🔒 WEBINAR: Global portfolio maintains +30% annualised run as Rand takes a knock

Since its launch three years ago, the Biznews Global Share portfolio has generated an annualised return of over 30%. It has achieved this incredible result through following Warren Buffett’s approach of finding a few carefully selected eggs and then keeping a close watch on the basket. The brains behind the portfolio Biznews founder Alec Hogg takes listeners through the September update, which sees a weaker Rand maintaining those above average returns.

It’s Alec Hogg here, talking to you from London. As you can see, I’ve got a slightly better setup here behind me. If you’re interested, this guy here is Marcus Aurelius. Our company is called Aurelius Media and he’s the inspiration. He was a Roman Emperor who was a great philosopher as well. The only Roman Emperor who was a philosopher and many people believe the greatest Roman Emperor of all time, and as you can see, there’s my Africa connection, never forgotten where home is. There it is with a Zimbabwe bird. Today we’re going to be talking about the Global Portfolio and the good news is that the annualised return continues to roll along at 31%. I’m going to give you a little presentation but before we start there my colleague, Stuart Lowman, is in Johannesburg, Stu?
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Thanks, Alec. Always good to be here. Just quickly on questions for those who are new to the webinar, there’s a little questions toolbar on the right-hand control panel. If you plant your question there I’ll pick it up and throw it to Alec. Otherwise, can everyone just show your hands, there’s a little button where you can click if you can hear us all loud and clear. There should be a little toggle thing then…

I see lots coming through, Stu.

Great, let’s get started.

We’ve got a lot of people on the webinar today. If you would like to get your questions through earlier, I see there’s already a couple of questions, Stu. It’s probably a good idea to get as many of those through. We allocate an hour for this. We really don’t like going over an hour in the presentation but if you can get your questions through we’ll try and get to all of them. Okay, all ready. Let’s go.

Changes this month – you might remember, (those of you who were with us last month), we made a purchase of Microsoft Corporation. We added that to the portfolio for the first time. The idea is that when we buy shares we stagger the purchases over 3 months to take out the problem of the Rand that might move against us or the share price of the company that we’ve targeted. This is the second month of the purchase of Microsoft Corporation. We bought another 92 shares. In fact, last month we bought 92 shares at $74. This month, 92 shares at $73.85. We’ve also got a little bit of dividend income coming through from the VOO, that’s the S&P 500 holding and from Apple, and that gives us $295 on that side. So, cash forward $6,924, that’s all going to be used up in the next month, when we buy the final charge of Microsoft shares.

There’s the portfolio as it currently stands. You can see at the bottom in USD terms, it has grown by 48%. That’s pretty good going because it is more than double the return for the market as a whole, in the US. If you look at the first stock that’s in the portfolio holding, Vanguard S&P 500 Index – that is up 22% in the past nearly 3 years, (33 months) that we’ve had the portfolio running. The idea really was that we would put money offshore. We started with $200,000 and that $200,000 has now grown to $296,000 but much more importantly is that in the Rand basis. The $200,000, when we started the portfolio in December 2014, was worth R2.2m. That has now, the portfolio as a whole is now worth just a shade under R40 thousand under R4m so, it’s been an excellent Rand hedge over this period and we’ve been very delighted with the performance of the portfolio.

As you can see there Amazon.com – easily the best performer, 190% gain in the stock since we first bought it. In the past month though, the Amazon share price is down by $16. Google is up 77% since we acquired it in December 2014, and that is up, in the past month, it was a $15 gain in that share price. In fact, the portfolio generally, in Dollars was very similar to where it finished at the end of August but the big move came elsewhere and that came in the Rand basis.

As you can see here the Rand delivery performance of the portfolio has been particularly strong. If you had just taken your money and put it into the Vanguard Index, in other words into the US market 3 years ago, you would have enjoyed a return of 46% because of the markets improvement of 22, and the Rand’s depreciation. In the past month. It’s dropped 4% against the USD, 8% against the Pound, and the other currency we watch is the Hong Kong Dollar (HKD), (because we’ve got Tencent holdings), it dropped by 4% so, the whole strategy was to get money offshore because we don’t like the way the SA economy is being managed and that will eventually reflect itself in the value of the country’s share price, if you like, which is the SA Rand (ZAR). As a consequence of that our intention was to find shares that we felt could outperform the overall index and, as a basket they certainly have done that.

Here’s the ZAR’s performance and this is really the past month where all the performance on this portfolio has come from. As you see a month ago, I’ve got it as the 27th July but that should actually be the 31st August, the ZAR was at $13.07. It is now $13.60. If you look on the right-hand side of your chart there (the ZAR to USD) you can see very clearly. I’ve just taken a one month chart there (as you can see from the side) and it was trading there just over $13. It came back as low as $12.76 during the month in early September, and it’s just gone the wrong way – as far as the SA assets are concerned. As far as the portfolio is concerned, of course, it’s helped the portfolio but the ZAR from a low of $12.76 in the month is now sitting at $13.60 so, it has certainly fallen very sharply against the USD. That’s a 4% decline, month-on-month, but against the Pound it’s been even more spectacular.

The ZAR against the Pound started off the month, as you can see, around £16.66, and it has come back a long way from there and now £1.00 will cost you R18.15. What happens when people visit me here, in the UK from SA, it’s impossible to allow them to even buy a cup of coffee because when you convert it in SA terms it’s horrific. You tend to get immune to the cost of living in the UK especially when you are earning Pounds but for SA visitors it really is an expensive place again and in the past month it’s become a lot more so. Of course, as far as this portfolio is concerned, that is performing well and if you’re living in SA and you’ve invested in foreign currencies you are giving yourself a good hedge against what’s happening in the SA economy.

There’s the individual performance of portfolio since inception, Amazon.com has been the big winner in Rands, 250% extraordinary. Alphabet – 113%, even Tesla, which we bought less than a year ago, is up 70%. Berkshire – 48% and they have all outperformed the market as a whole. Apple came back quite significantly this past month and we’ll talk about that later, but it’s still 36% up so underperforming in the market generally, and Metro Bank – our sole stock that’s in the UK, in less than a year, it’s been under a bit of pressure but I’ve got some good news on that one coming up a little later. Stu, shall we hit a question?

Cool, thanks Alec. Clive wants to know, ‘if one started off now, which shares do you buy first since a lot of them have seen substantial gains made, and he thinks have limited upside in USD terms?’

Clive, my suggestion on this really is to try and replicate this portfolio. We don’t know, for instance, if I were to restart the portfolio today I would put 25% into Amazon. I just believe that the business model is even stronger than it was when we first bought it 3 years ago. It really is a bulldozer that is killing everything, and we’ll talk a little bit about that later. We don’t have 25% in the portfolio. In the same way, by the way, that we have a SA portfolio where we should have put more into Naspers.

Naspers, if you are buying… If you buy the SA weighting, in other words, what’s called the SWIX, the shareholdings owned in SA of the JSE listed companies. Today you’d have to put 25% into Naspers – that’s how big it is so, by only having 8% or 16% where we are now in Naspers, we are really underweight the index. I don’t try and second guess the market. What I believe is that you find the right companies. You take the view, as Warren Buffett recommends to us that you’re holding them forever and then hold them forever. There’s a case to be made now for not buying, for instance, Capitec in the SA market because it really is just blatantly over priced at seven times book, as against 2.5 times book for First Rand for instance and international banks you can get at less than book value. So, you really are asking a lot of Capitec in that instance but these stocks we’re talking about are a completely different business.

Amazon is globalising. It’s getting stronger. It’s in the early stages of its development and it’s at a stage, although the share price has appreciated hugely in the last 3 years. I would make it an even bigger share of the portfolio if I was starting from scratch today. Alphabet is one where there is a little bit of a flag waving. The Europeans are unhappy on problems of too much dominance. They’ve taken on Alphabet – they want them to pay a big fine, this is Google, but their business model is so incredibly sound and so strong it would be a hard one for me to say, even at these levels, in fact particularly at these levels, because the shares have come back a bit – not to invest there.

Tesla, you’re taking a long-term bet. It’s a long-long game, as far as Tesla is concerned and there we’re having a bet on the electric cars. They’ve got a massive start on the whole market place. They’re selling lots of cars. Now they’re going lower down the market and they’re in a position where the cars that are being sold, the electric cars, which really are mushrooming and exploding, while they kill the internal combustion engine. Tesla is best suited. Its share price at the moment, looks expensive but in 10 years time I’m sure you’ll look back and say, ‘my goodness, how cheap they were then, and so on and so forth.’

Just one final point on that. Amazon, if you had bought Amazon at the absolute peak, before the burst of the NASDAQ bubble. Remember, Amazon share price dropped 90% after the peak. So, if you had bought it at the absolute peak in the year 2000, you would still today be 10 times ahead of what you paid at the absolute peak there so, my view on these things is don’t try and time the market. Try to take the pricing out of it by staggering your purchases over 3 months, as we do, and buy the shares, put them away. Unless there is a fundamental change in the underlying business, stick with them. Stu, another one?

Yes, thanks Alec. There’s a question on Apple. I’m sure you’ll get to it but let’s have a look now. It says, ‘how are the non-iPhone revenues looking? Regards, Ian.’

The non-iPhone revenues is where all the excitement is in Apple. Apple has got a billion devices or a billion iPhones that have been sold since it was launched by Steve Jobs, the late great Steve Jobs in 2007. The real story of Apple, although the market, the traders are looking at it quarter by quarter and they’re looking at iPhone sales but the real story for Apple is the environment. The ecosystem, the apps economy that we now all have – that’s where the excitement is on Apple. That’s what I bought into when first buying the Apple shares and that’s something that I’ll stay with.

In the same way as the real story of Facebook is social networking. The real story of Tencent is having the operating system for the whole of China. The story for Tesla is the electric cars. The story for Alphabet or Google is through search engines and the story for Amazon is retailing. What we’ve tried to do with this portfolio is we’ve tried to understand the Fourth Industrial Revolution. We’ve tried to understand the seismic shifts that are happening in the world and then we’ve gone for the winner or have tried to pick the winners in each of those areas where the seismic shifts are happening and to me Apple, and you can see it in the Apple numbers, outside of its hardware sales the real story there, and the long term story is what is happening in the app economy. I’m very happy to stay with it.

Thanks, Alec. I think we get this question every month. Len wants to know, ‘what about Alibaba?’

Yes, Len, that’s a good one and Alibaba, almost like Tencent, is one that we haven’t added to the portfolio yet. Looking at and scanning stocks around the world all the time, Alibaba is a definite opportunity and it’s a fantastically run company in the same way as Jeff Bezos has been given so many accolades for his running of Amazon.com. Jack Ma is a similar kind of visionary entrepreneur, like Pony Ma at Tencent is. So, it is one and if you own it, I would certainly not be selling it. Just as far as our portfolio is concerned we would need to now, because we don’t have any cash left, we would need to take a call on either the S&P 500 Index or Berkshire, which are our two bankers if you like, and once we take a call there Alibaba will be the one. But I’m watching it – I’m watching the share price. You might remember that we’ve been watching Microsoft for a long time before adding it to our portfolio last month, in the same way as we watched Facebook for a long time before getting in there. It’s definitely right at the top of my ‘watch list’ at the moment.

Thanks, Alec. We’ve got quite a few questions. This is quite exciting, we’ve got 231 people on the webinar, which is fantastic. Jeremy Robson wants to know, ‘isn’t Tesla a risky bet, for a company that has yet to make any money?’

Jeremy, no. I don’t believe that because here you are, remember the strategy here. Let’s just start with what the portfolio strategy is? (A) Take your money out of SA because your Rands are going to be worth less in the future because the economy is being badly managed (that’s point one). (B) When you put it outside of SA, you don’t want to put it into badly managed companies that would be victims of the Fourth Industrial Revolution. You want to put it into companies that will benefit from the Fourth Industrial Revolution and if you have a look at those companies. Amazon makes very little money. In fact, if Amazon wanted to make a pile of money tomorrow it could literally make a few tweaks in its business model and the cash would come flooding in but it’s working on the basis that actually, it can grow. It should reap the best allocation of its resources is to reinvest in the business.

So, it’s reinvesting in the business and virtually all of our companies that we’ve invested in are growth businesses because at this stage of the global economic cycle. The seismic shifts that the Fourth Industrial Revolution, driven by artificial intelligence, driven by technological changes. Those seismic shifts are really turning companies on their heads. As a consequence of that, don’t worry about the profits. This is not 1950, or even 1980, where you looked at the PE ratio and you said to yourself, ‘is the PE ratio justifying the investment that I’m making in this business?’ That’s in an economy that’s not transforming or in a world that’s not transforming but as we know, the internet changed everything and we’re finding the same thing is happening with augmented reality, by the way, which is something that those critiques of the new Apple iPhones are just not getting.

That augmented reality is going to be the next big boom industry in the same way as cloud computing has taken off. If you start thinking along those lines you come at it from a very different perspective. Google is a very good example. For years and years Google didn’t make money because they reinvested back into the business on the understanding or on the belief that they could do better with your cash by keeping it in the business and by growing the business than paying it out or declaring profits, and then paying a chunk of the profits in taxes, etc. That’s really the philosophy of all of this. Warren Buffett has done the same thing, by the way, in the sense that he doesn’t pay dividends for Berkshire Hathaway. He believes he can do better with our money by having it in the company and reinvesting it, and so far, he’s proven to be right.

We’ll pick up another question in a minute, Stu, but I just want to highlight on this graph quickly, which is the Vanguard S&P 500 Index. As you can see in the past month, (this is a one year graph), it hasn’t done a whole lot. It’s gone up a little bit. The index is $22,967. It’s very easy to work it out. Just multiply this by 100, and then you’ll get what the overall index on the market and you can understand it that way very easily. So, as the S&P 500 Index rises, so you’ll get appreciation in this because it tracks the index and it’s been pretty slow since around May. The reason for that is that the American market is just like the JSE. On the JSE, when you have a look at the JSE, you will see that we have, not so much today, but certainly in the past it was very evident that you had a resources market and you had the rest of the economy.

Now, in the US we now have a new economy market and an old economy market. When you add the two together because the new economy market is expanding, it’s mushrooming, and the stocks there are benefiting as the profits rise and they’re going up, and then the old economy stocks are going down. A very good example is what happened well, just to show you, Alphabet didn’t do a whole lot in this month but I wanted to just show you on Amazon.com. Although the share price of Amazon.com has come down a little bit. In the past month, in fact, last week we had a very good reflection on the long term opportunity of buying into this share. Those of you who haven’t bought the stock yet you can now get in at quite a nice discount. It was over $1.000 a share, in Amazon, just over a month ago. You now get it for $950. In the last week Toys R Us went bankrupt.

Now, this is relevant because Toys R Us has been around since 1948. It had 1,600 stores in the US, as recently as 2005, just over a decade ago. Some of the smartest investment bankers in the world, Bain and KKR, put up $6.5bn to take it private and now it’s bankrupt, why is it bankrupt? Because of Amazon, it’s that simple. Amazon is just sweeping the businesses that it’s competing with, the retailing businesses, out of the way and it’s only just started. There are many retailers still around that have got a much bigger chunk of the market than Amazon has. If you live in a country, like I do in the UK, you see this so easily. We order stuff now from Amazon because (A) it’s cheaper and (B) it arrives on your doorstep much quicker. It doesn’t mean you don’t go to the shops anymore but you go to the shops a whole lot less than you did in the past.

Where the investment analysts are now looking is to say, ‘who are the next companies, like Toys R Us, that are going to go bank because of Amazon, and let’s get out of them, and who are the companies that are immune in the retail space – and they’re worth investing in.’ I’ve got good news for South Africans in that Steinhoff has focussed its attention where… It’s Amazon proof, if you like, mattresses. Amazon doesn’t do well with big ticket items. It’s delivery system doesn’t lend itself to delivering beds and big pieces of furniture but toys, like Toys R Us has discovered, and food – it’s excellent at that. Onto some questions, Stu?

Thanks, Alec. There’s a question on stock losses, which I don’t think would make any sense in this portfolio, but Steven just wants to know, ‘if he needs to put in something to protect the downside?’ He’s looking at something like a 15% stock loss.

Steven, no. Stock losses are very useful tools if you’re a trader and they are absolutely hopeless tools if you’re an investor and you need to understand in your head that this is an investor’s portfolio. This is something where we started it off on the understanding that it was possible that we wouldn’t make any money for 5 years. Warren Buffett teaches us that when you buy companies you must imagine that those companies close or that the stock market closes down for 5 years, and you’d still be happy having them. In every single stock that we have in our portfolio I’m quite happy that we could do that so, stock losses – irrelevant here.

Thanks, Alec. Trevor asked a question about, ‘global government debt and how this could affect the portfolio as well as US stocks, in general, going forward, especially with governments in Europe, particularly starting to default or having difficulties meeting obligations?’

It’s a whole new area. I would just refer you to what Warren Buffett says on this. Again as you can hear, I’m a huge fan. I wrote a book about ‘The Buffett Way of Investing’ and I’ve been so influenced by this man, (it’s pretty scary) but the biggest influence that he’s given is to say, ‘none of us can predict the big pictures.’ We don’t know. The big stories, the big pictures, things like government debt, people going bust – there’ve been those who’ve been waving flags about this stuff for 10 or 20 years. It isn’t something that I have the expertise to understand, and it’s outside of my circle of competence but then again, Buffett would tell you, it’s outside of his circle of competence too so, I’m in good company. These kinds of things really, if you start worrying about what’s going to happen in the world, can you just imagine if there were to be a nuclear explosion? Then all bets are off obviously, and if you worry about that you certainly would not invest.

It’s a bit to me like people who live in California. They know they live on a fault line. They know there’s going to be an earthquake but it might be in 500 years or it might be in 5 days. It doesn’t help to position your life if you are not sure or you’re uncertain about when these big, seismic events would happen. If you’re really that worried about global debt and you’ve done your research on it, perhaps the best thing is just keep your money in cash, put it under the blanket, buy BitCoin, gold or whatever. All companies would be effected if there were to be a global economic meltdown but to expect another shake on the scale of what happened in 2008, when we really were on the brink of it, and yet we know enough now, looking back on it that the decisions that were taken then were sufficient to ensure that the economy did not collapse. That mankind does have sufficient ingenuity to overcome even those kinds of obstacles. Then I think that we probably are in a, I don’t say that you can always sleep safely at night, because we do live in a dangerous and a crazy world sometimes, but we certainly can’t predict those kinds of things.

Thanks, Alec. Another question I think we get monthly is on biotech. ‘What do you think of them, too much risk? – from Gina.

Again, it’s outside my circle of competence. I think that’s the… If you have a look at the portfolio as we have it here, you’ll notice something quite clear. A lot of the stocks here are internet related and I’ve been in the internet game for 20 years. I was a financial journalist since 1980, working on newspapers. Then in the late 90’s, I started an internet publishing company when the internet was very much in its infancy. I had the privilege of being shown it, in 1996, by a colleague who was then running the technology department at Absa, and he had insight into what IBM were doing because Absa was one of IBM’s biggest clients. I was at Absa for a couple of years in the corporate world and then I went back on my own, outside of it.

That has been my, if you like, my area of expertise, my circle of competence, my area of passion and as a consequence of that I’ve been able to understand perhaps a little better these companies that are operating in that area than other companies outside of that area. What I’m saying here is that biotech is a whole, new developing field that if I was a medical doctor I would probably have a portfolio here, which was full of biotech shares but because of my background in the internet this shapes the portfolio because they’re within my circle of competence. I can never say, I can’t even pass a comment on whether they’re overpriced, under-priced, what the good ones are, or what the bad ones are, and I hope you appreciate that.

Thanks, Alec. You made a fleeting reference to BitCoin earlier. Derek Day would like to know, ‘what is your view on BitCoin?’

Again, too tough to call. If you were to take a 10 year view, you’re probably going to look pretty good on BitCoin that you buy today. If you were to take a 10 minute view you could look very bad. It is one of those high risk stocks at the moment. We tend, as human beings, to exaggerate the short term impact of a new technology, like the block-chain and BitCoin, and cyber currencies, and under appreciate the long-term impact. I saw this in my own industry, in the internet publishing industry when 20 years ago we listed the company that I started, literally, above the garage at home. We had 5 people in the business and the internet boom was going crazy all over the world. We then were able to… I was approached by a very smart billionaire investor who said, ‘put your company onto the stock market, raise money, and you will then be in a position that you could ride out any wave at any storms that was coming on the internet side.’

We sold shares in the company on a projected price earnings ratio of over 100. We got more applications than we would ever have… Well, we could have sold probably 5 times as many shares as we eventually did sell at that very inflated price, (looking back), but it was the time. At that time the world was going to change. The internet was going to transform everything. In a few years’ time there weren’t going to be newspapers, everything was going to be online and, of course, that didn’t happen. We had the crash of the Dot-Com bubble, and I remember our share price going from R2.30, on the opening day, and it was only a few months later, it was trading at 17 cents, an incredible story.

But having lived through that it shows you that the BitCoin is probably in the same situation. It could be at that equivalent of R2.30 today and go down to 17 cents but in the long-term I have no doubt that it will be R2.30 plus. Perhaps a better example of that is the one I gave you earlier in Amazon.com, which if you’d bought it at the absolute peak in 1999/2000, (just before the bubble burst) you would still be 10 times up on your money today that what you would have paid on the absolute peak, at that stage. So, if you’re prepared to take a 20 year bet on BitCoin, who knows, you could also be looking back and having 10 times your money. But if you’d bought Amazon after the crash you would have been a lot more than 10. More like a thousand times up on your money, and I think that’s probably the closest example.

Thanks, Alec. You’re probably going to still talk about Microsoft in a bit but Eben Kruger would like to know, ‘with regards to the Fourth Industrial Revolution, could you elaborate a bit on the stock itself and the reason for adding it to the portfolio?’

Microsoft is a company that is going and has gone through its own challenges. It’s been an interesting one because when the internet first arrived, and only those who have got kind of longer hair, there’s Nadella, the chief executive. Only those of us who’ve got a few grey hairs on our head will remember this but initially the founder of Microsoft, Bill Gates, completely discounted the internet. In the early stages he felt the internet wasn’t going to affect his business model at all but I am talking about in and around 1996/97, and then he transformed his view totally at that stage and he had to catabolise his company. If you remember, at that time, Microsoft was selling software that you would purchase in a shop. There was no such thing as downloading software online and it was a very clunky model, based on a world where everything was in a physical world.

He was prepared to catabolise the company at that point in time, to position it for the internet world and with huge success. It’s a massive cash generator. In the last few years Microsoft has gone through that again with the understanding that it’s model of selling CD’s through retail stores is not fit for purpose in the internet age and it now has gone from a model of where you buy or you can even update your Microsoft licenses online. To one where you’re now going to be paying for the license every year rather than actually buying the software. They’re moving, they’re transitioning across. There won’t be anything called Office 2015. It will be called Office 365, and Word 365, etc. So, it’s another massive transformation that Microsoft is going through and I really like it because they’re positioning themselves as a subscription model. They’ve already got a wonderful market positioning. Not too many people have gotten rid of Excel, Word, and PowerPoint and moved across to the Google equivalent, despite Google’s very best efforts.

So, Microsoft has got this positioning. They are focussed there. They are continuing to develop their products. They’re also moving aggressively into new areas, like augmented reality. The whole X-Box gaming strategy has been brilliant. They’ve made some mistakes along the way but this is a business that is just so well positioned for the New Industrial Age that I can’t… I watched it for a long time and then eventually realised that it’s never going to be cheap. Their new model is certainly going to be making them even stronger into the future and that’s what I like about it. I love Microsoft in our portfolio and I hope that that reflects a little bit of my enthusiasm.

Thanks, Alec. Ian would like to know, ‘what do you think of Visa?’

What I think of Visa, wow? Again, it’s outside my circle of competence. I’m not a great fan of companies that are going to be going head-to-head with technology and Visa has got a fantastic footprint at the moment but we’re seeing Apple Pay come onto the scene in the Far East. Tencent are moving into the market as well so, it’s got challenges and anything, like a bank, and that’s an interesting point. If we look at this bank here, Metro Bank, and I’d like to talk to that a little bit as well.

Like a bank, you can see a bank doing okay at the moment, and SA’s Capitec is a good example. Capitec is sitting at seven times book. Now, that is the kind of rating that is discounting perfection on steroids. If you have a look at other banks, other traditional banks, and Capitec has been very good because it’s not a traditional bank. It’s more of a store or a retail operation. But most other banks are trading at a fraction of what Capitec’s rating is so, I love Capitec as a bank. It’s got a lot of road still but it is going to be the one that is or its rating is going to be questioned increasingly, as new banks come in.

Today we’ve seen the launch in SA of a bank called Tyme and Tyme is a subsidiary of Commonwealth Bank of Australia. Commonwealth Bank of Australia is a massive operation, very forward thinking and it is launching this ‘digital only’ bank in SA. Who’s it going to be attacking? Clearly, First National and Standard Bank, and some of the others who are in that field, but it is also going to be doing something that is going into a whole new area where digital is now becoming an opportunity. It’s a little bit like what’s happened with BitCoin as against field currencies or even BitCoin…Some people say, ‘you buy BitCoin nowadays rather than buying gold because it is a hedge and it is transportable.’

But these are things that take longer than we think to impact us but when they do impact us the impact is far greater. So, just to talk a little about Metro Bank here. Vernon Hill, who’s the founder of this bank. It’s the 5th bank that he’s started. His last bank in America started with one branch and he built it up to 500 branches and he sold it for billions of Dollars to a Canadian bank. He started Metro Bank in the UK and I got to meet him in this past month and if you ever want to get a feeling of an entrepreneur, who knows his game and is moving into a field that he’s supremely confident about – it’s Vernon Hill.

He says, ‘Metro Bank is the first High Street bank in the UK, to have been launched since 1840.’ His view is that the British High Street banks are really awful. Well, I have to agree with him because having being used to the standards of the SA big 5, where literally the service levels are just in a different universe to those in the UK. And you come into the UK, where you’re told, ‘well, yes, we’d like to open an account but come back next Thursday when the local business development manager will be here.’ The contrast, when you walk into a Metro Bank, and an hour later you walk out with your bank card, etc. You can see there’s a huge opportunity and Vernon Hill believes that the opportunity is even greater than he had in the US.

He said something very interesting as well, hearing my accent, he said, ‘oh, you’re a South African.’ He said, ‘of all the ethnic groups in the world the people I most love to employ are South Africans because they are more entrepreneurial than anyone else.’ So, how’s that? We’re getting beaten on the head from rugby through to our politics, to the economy but this guy who knows his game on entrepreneurship says, ‘we are amongst the best entrepreneurs in the world.’ So, let’s just put that into the good area. Metro Bank has, and I’m going to be writing something in some detail. In fact, I’ll be interviewing Vernon Hill in a little while, I’m just trying to squeeze into his diary, but there’s lots to have a look at that interview, and learn more about it but you’ll see the share price of Metro Bank has declined.

Why I like it so much, it’s like a Capitec but it’s just better, and why I say that is because Capitec was thinking of coming into the UK, as any other go-ahead bank would have done, but when it saw that Metro Bank was already here, Gerrie Fourie said, ‘well, they’ll rather look elsewhere.’ This is a company that is using the best of American ideas. He says, ‘anything stupid in banking they get rid-off.’ They treat their banks like stores, they’re open 7 days a week, until 20h00 – 21h00. It’s like a retail operation. It’s such a long way away from the traditional banks. It’s been growing at 60% a year in its deposits and its lending and that’s been the big reason for the share price coming under pressure lately because when you grow rapidly as a bank, you need to raise capital. So, they’ve been issuing stock to raise capital and that has put the share price under pressure. When I spoke to him about it he said, ‘just stay with me, you’ll be happy.’ And I think we can. It’s been an underperformer in the portfolio. It’s trading higher than when we bought it but on the other hand, Metro Bank is one of those Capitec look-alike’s in the long-term. Stuart?

Thanks, Alec. Just on Metro Bank, Michael wants to know, ‘are the conditions similar for Metro Bank to grow as fast as Capitec?’

Even better. The growth that we’re seeing from Metro Bank is more rapid than Capitec because it’s a much bigger market and a much bigger opportunity. SA banks, the big banks, are pretty switched on. They are pretty switched on – they could probably make a good go of it in most countries in the world and Capitec has had to fight against that so, it’s been a little more difficult for Capitec, relatively speaking but Capitec’s business model and Metro Bank’s business model is the same. You go into the branch, you’re treated like a retail customer. The branches are open 7 days a week. They’re open even later in the UK, by Metro Bank, than they do with Capitec in SA. The whole approach has been one where they’ve been able to come in without legacy systems and start from scratch. So, the runway that Metro has got is huge and as you see there, the market cap of £2.9bn – that is minuscule in a British sense. It’s a very small market cap at this stage. This is the kind of company that you can see the valuation, looking back in 5 years’ time, certainly at its current rate of growth, as being very much bigger than that. The branches – there are about 50 branches at the moment. They’ve only been launched for a few years, and they’re looking to get to 100 branches so double the size in the next 2½ years, and he says, ‘there will be a Metro Bank near you, no matter where you live in the country.’

Thanks, Alec. Des just wants to know, ‘have you got any news on PayPal?’

I don’t but that’s another good one. It’s another very interesting one. If you recall that PayPal was part of eBay and then they got their independence. Since they’ve got their independence it’s been spun out there, they really have been going ahead at a very rapid clip and doing very interesting things. They’re raising their profile. We know, with our Premium section on BizNews, we get a lot more queries nowadays from people saying, ‘please, can I pay through PayPal?’ So, that’s a small sample of course, but it does give us an appreciation that PayPal is making strides in areas perhaps where it wasn’t in the past. I need to do some work on it. I’m sorry, I can’t help you on that at the moment. I haven’t been following its valuations.

Thanks, Alec. There’s a comment from Gavin. He said, ‘you mentioned New World type stocks. Would you consider developing an ETF with an institution, which could track such stocks for retail investors?’

There is one. In fact, the best performing ETF in the UK, is one run by a Scottish investment house. I know my colleague, Jackie Cameron wrote about it, and if you just go, as a Premium subscriber, if you just go onto BizNews and put in ‘New World ETFs Scottish bank or investors,’ it will come up. It was a very well researched article that she did so, they do exist and they’ve been very good performers. For sure, a very good and a smart idea.

Thanks, Alec. A question, not quite global, but you mentioned Capitec earlier so, Anthony wants to know, ‘would you recommend him to hold onto his PSG stock with the Capitec share price being so high?’

Yes, Capitec, PSG – these are very interesting questions that you need to ask yourself all the time. Investment trusts are usually companies that trade at a discount to the net asset value, the underlying value. Now, PSG has a most unusual situation where it trades at a premium, it often trades at a premium to its underlying net asset value because of the high regard that investors have for Jannie Mouton. It’s come back in recent times and I haven’t looked at it lately, but it’s almost likely that it’s back to normality now, trading at some kind of a discount. But it does have a huge exposure to Capitec and its market cap has gone from R67 billion to R104 billion in the last year. You’ve got to ask yourself if the growth rates in the past year have gone, they’re still very respectable but they’ve gone from 20% to 17%, is it ex-growth? And if it is not ex-growth, but is its growth declining? If it’s growth is not accelerating any more but declining then can you justify seven times book? It’s a fantastic operation and I’m a huge fan of the management team and I’m a huge fan of the bank and what they do but shares, it doesn’t mean that you have to be a huge fan of the shares. So, in that case, I think the answer is pretty clear. PSG – if you believe that Capitec has been pushed too high then you’ve got to believe that PSG is going to be…

Well, the way I look at it is a little different. It’s when you invest in stocks you buy them forever. But when those stocks disconnect with reality then you have to make a decision on whether or not forever it today. Warren Buffett did this. He did this in the 60’s when the share prices on the New York Stock Exchange were so high that he felt he couldn’t buy anything that was offering value anymore. What he did was he liquidated the entire Buffett partnership and gave back money to all of his investors. He also gave some of them the option to convert into Berkshire Hathaway, which was a textile mill he bought, which has not become the Berkshire Hathaway of today. But his view at that stage was that the market, as a whole, was overpriced and he was proven to be very spectacularly right.

In the case of Capitec and PSG – you’re not talking about the market overall but you’re talking about a particular stock, and if you were to ask yourself, ‘would you be buying Capitec today, at seven times book?’ And, as a consequence, ‘would you be buying PSG, which is based on that?’ You probably would be questioning it because it’s not a new economy stock. It’s not a stock that will enjoy the benefits of the network effect of artificial intelligence, of globalisation or being in the cloud of scalability through technology. It does, to a degree, but it hasn’t got the attributes that you’d get from an Amazon, for instance, or from a Google, or Facebook. Then you have to think about it very carefully.

Thanks, Alec. Just an interesting one that came through. You mentioned ‘price to book’ and then ‘price to earnings.’ Obviously, the one you referred to with Capitec, ‘what’s the simple difference?’

Yes, ‘price to book’ is what you use in banks and it is the net asset value of a bank, the tangible net asset value of the bank. In other words, if you were to liquidate the bank today what would you get out? It’s like a company as well. We call it ‘net asset values’ in companies. In banks you call it ‘book value.’ Then with banks, you would then take it as a multiple so, let’s just say the book value is 100 and the share price is trading at R100. Then you know that you are on a one times priced the book. In Capitec’s case, the net asset value is R14.5bn and the market cap is R104bn. So, if you stop trading today, at Capitec, completely, you would get back R14.5bn for your R104bn. A year ago the net asset value of Capitec was R12.5bn so, it’s gone up R2bn in the past year but it’s market… So, its net asset value has gone up R2bn in the past year but its market cap has gone from R67bn to R104bn so, it’s market cap has gone up nearly R40bn for a R2bn improvement in the net asset value. I think that kind of tells you.

When we’re talking about ‘price to book’ it’s about banks. When you talk about ‘price to earnings’ that’s industrial companies so, that’s an old traditional basis that you would work out how many years is it going to take me, at today’s profitability, to earn my money back from this company? So, if I were to buy a company that’s generating R100m in a year, and it’s market cap was sitting at R1bn. Then that means that your price to earnings ratio is 10. It will take you 10 years, at the current rate, of your earnings, of the R100m, to get to R1bn, and that’s just the very simple difference but we only use ‘price to book’ mostly for banks. You can use it for industrial companies but if they’re trading, and they generally do trade under net asset values or very close to it.

Thanks, Alec. I’m not sure if you know anything about JD.com? Ian Hall just wants to know what you think of it, it’s the third largest internet company on revenue. They’re based in China.

The name again?

JD.com.

JD.com, no, sorry, that’s a new one for me. Sorry, I don’t know it. It’s one to look at. Thank you.

Larry, and a bit more on the local front. He asks, ‘apart from Naspers are there any companies on the JSE that are new industry focussed?’

Apart from Naspers are there any others that are new industry focussed? Yes, that would fall into this category. That’s an interesting question. I’m sure there are. They don’t jump out at you though. I can tell you that you can almost invert it and say the ones that aren’t, and they’re very easy to identify but the ones that are, they’re not so easy to identify. SA – the damage that was done to the country through the bandwidth starvation from Telkom over all those years has been enormous. But we are seeing it coming out of that now. Generally, what happens in SA is when you get these really good start-ups and very innovative companies. They tend to get bought by global businesses so, they don’t get onto the JSE because the JSE doesn’t give them the rating that they would get in California, for instance. There’s been a number of these examples in the past couple of years, where you’ve had companies and particularly in the Cape. We’ve had some big success stories there but they would get sold for $100m in a relatively early stage of their development. Whereas if you were to try and list them on the JSE, you’re not going to get anything near R1.5bn for them. The SA investor still hasn’t kind of clicked to what’s happening in the new economy.

I remember with my own company, with MoneyWeb. I’d scratch my head and think, ‘but we should have listed in Silicon Valley or in the US, or even on aim.’ Identical companies were trading at a multiple to what our stock was trading at and unfortunately, I didn’t get the chance to convert is and to kick it on because just as we were getting there I left the company. But those are the realities of the SA situation that you don’t really have an investor community that is rewarding entrepreneurs who are starting tech companies or highly scalable businesses, to the degree that the reward comes elsewhere and of course, then you just overlay the Rand and the hard currencies and you can see why companies are actually selling to international buyers, rather than taking the other route of going onto the stock market. So, outside of Naspers, there’s nothing that jumps to mind but who knows, they could be coming.

Thanks, Alec. I’ve got one last question from Shane. He just wants to know, ‘what’s your view on using artificial intelligence as an investment tool?’

Using artificial intelligence as an investment tool? Wow, that’s a very-very good idea. Any way you can use artificial intelligence is smart. We’re seeing an expansion of what’s called ‘robo-advisors’ in other parts of the world. Of course, it’s all to do with early adopters. The bulk of society, and the Americans will show you this. The bulk of society are resistant to change. In fact, you’re seeing it in the UK as well. The surge in the Pound against the Rand in the past month (an 80% gain) was largely because of the realisation that a hard Brexit is a dumb Brexit. But the British didn’t vote for Brexit because they wanted to get poorer. They voted for Brexit as a protest against the bureaucracy that exited in the EU.

When we saw Macron this week coming out and saying, ‘yes, we hear you Britain. The bureaucracy in the EU has to be addressed and we need to address it and we need to fix it.’ Immediately there’s an understanding and Macron said this. He said, “The EU that I envisaged is going to be a very good home for the British.” The British would not be able to stay out of it because the reasons that they left were not because they wanted dramatic change but because they didn’t like the bureaucracy. That’s the reality of what happens in life is that most people don’t like change and the early adopters are the ones who, sometimes they talk about the pioneers getting the arrows and the settlers making the money. It depends on which pioneers you are.

There’s a pioneer on the screen now, an incredible human being, Elon Musk. His company, Tesla, is completely remaking the whole world of electric vehicles but it’s doing more than that. Because the electric vehicles needs batteries they’re completely remaking the whole storage of energy, and because of that SA doesn’t need to have a nuclear plant any more or these nuclear plants that we know are going to be open to so much corruption. Because renewables – renewable energy and the prices of which are tumbling. In fact, this last week in the UK the very first renewable plant opened without a government subsidy so, up until now what’s happened is that if you are wanting to make the long-term investment in a renewable energy operation you’ve needed the government to guarantee you a base minimum that they would pay you over a period of time. So, you’d say we’ll build this plant of 20 megawatt hours and we will then sell electricity to you at say £100, say, for each megawatt hour and the government said, ‘fine, we want to see green energy – we’ll accept that bid.’

Now, of course it’s a whole process of many people bidding at the same time and those bids have been dropping or the guarantees have been dropping significantly. Now, in the past month, for the first time there’s been, if you like, a commercial renewable energy company coming in and saying, ‘I’m not interesting in what the government is guaranteeing me. I’m doing it anyway because I think that I can provide this energy at an acceptable price.’ Acceptable relative to nuclear, relative to coal, etc, and without all the carbon omission issues so, the world is changing and it’s because of this man, here, Elon Musk.

He started electric cars. We’re seeing the death of the internal combustion engine. Around the world people are saying, ‘electric cars are actually here to stay.’ There was another announcement this week from a company called Dyson in the UK because it’s a tech company. It’s got battery technology and it said it’s now going to start making electric cars as well. Extraordinary, and that’s the time that we’re living in. We’re living in a time where technology is pushing the boundaries. Where changes are transforming the way we live and its people like Elon Musk who are in the Vanguard of this.

I just wanted to make two final comments before we go, and thank you for your questions, sorry I haven’t been able to get around to all of them but I do hope that you’ll be back with us again next month and we can hopefully pick up there. There’s been a couple of interesting things happening with this guy’s company. We know that the share price is treating us very well, thank you Mr Zuckerberg, and although we only bought into this stock less than a year ago, it’s already a very good performer for us. But there were two big things that I really just wanted to dwell on very quickly here.

The one was the attack on the US democracy by the Russians through Facebook. When it first started off it looked like, well certainly Zuckerberg thought that the accusations were a lot of bunk but last week he admitted that Facebook had been used to distribute something like three thousand targeted adverts by the Russians to promote Donald Trump. Now, how interesting is that? He’s admitted it. It hasn’t affected the share price. They’re going to make sure that it doesn’t happen in the future but it’s all a learning phase.

But the second point about Zuckerberg, and this is a very important one. A young entrepreneur like this had an idea that he would know better than most people, certainly outside investors, on how to take the company forward. It’s very important when you’re talking about a media business and we had a question about this earlier on, ‘why should we be buying into companies like Tesla, who are making losses?’ Now, what Zuckerberg did this week was, and you might recall that a while ago he said, he’s giving all his money away to charity, and one of his challenges is that if he sells the Facebook shares and gives it to charity he’ll lose control of the company. He’s got a special class of shares, which have got 10 votes, as against the normal shares that the most of us or the rest of us own, which has only got one vote. Because of that, he controls 53% of the votes in the company, at the moment.

He’s thinking of selling 35 million of these shares, raising about $6bn or $7bn to fund his new foundation, which is called ‘The Chan Zuckerberg Foundation,’ his wife is Priscilla Chan, but once he sells more than those shares he’ll go below 50% so, he tried to put together a new scheme, which will bring in a new class of shares completely. Shareholders didn’t like that, they kicked back against it and he’s now given up on that new scheme and his foundation will, as a result, not be getting the kind of money that he was hoping to put into it but it shows that there’s always this tension that goes on between the investors and the entrepreneurs.

In the ‘new world’ the entrepreneurs, like the Google guys, who also control their company, or Alphabet, through a share structure. The entrepreneurs are insisting on that and maybe that’s another reason why entrepreneurs are not looking or ‘new age’ entrepreneurs are not looking to invest on the JSE because the minute they do that, or they invest in traditional markets. The JSE says, ‘we don’t like this pyramid structure,’ we’re very critical of Naspers, for instance, with its pyramid structure, with its N-Shares, which are high voting shares. As a consequence, entrepreneurs are just reacting to it and saying, ‘well, first of all, I’ll probably just sell the whole company to someone with Dollars.’ Secondly, ‘why should I list there?’

That’s the reality of the tensions that are going through so, a fascinating world we’re living in. Thank you for being with us today. It’s been a pleasure, as always, to have a chat and to show you the portfolio and how it’s been doing. Up at 31% annualised – that is unrealistically high. You’ve got to understand that we are in a world where those kinds of returns are just exceptional. We’ve been riding the tiger very nicely for 3 years now, in the past month (as you will recall). The major reason for the improvement in the portfolio has been the decline in the Rand, and that’s really one of the basis.

Just to go back to the Rand itself, as we close off with. The Rand in the past month, and this is quite an important issue. In the past month it has depreciated by 8% against the Pound and by 4% against the USD. Now, there it is there. That doesn’t mean that in the next month it’s going to do the same thing but it does mean that if you’re investing offshore, when these rapid depreciations occur you know that you’re protected against them because you are investing in a more global portfolio and that really, is what we are trying to achieve, with the offshore portfolio or the BizNews Global Share Portfolio, which just to remind you, has really done us proud over the last little while.

Thank you again for being with us. I know I’ve overstayed my welcome by 4 minutes in fact, and we look forward to being back with you again, on this webinar in a months’ time. Over to you, Stuart.

Thanks, Alec. See you next month.