of his most valuable members of his team. One of those who is widely tipped to take over, when Buffett leaves. He is from India and Buffett went there with great expectations and he left there saying he will never invest in that market because it’s too corrupt, and those are the issues that you deal with. If you’re a US company and you bribe anyone anywhere in the world you go to jail. You, as the CEO, go to jail. We’ve got the situation right now with KPMG and McKinsey, with the role that they played in the whole Gupta story in SA and they’re running around trying to close or cover their backs. The partners of those companies in the US. It’s a similar thing when you have a look at what’s going on in Germany there are very strong laws against things like corruption but in emerging markets, it hasn’t got there yet. So, as an investor, where would you rather have your money? In a company that’s doing thing honestly, that’s playing by the rules and that has got huge disincentives to be crocked or not? I know where I’d rather be.

Thanks Alec. Just one last question from Graham Alexander. What about energy shares?

No, Graham, that is definitely off my list. The reason for that is that Moore’s Law is in the process now with renewable energies and what that means. In the early 1960’s, one of the co-founders, Moore, wrote a paper that was published by Fortune Magazine where he articulated a law that his view was that the computing power would double every 18 months for the same price. So, what you’re spending today, you’ll get double as much in 18 months, and so on and so forth. This law has been applied to technology across the board. When you have a look at renewable energy it wasn’t long ago that there was an argument that renewables were not worth investing in or were not an alternative to nuclear or coal because they were too expensive. Today they’re cheaper. Today we know that Eskom is producing electricity in SA, from coal more expensively than it can buy in from its renewables, from its most recent renewable round and that is just accelerating. Renewables are getting cheaper and cheaper everywhere in the world. India is doing a lot of work on this.

Moore’s Law is in tact there but what does it mean there for an investor? The problem for an investor is that the output or the revenue that you’re receiving per unit is falling and it’s a similar thing when you have a look at what’s going on with shale gas. It was a great investment when oil was $100 a barrel but as the shale gale, as they call it, started to gather momentum. Shale, in fact, was the major reason why the oil price fell the way that it did. To begin with, Opec, in a very misguided way thought that it could put the North American shale operators out of business by simply flooding the market with oil and dropping the price. All that happened was that they took a bet against human ingenuity and the ingenuity within the frackers in North America saw that the prices continued to fall. Right now, you’ve probably got a cap on shale gas, related to the oil price, of about $55. It’s very unlikely that we’re going to see, in the near term anyway, $100 a barrel again beaus as the oil price rises above $50 to $55, a whole wad of new shale operations come onstream. They’re mothballed and ready to go.

SA is another one, it’s got huge shale potential, as has Argentina, as has China even. That makes energy a very questionable investment from an investor’s point of view. Of course, it’s fantastic for mankind but for investors – not so good. Stu, we’re getting towards the end of the webinar so I’m just going to quickly through the portfolio before we take any other questions.

That gives you Vanguard, which is the S&P 500 Index over the past year. As you can see, in the past month it didn’t do a whole lot. There were the odd ructions coming of this whole story around North Korea. You have an administration in Washington that does make people nervous. But generally speaking, my reading on that is what happened in SA up until 1994, SA had nuclear weapons. The reason it developed nuclear weapons was really to say to the rest of the world, don’t mess in our internal affairs and that’s similar to what the North Koreans are doing now. For them to think that they would go out there and take on the rest of the world because they’ve got two nuclear bombs and US has got maybe 200 thousand or whatever the numbers are but here’s an exponential difference. It just doesn’t make any sense. It is something the markets are telling you that they’re not taking it that seriously yet but of course, black swans happen – anything can happen on that one.

Alphabet has been under a bit of pressure and it looks like there’s a bit of a downward trend there. It picked up nicely in the last few days. This is still a bet on search engines at the moment. They’re doing some interesting things in other areas, driverless cars being one of them but Alphabet is one to keep watching.

Amazon, my favourite share in the whole world, look at that Bob Skinstad, you can go and buy your Amazon shares today. You’re getting them a lot less. Right under $1,000, I don’t know how long that’s going to last for.

Then Berkshire Hathaway – Warren’s stock is rising. It continues to go in the right direction. It broke at $180 for the first time ever in the last few days. So, Berkshire Hathaway, which is a proxy, in some ways for the S&P 500 Index. It’s enjoying a big run as a consequence of improvement in US banking shares. Big banks have been tipped as being big turnaround situations for a while and now, the opportunity is existing.

Apple, the big story there is anticipation for iPhone 8. If it’s a disappointment this stock will fall. It could fall down to $140. However, there’s just too much going on for people – there’s too much worked into it and too many people know that this is going to be a winner. As a consequence of that you might even see, when it is unveiled, the share price getting even higher. Buffett likes it and that’s got to be good enough for the rest of us.

Facebook, well after its quarterly results, the share price took on a new life from the mid $140 to now just under $170. It is a company that certainly has got a lot runway ahead of it, in the social media space and continuing to expand. In the past month, it bumped around a little bit from its new, higher levels.

Elon Musk, despite that huge short position, it seems that every time that Tesla shares do get hit back, new buyers come to the market, buyers like you and I who think that Mr Musk almost walks on water, (nobody does) but you know what I’m getting at. And that there is a long-term trend towards vehicles, driverless vehicles on the one hand, but certainly electric cars on the other. You can see when we bought, if you go to the beginning of this graph. This is a one-year share price graph – you can see we bought around the $200 level. Up until the end of November, there was interest in this stock from Wall Street and then suddenly it caught fire.

Metro Bank, it has been a bit disappointing but as mentioned earlier, this was due to a fund raiser. If you look at Capitec’s life you’ll find a similar situation on their graph. It’s almost like as you are growing the bank the jury is out or some members of the jury are out, as to whether you can translate that into profits. I’m very happy to have this one. It’s a bit of a wild card if you compare its market capitalisation with those of other members of this portfolio. This is one, it’s a very specific investment and everything I see from the Metro Bank here in the UK is good.

And of course, Tencent. Man, their financial results were mind blowing. This company just goes from strength to strength. Pony Ma, who is not as well-known as Jack Ma, the man who runs Alibaba, has been rated in China, for some time now, as one of the two great entrepreneurs of that country. If you own Naspers shares you’ll know all about this one. Naspers, of course, is a cheap way into Tencent but investment companies often are cheap for a reason and they stay that way over the long-term.

So, there it is, the annualised return of this portfolio over 3 years, is 31%. Stu, I guess we’ve got time for a couple of more questions just to end off with.

Yes thanks Alec. Paul Jeffreys makes reference to a WorldView written by Jackie. She mentioned Purple Brick, the online estate agency. He wants to know do you still think this is a good disruptive investment?

Yes, it’s a bit of fun there I think, and I think that’s what Jackie was saying. Just highlighting that there are lots of disrupters around and Purple Brick is one that has attracted the attention of one of the great investors here in the UK. Sometimes these guys throw out the occasional bone to the rest of us so, it certainly is an opportunity to invest in. As far as this portfolio is concerned, I don’t know what I would sell her to get into Purple Brick. I certainly wouldn’t sell Metro Bank. Maybe Vanguard, I’m very scared to sell more Berkshire Hathaway’s but maybe we’ll reduce our Vanguard holding and look at something like that but for my money – I’m very happy that we’re invested in the way that we are right now. Our portfolio has got a really nice balance and Purple Brick, in a personal capacity – don’t go overboard, don’t go crazy on it. It is obviously speculative.

Just a quick one from John. Would you buy Berkshire at these levels?

Yes, very comfortably. Berkshire Hathaway is a proxy for USA Inc if you like. It has been in our portfolio as that. If you can see, we have 15% of the portfolio in Vanguard and in Berkshire Hathaway and both of them, in my opinion, excellent value. So, America is growing. The economy is moving in the right direction. The checks and balances in the system have managed to throw off some very serious challenges from the political front, and unemployment is extremely low. It is still the land of the free. It is still the country that has to turn away a multiple of those who would like to immigrate and go there. It’s an aspirational land. It’s got a fantastic system of distributing goods and services and that’s what you’re buying. As I mentioned earlier, as well, that it has the most educated business scientists in the world operating in the US. The Chinese are catching up and they’re catching up by sending their students there but America is still pre-eminent when it comes to creation of wealth, at the moment. And that’s what you’re getting with Berkshire Hathaway, it’s a bet on America and don’t bet against the US.

Yes Alec, I see their second quarter growth was the fastest in over 2 years, that’s just recently been announced, of 3%, which shows the economy is on an upward trend and it’s the largest in the world.

Yes, it is quite extraordinary. The Americans are, and Buffett said it so well. He said that after the American War of Independence in the late 1700’s, in 1776 when they signed that declaration. The US, at that stage, had 0% of the global economy. Today it is 26% and it’s got 5% of the world’s people. Now, if you are a man from Mars and you have a look at that and you say, 5% of the world’s people, 25% – five times as much of the world’s wealth. What’s going on there? What is going on there is they have the most efficient system for the distribution of goods and services, despite some issues they need to deal with, as everyone has to, that’s really the basis of it. So, if you’re a man from Mars and look at that and say, does freedom translate into wealth creation or does control translate into it, and clearly, you’ve got your answer.

Thank you Alec, is it a good time to buy Tencent?

Yes, again, that’s one of those stocks that you buy it over three months so, break it down over three months. That takes the Rand out of the picture. That takes the share price out of the picture so, if you’ve got $10,000, you buy $3,000 in month one, $3.000 month two, and $3,000 month three, and then forget about it – just let it run. It is a fantastic business model – 900 million people using it. They’re there. They’re expanding the use of it.

Have a look at our piece, I had a lovely interview with Mark Ingham, on Tencent results where he just couldn’t stop raving and neither can I. It’s one of those companies that were it based in Silicon Valley rather than in Hong Kong it probably would have been double the share price that it is at the moment, given the relative rating. So, the next wave, if you like I think might be with the Chinese giants. The Chinese equivalents of those US gorillas actually, getting better ratings all-round.

Thanks guys, for contributing today, and I see we’ve got a very big audience and many questions. Apologies that we didn’t get round to all of them but drop them to Stuart, [email protected], and we will certainly address those questions for you. Lovely to have been with you and look forward to the same again next month. Let’s hope, (holding thumbs), that Microsoft is an inspired purchase. I’ve got a feeling it will be.