JOHANNESBURG — October, as the farmers call it, was a bumper crop for the Biznews Global portfolio. It was ‘double whammied’ as American listed tech stocks soared as analysts under forecast earnings, while a ‘Gigaba-infused’ mini-budget saw the South African Rand take a big knock. These two factors saw the annualised return of the portfolio hit 39%. Alec Hogg takes Premium subscribers through this month’s update. – Stuart Lowman
The way the Biznews Global portfolio is structured is that we make changes from time-to-time. We invest in stocks that we believe we can hold forever. Like Warren Buffett says, ‘if you buy a share and the stock market is closed for 5 years you should be happy to be invested in that share.’ So, no trading on this side. We buy stocks where the whole period, and certainly notionally, is forever and then we will adjust the portfolio as and when shares get overpriced or when there’s a fundamental structural change at the company. So, it should be pretty easy. What we do is we buy stocks over a 3-month period as well. Sometimes it works to our advantage and sometimes not.
___STEADY_PAYWALL___
On Microsoft, we bought the first tranche 2 months ago, the second tranche last month, and the final tranche now, this month. As you can see we’ve paid up for it, we bought the shares this morning for $84. The last tranche we bought at $73 so that gives you an indication of the way it has moved. Of course, had we bought all of the holding 3 months ago we’d be looking very clever. The Rand was stronger and we could have got more shares but even so, it’s a good discipline that you invest in those shares or when you invest in shares that you buy them up over a period of time. That’s to take out the impact of the exchange rate and to take out the impact of share price movements – in theory anyway. Sometimes it works, and sometimes not so great.
So, we’ve finished our purchases of Microsoft. You can see there that we now have 266 Microsoft shares. The price that we’ve paid, on average, is $77 a share up front, because we paid quite a lot for the last tranche, and the price now is $84 so even by purchasing over that 3 months period we still had a nice rise, an improvement of 9%. That really is just sensational. Usually when I buy into new companies, and those of you who’ve been following this portfolio for the last 3 years will know that I tend to be a little early, (a little ahead of the game) and often it takes a long time for the shares to start moving. Apple was a good example. Our purchase price there, as you can see, is roughly $125 a share. We were down to $90 at one stage and it has rebounded and I’ll tell you more about that later.
But if you look at this portfolio, this is in US Dollars – there it is, since we launched it in December 2014. It has grown by just under 60%, which is a wonderful return. It has way surpassed any of the ideas that I anticipated but primarily that was because of Amazon.com, which is up 240%. Just as a little aside, you will see that the stocks that we have in this portfolio, a lot of them are internet related and internet based. I think the advantage that I have is that I’ve been in the internet field, would you believe, for 20 years. In 1997 I went into the online environment when I started Moneyweb above my garage in Parkview in Johannesburg, and clearly as it has been the business that I’ve been focussing on it’s something that you watch the great players in the field and there’s a good indication of this also in our SA Champions Portfolio where Naspers accounts for 20% of that portfolio, one of the great global players.
But as you can buy Naspers in SA, our feeling is that this is in USD, let’s buy stocks outside of the country and you can then see Tencent Holdings, which is the reason for the Naspers share price boom, is part of this portfolio, and 9% of our holding is there and that’s primarily because although we invested, I think it was 7% of the cash into it – the share price has risen very nicely since we bought in and that was only as recently as May 2017. So, there’s your portfolio. Thanks to Amazon, thanks to Alphabet, thanks also to Tesla Motors. In fact, Tesla was the only share in our portfolio that did not increase significantly in the past month.
Going onto the Rand and you can see there our annualised return a month ago was 31%, which is extraordinary. Our annualised return now is 39%, which is mind blowing. It isn’t something that you can bank and say, ‘well, if I put $100,000 into this portfolio, we’re going to grow it to $139,000 in a year. These are really extraordinary numbers if you think long-term. The stock market will give you long-term returns of about 7% in real terms so that is over time and we’re looking at 39%. We could almost close the portfolio today, sit back for 10 years and then be, at least align with what happens in the world generally. Of course, that’s not what we’re going to do but it just shows you how well we’ve performed.
A month ago, that figure at the bottom, where you see the value in Rands. The portfolio was just under R4m, (R3.95m) and in one month it’s gone to R4.5m so, it shows you what an extraordinary month our portfolio has had and share prices have had, again reflecting that double whammy, a fall in the Rand and a strong improvement in the core holdings or strong rises in the core holdings of the shares that we own. Amazon and Alphabet both exponential increases but some pretty good increases across the board.
Just an interesting point there, when you start at Vanguard. You see the profit in Vanguard has been 55% in Rands. If we go back to the previous slide the profit in Dollars has been 25% so, had we just held onto or put the money into USD our improvement would have been about 30%. Whereas by investing in the US stock market the gain has been 55% so the strategy was first and foremost, hedge yourself against the Rand where you can do that by putting it into money market instruments if you want. We felt that there was great value to be offered by the US stock market so we started off with a big chunk in Vanguard, which is an index tracker for American shares. Then the balance so, 1/3rd was in Vanguard, and the balance was in share picks, and as we’ve got to know these markets better we’ve had more confidence to go into individual stocks. As you can see them there they’ve pretty much all performed – it’s lovely to see a portfolio that every single one of your shares is in the black. That doesn’t happen, as we well know from history, all the time.
The Rand’s performance has also played its part. Most of the portfolio is invested in USD so, when you see the Rand depreciating from R13.60 to R14.10 against the USD. As you can see on that little table at the top it’s clearly going to have quite an impact on the portfolio. With the British Pound, it’s been a similar thing, and you can see that the big move here happened around about the time of the ‘mini-budget,’ there it is, mid-October, and the depreciation of the Rand, it was running around R13.50 – R13.60 against the USD, is pretty much where it started the month and of course, ended 50 cents weaker. That has had quite an impact on the portfolios performance.
Similarly, the Rand against the Pound. It has now got back to R18.62 today so that’s almost a 50 cents depreciation there as well. Against the Hong Kong Dollar (HKD) I didn’t have space on this table to put it, it’s also depreciated so all around the world the ‘mini-budget’ has had an impact on the value of SA assets. I just want to show you the individual performances there. This is pretty obvious there. The Rand profits, since purchase, in other words in the last 3 years, we’ve gained 25% by just taking our Rands and just putting it into USD but that 25%, as you can see in this graph, has been a lesser return than the individual stocks that we bought.
Alphabet and Amazon is quite obvious. Tesla has been a great winner for us. Even good old Berkshire Hathaway and Vanguard, the two bankers, the two steady ones, have done a lot better than the pure Rand/Dollar. Apple is coming into its own as well. Facebook, we haven’t held for that long so, that’s a great performance, as with Tencent. Metro Bank has been a little bit of a sleeper but I’m very happy to have that one in the portfolio, as we’ll discuss later. Stu, shall we hit a few questions?
Thanks Alec. I have two questions at the moment. From Don Kruger he asks, ‘is it illegal to manage money on other people’s behalf without a FSB license?’ Some of his students have started doing this and he’s raised an eyebrow or two. They are working with, plus/minus R300.000 worth of funds from ‘clients.’
Well, it is illegal to take deposits so, you can’t open a business and run a business that takes deposit if you don’t have a banking license so, that’s kind of where it starts. You cannot, and for instance we, as BizNews can’t put together a company and say, ‘invest with us and then we’ll invest the money for you.’ That would also be illegal because the FSB would have to be happy with that but what we do is we put together a portfolio and you can then follow that portfolio with Standard Bank or our local JSE portfolio, with EasyEquities. When it gets to individuals, who are taking in money and investing it on behalf of others – there are a thousand ways around that. The most obvious way of that is Warren Buffett.
Warren Buffett had the Buffett Partnerships. He wasn’t registered with anybody. People came to him and said, ‘Warren, would you handle the money for me?’ He put it into a company, which they created. The money went into that company and that company then made investments and they were shareholders in the company so, I wouldn’t take a narrow view on it. If these individuals are handling money on behalf of friends and family then there certainly is nothing wrong with that. If my mother in-law were to say to me she wanted me to invest money on her behalf. I don’t think there’s a court in the world that would stop her from doing that but when it comes to people soliciting funds to invest on your behalf I think the law is pretty strong in that regard. You’d need some kind of a license – I hope that helps.
Liesl just says, ‘it’s quite a large value portfolio should she try to replicate this with significantly less or cherry pick through stocks that are still value for money, what do you suggest?’
Liesl, the problem with trying to cherry pick a portfolio is Murphy’s Law says, you’re going to get it wrong and that’s just the reality of this. My recommendation would be, I’m trying to balance this portfolio as best I can. I’m also trying to ride the winners so, the big problem that one has is in the stockbroking community they only make money from you when you trade in shares and that’s why I love having the relationship we have with Standard Bank because Standard Bank doesn’t take that approach at all. Standard Bank’s approach is, ‘we want you to get rich and then you’ll grow your portfolio and you will then, in the long term, be part of our wealth creating.’ Everyone will win. It’s almost like the Discovery approach where they call it shared value.
I would say that what you should do is just try and replicate the portfolio, even if you’ve only got $10,000 or a lesser amount. Make the replication exactly as is. Then you’ve got somebody, i.e. me, who’s watching the portfolio for you every month and if things start going awry in a particular company, and it’s happened. We’ve had 3 examples of this in the 3 years. We’ve had Novo Nordisk, which we picked up thankfully, quite early before a profit warning came out. Novo Nordisk was one of the great or high flyers of the international community. In fact, the CEO was rated by Harvard Business Review as the best CEO in the world, before the wheels came off there.
We’ve had Barclays, which was a bet that we took at the wrong time, (just before Brexit), we were quite excited about the new managers at Barclays and how they would fix it, or so we believed but when some incidents happened that kind of showed you that Barclays was not everything it was telling you or the new managers weren’t everything it was telling you, but they were following values that were different to the ones that we believed in. We actually got out of the stock and thank goodness we did so because the shares had performed poorly since then.
We had a similar story with IBM, where we bought the story and we bought the turnaround and then Warren Buffett who had IBM as one of his top 5 holdings, turned sour on it so we followed him out. That, if you like, is the value that you have by following this portfolio as a whole because I’ll keep a close eye on it for you and then every month, as a BizNews Premium subscriber you get to hear exactly how the portfolio has performed and keep you up to date. I have my money invested in these stocks as well so, you know if you like, you’re running alongside. We’re together and I won’t stop paying attention. That’s the advantage of replicating this portfolio. When it comes to trying to cherry pick I wouldn’t know where to cherry pick today. Quite often in these webinars we get the question to say, ‘which of the shares would you rate as your best opportunities?’ Every time that I’ve made a suggestion I’ve made a mistake so, I’m not going to do that anymore. I’m just going to carry on now and say, ‘no, stick with the full portfolio.’
Just following on from that. George wants to know, ‘is it a good time to invest in this portfolio or should one wait for the Rand to possibly recover a bit?’
George, if we were to wait or to try and play the currency markets we’re guaranteed to lose money. It just is that way. My suggestion on this is that rather take 1/3rd of your cash amount. So, let’s just say, you’ve decided you want to put R1m, because up to R1m you don’t need to get Exchange Control or anybody’s approval. You can give the money to Standard Bank, they’ll find a way or invest it for you in USD. So, you take that up to R1m. After R1m a year, by the way, you have to start asking for permission but you take that R1m and then you change that. The first month you take R300,000 of it, and convert it into Dollars. The second month another R300,000, and a third month another R300.000. Now, this is probably the most difficult decision that you’re going to make because we are social animals. We are emotional human beings and as a consequence we want it now – I want to buy the shares now, I want to get them today. Whereas the best way for investing is to take emotions out of it. Be rational and logical completely, and understand that if you’re going to buy over 3 months it reduces the risk of buying the currency and the stocks at the wrong time.
So, here’s my suggestion to you, George. Put aside the amount of money that you have, be it R100,000. Take 1/3rd today, put it into your WebTrader account. Take 1/3rd today and convert that into USD and invest into the shares in the portfolio with those USD. In a month’s time, (end of next month) you do the same thing for the second 1/3rd and a month’s time you do the same for the last 1/3rd. You’ll see, when we do our investments, we do exactly that as well. Sometimes it works against you. We bought the Microsoft shares now, we bought 10 less shares with the same amount of money than we bought last month but mostly, you sleep better at night. You’re taking out the risk of buying or trying to time the markets – remembering that this is a portfolio that you should be holding forever. Stu, happy to go?
Yes, thank you Alec.
Here’s the Vanguard S&P 500. This is an index tracker. This follows the performance of the US stock market or the 500 weighted stocks (biggest stocks) on the US market. S&P is a firm well known to South Africans. They rate sovereign debt but they also rate corporate debt as well and they have this index, which has been used now for many years and it gives you a much better understanding than say the DOW, which is 30 shares equally weighted and they are historic. These are weighted every 3 months according to their market capitalisation and as you can see, it’s been a good month. There it’s gone from just under $232 to nearly $236. It doesn’t sound like much but a little bump up in the Vanguard index tells you that the market overall has done better. Now try and keep this idea in your mind because what the market does in a month it does give you an understanding of overall, how your portfolio is structured – did you do a lot better or not that much?
Starting off with Alphabet, which is the old Google. There’s the founders, Sergey Brin, and Larry Page, who’ve made a lot of people a lot of money and have done some incredible stuff for the rest of us. You can see on Alphabet towards the end of October the share price bumped up so, it started the month around $970 and it got through $1,000 in early October, came back below $1,000. That was, by the way, for the very first time, on the 11th October that it went above $1,000 a share, which is a benchmark for them. Why did it surge up last Thursday? Well, that was on financial results that caught everyone by surprise, in a good way. What happened, as far as Alphabet’s results were concerned, remember we have a quarterly publishing season in the US so, every 3 months the US companies release their financial results. What they do is they have phone ins that you can listen to the financial results yourself, if you’re that way inclined and, as a shareholder, you should do that.
What Alphabet said in their financial results for the 3 months to the end of September was that the earnings came in at $9.50. The market had been anticipating $8.30. Clearly, if you’re making a lot more profit than everybody thought you were going to make it gives us a surprise and of course, the share price as a result has moved up really well. The revenues year-on-year are up 24%. That’s why I like a company like this – exponential growth into the future. Its revenues are now looking at $28bn a quarter. They’re sitting on cash of $100bn for the first time, 60% of that outside of the USA.
Donald Trump has said continuously that he wants to make it attractive for American companies to bring their cash back home. If they do that it will require some changes to the tax laws at the moment. If US companies bring cash back home they pay tax on it. If they do that then Alphabet will be one of the biggest beneficiaries. Bring their money back to the US and make further investments in its core business, no doubt. Some of the ballpoints and those of you who have been reading the material on BizNews Premium would see that Felicity did a pretty good story just after the results – one of the advantages of having our colleague based in the US, and she gave the highlights on three bull factors. The one that I really liked that she spoke about was on YouTube.
Now, YouTube has got 1.5bn users. Now, just think of this for a minute. The biggest advertising medium in the world is television. Online is catching it and will surely surpass it quite soon but television is where advertisers tend to spend most of their money. In the television of the past you had networks so, like the SABC in SA, you have in America CBS, NBC, CBC, and various networks where they have programming that people buy into. Here, in the UK, the BBC is very dominant. It is driven by licenses, a license revenue. You have Sky, who are another network, and so on – you know what I’m talking about. But what’s happening now is that we are consuming our video more and more in the same way as YouTube delivers it.
So, YouTube – we upload videos to YouTube at any point in time. The world is now consuming its videos via a YouTube type mechanism. That’s why Netflix has gone through the roof. That’s why Amazon has moved into the video market and it’s something that Google has now finally gone into as well through something called YouTube Red. Go and have a look at the offering. It’s not available yet, not even in the UK, but I love the kind of programming they’re putting on it. It’s not the drama, the stuff that makes you crazy in an already crazy world. A lot of what they’ve put on there are comedies. There’s a lot of fun in it. It’s great energy when you look at the YouTube Red channel and the original shows.
Remember, these are guys with lots of money, deep pockets, and they’re starting to invest in the production of video or video type content that you pay for, in Netflix’s case £8 per month, and you’ve got as much as you could eat, and of course, no advertising – you don’t see any ads there. Contrast that with DSTV in SA, where not only do they charge you quite a lot of money but they also pack it with advertising. Clearly, if I can go and watch House of Cards on Netflix or some of these, what are we watching at the moment? Something called Victoria, a lovely show. The Crown is another example of a big investment. The Crown, I believe, they spent £100m on putting that together.
Now, if you’ve got the spending power as Netflix has got you produce your own content. It’s much more powerful and much stronger if you’ve got the subscriber base, then to have network television and that’s why network television is dying and dying fast around the world. It still surprises me when I look at SA that there are things like ANN7, and various other news related channels that are only on satellite television. Now, why would you want to go and watch something like that when you can consume your news or comedies, or entertainment, etc as and when you want it so, that’s what’s happening in the world. If you, for instance, want to watch the great Trevor Noah who has got his show at a particular time on Comedy Central. You can also pick it up in SA when you’re awake. You don’t have to wait until such time as Comedy Central is broadcasting the first show of Trevor Noah. So, you pick it up at a time that it suits you and is convenient to do and you won’t be sitting there watching a network channel that’s got to fill the channel 24/7.
How about giving you some insight into that? So, here we’ve got YouTube Red, which will be going head-to-head with Amazon’s fantastic offering and, also with Netflix’s offering and these are like super studio production houses or Hollywood production houses on steroids. This is the future and this is something where Alphabet has another big upside and people are starting to understand. Imagine, you start off with 1.5bn viewers, how can you go wrong? It’s incredible. Anyway, Alphabet’s results are excellent. The whole YouTube story is really getting exciting. Their click-through rates are surging. They’ve moved from desktop into the mobile advertising space. They’re still doing desktop but mobile advertising or internet advertising is an area they’ve successfully moved into. The click-through rates have been going through the roof, after declining for many years. This is a company on a role.
It did give us an opportunity to buy in cheaper. Those of you who hadn’t bought into Alphabet in the past, after the EU attacked Alphabet or Google, it’s major subsidiary on a competition or an antitrust issue but that’s now, way forgotten because it’s a minuscule thing in the grand scheme of things for Alphabet and there you can see the share price and the market capitalisation – $700bn and through $1,000 a share for the first time. Boy, are we glad we’ve got these shares.
Thanks, Alec. Just on Alphabet – there’s a question from Peter Jones who says, ‘can you buy a different class of shares, which is cheaper, without the $1,000 price tag?’
Yes Peter, there’s two classes of shares and this is something that’s been repeated with Facebook as well, although they don’t list two classes on Facebook. In fact, it’s repeated with Shoprite. If you have a look at, and just to put it into context. When Shoprite started off they issued preference shares and Christo Wiese owned enough preference shares with super votes to control the company with less than 50% of the capital. It’s a similar thing that’s happened here with Alphabet. When Sergey Brin and Larry Page listed the share, together with their chairman, Eric Schmidt, they issued a new class of share, the C-class shares, which have got many more votes than the A-class shares. Sorry, my apologies. We’re showing the A-class shares, which has got more votes (I’ve put up the wrong graph here). The one we’ve got in our portfolio is the low voting share, and is $1.017.
While I was putting this together I made a mistake and put in the class-A share at $1,033 but the performance of the share price is very similar. We don’t own the class-A, we own the class-C shares. You can buy one or the other. If you’re buying class-A it will have a small premium over class-C. In other words, the high voting shares will have a premium over the lower voting shares because if somebody ever wanted to come and acquire or buyout Alphabet, all they need to do is make an offer or acquire the A-class shares and then they would get control. In other words, they buy from Sergey, from Larry, and from Eric but at $700bn – it’s going to be quite a long time before anybody has got that kind of cash, and I think that this is, at the moment, the second highest market cap stock in the world so, we’re quite happy having the C-class shares, the lower voting shares, but if you want to believe that at some point in time there’ll be a change in control then you can pay the little bit of premium.
Thanks, Alec. Just a question that’s popped up from a few people. Why do you keep out of Euro Stocks, with particular reference to the Euro Stoxx 600?
The reason why we went into the S&P 500 Index was because I have a very deep belief that the Americans are business scientists and elsewhere in the world we are social scientists. What does that mean? That means that when you are structuring a business in the US you actually look at the profitability first and the sustainability perhaps of your social license second. Whereas, if you’re in Europe it’s the sustainability of your social license first. Now, that means that you get (I’m not going to give you any philosophical view on that) but it means that you’re likely to have a better financial performance from an American company than a European company, all things being equal.
Europe has got some endemic issues that it has to deal with. Some very serious social issues, un-competitiveness. Remember, Europe has got about 1/10th of the people on earth but they own about a quarter of the global wealth. However, they work much less than people who earn much smaller percentages of global wealth. Now, it’s fine. The Americans have got 5% of people on earth or 25% of the global wealth so, they’ve got to keep, if you like, running fast. They’ve got to keep going ahead to just maintain that rather than to come back to the normality, which would be 5% of people should have 5% of global wealth. They’ve got a really good system and they’re really good people.
The Europeans have not got such a good system of distributing goods and services, and they’re not as good business people as the Americans. Europeans still, they like their holidays and they have laws that say, ‘you can’t work more than 40 hours a week.’ Whereas the US, they don’t take many holidays and they certainly don’t have a 40 hour a week maximum working time. The Chinese, on the other hand, will work for less money, as will the Indians, and for less holidays because they are hungrier than the Americans even. So, if you put all of that together and you’re looking at Europe you’ve got to shake your head and think, ‘would I be investing in that system as a whole?’ That’s what you’re doing when you’re buying the Euro Stoxx. It’s not to say there aren’t some brilliant European companies, and some of the companies are absolutely fantastic investments. I just haven’t had one that’s jumped out at me and said, that this company is good. Apart from Metro Bank here, in the UK. This company is better than say, an Alphabet, an Amazon, a Microsoft, a Tencent from China, and so on. I hope that helps.
Thanks, Alec.
Moving onto Amazon – this is our star performer. That’s Jeff Bezos. He is now getting the recognition he richly deserves. He could seriously, disrupt just about anything. One of the few un-disputable areas though is big goods, and I’ll give you a personal example. In August this year I ordered, through Amazon, 2 bookcases. I love reading and I love being surrounded by books. Let me show you what I’m talking about – that’s a little bookcase there and another one there, and one in Jeanette’s office – I just love being surrounded by books. So, what happened in August this year I went onto Amazon, looked for a bookcase and found a smashing one, for that space behind me, 2 absolutely perfect – they fitted nicely, the measurements were nice. I paid the rather extortionate price for them and waited, and they still haven’t been delivered. So, Amazon is not so good when it comes to big items. These are big bookcases. These are bookcases that will be about 2 metres high. It’s the same thing with beds and appliances. Amazon is not great at that but because it’s model is on warehousing and distribution, and you know that when you’ve got a huge item where the margin is not so good, or certainly isn’t as good as smaller items. Then it’s not something that a business scientist, like Jeff Bezos would be going in for. I’ve learnt my lesson. I’m still waiting, by the way, for these bookcases. I don’t know if they’re ever going to get delivered but hopefully somebody, somewhere will answer my emails.
That shows you that a company like Steinhoff, for instance, in SA is really well positioned and they’re not Amazon vulnerable because they’ve gone for big. They’re in the delivery system of beds and furniture, the stuff that Amazon is not that good at. But where Amazon does focus its attention, my goodness you’ve got to start worrying. They did it recently when they bought Whole Foods, and that acquisition sent a shockwave through the whole food distribution industry, or the food retailing industry. They’ve now just done it the other day with the information coming out that Amazon has acquired wholesaler licenses in pharmaceuticals in 13 US States. The consequence of that was drug distributors in the US had a massive selloff. So, Amazon moving into the market – get out or get out of the shares that are going to be competing with them. Amazon, of course, had ‘no comment,’ about its move into any other area but it gives you an understanding that it can look at things.
It’s got this thing called Amazon Prime, which we are members of. We pay £80 a year. It gives you lots of free movies, free music, free delivery – it’s a wonderful system if you use it. If you don’t use it it’s pretty wonderful anyway because you could use it at some point in time but it’s great for shareholders because Amazon have now got these millions and millions of people who have signed up to Prime, who have just given annuity revenue. They also launched something called Business Prime Shipping, where Amazon is now moving into delivery. That launched a couple of years ago but they haven’t really focussed on it yet. Moving into delivery to factories, hospitals, and offices so, now you see what we’re talking about with pharma products. If you’re delivering to hospitals and you’re actually a wholesaler of drugs or pharmaceuticals it’s an opportunity for you. With the margins and the distribution base that Amazon has got it can wipe out competitors.
They call it the Amazon Effect. In fact, who’s they? Warren Buffett and Charlie Munger. If you want to go onto BizNews and just put in Amazon, Bezos, Munger, Buffett into the search you’ll quickly come up with the part from the Berkshire Hathaway AGM where they sang Bezos’ praises. The reason why Amazon’s share price surged in this past month though was just like with Alphabet, they came out with financial results on Thursday and they were expected to show a profit of 3 cents a share. Bezos doesn’t really care for profits, he’s reinvested over the last 20 years. He’s been reinvesting continuously every bit of profit that is made. They put it back into the business and that’s what shareholders expect but in the third quarter they showed a profit of 52 cents, against an expectation of 3 cents, and the market just loved it.
This is a company that, well the share price in the past month has gone from $950 to $1,110, that’s a $60 improvement and of course, we bank that all the way to the bank. Today Amazon generates 44 cents of each Dollar spent online in eCommerce in the USA – 44 cents of that goes to Amazon and that is just growing. It was at 38 cents a year ago. I haven’t got the UK figures but I can assure you it’s also moving in that direction. This is a company that is only now hitting its straps and one doesn’t know where the Amazon Effect will end. All I can say is I’m very glad we’ve got it in the portfolio and I’d be even happy today to be buying them. There’s the share price.
Alec, I’ve got two questions. ‘why did analysts forecast such a low EPS?’ ‘Why have they got it so wrong?’ And Theo just asks about Amazon’s PE, which I’m sure is something you don’t take into account with an exponential company. He just asks, ‘what’s the PE?’
Those are two very good questions. Bezos doesn’t actually give a hoot what the analysts think. He doesn’t give a hoot about Wall Street. He was punished by them in the early days, a bit like Elon Musk by the way. They do not pay attention to the quarteritis obsessions at Wall Street. Wall Street is telling these guys how to run their businesses and people like Musk and Bezos say, ‘don’t come out of university and get yourself a CFA and say you can teach me how to run my business.’ Stick to what you know, which is crunching numbers. You can either decide if you want to be part of it or not. I’m going to run the business the way I like.
If I can tell you in my career for 35 – 37 years in financial journalism, the number of company executives who’ve had the guts to say that, have been relatively few but hugely successful. The ones who run their businesses not for the market but because they understand their businesses and they run it for the long term. On the other hand, I can also give you some very good examples, if I were to apply my mind to it, of companies that were run by CEOs who ran it for the market. Unfortunately, the differential between the two is usually professional managers, who run it for the market, and owners or entrepreneurs who started the business, who run it for the long-term.
Amazon was started by Bezos – he runs it. Google, now Alphabet was started by Larry and Sergey – they run it for their own business. Elon Musk started Tesla – he runs it because he understands it is his own business. He doesn’t have to count out to the market and those are a massive differentiator when you think about buying stock in a company or buying co-ownership in a company. Beware when you invest with professional managers because often their intentions will be associated by what happens on Wall Street or how Wall Street is determining their stock price because these guys are incentivised through share options and they retire. Buffett is 86, he still hasn’t retired.
You’ll see in this portfolio we’ve got a predominance of entrepreneurs. The same thing with the SA Portfolio. So, the analysts will come out with an estimate for Amazon of 3 cents and Bezos will tease them and bring it out this month at 52 cents. If he wanted to, he could do it at $5. Amazon can switch on and off the profit tap as it likes. The reason that the profit tap is not wound up to full is because he still thinks he’s got huge growth to go so, he reinvests. Bezos keeps reinvesting in his business. Extraordinary business and rather be his partner, rather go along with it.
Is there still scope for Amazon into the future? Absolutely – exponential companies are those that grow at this kind of a growth rate. Sales at Amazon are up 34%. Now, all you have to do is sit back and look at our portfolio, where the portfolio has grown at 39% over 3 years annualised. We’ve gone from R2m to R4.5m. That’s extraordinary and the same thing when you’re growing at that kind of rate how do you work out a price? How do you work out a PE? PEs do not apply in companies that are growing at an exponential rate. They don’t matter. PEs are price, which is the share price. We see there, $1,100 to earnings, but Bezos says, ‘I don’t want to give you earnings because I’m reinvesting everything into the business so, where does the PE come from?’ It’s a nonsense number, in Amazon’s case.
PEs matter when you get to a company like this one, Berkshire Hathaway, where its investments are in companies that Warren Buffett sees will be able to generate profits into the future. It doesn’t work with an exponential company like this one.
Apple Inc, where you can see that share price. This is the biggest or the most valuable company on earth, $860bn market capitalisation and why has Apple’s shares run so hard? They haven’t come out with their financial results yet. Those are going to be coming out on Friday (this week), but people are terribly excited about Apple because of its new iPhone. Now, remember Apple generates over half of its revenues from sales of iPhones and the iPhone 8 was disappointing. As a consequence, in the anticipation towards the launch of iPhone 8 the share price went up and then came back a little bit. This push has been through the iPhone X.
Ten years since Steve Jobs launched the first or brought the first iPhone and transformed our society in 2007. The iPhone X launch is this week, on Friday, it’s coming out. The pre-orders for the iPhone X have been, and to quote the Apple’s spokesman, “Off the charts,” not surprisingly. People were holding back. The analysts, again Wall Street getting all excited, ‘oh, here comes a new model – it’s going to be much better than the 7, people are going to buy it.’ Apple buyers or Apple fans, like myself are saying, ‘hang on, if I’m going to get a new iPhone, I know the X is coming out in early November – I’ll rather wait for the X.’ Why should I buy the 8 when it’s going to be obsolete in just a few weeks? The big thing that’s surprising everybody is that the pricing of the X is $999 but pre-orders for it, say that it’s going to take something like 4 months before equilibrium is reached. So, you’re going to have to put your name on a waiting list and you could wait for 4 months before you get your iPhone X – that is a successful product, and that’s the product that we’re seeing the market is also very clever. The suppliers to Apple AMS was up 29%, ST Micro up 20% those share prices went up in a week because of the anticipation of what’s happening with X.
Facebook has also had a phenomenal week. It enjoyed the improvement. Its results come out on Wednesday. It’s gone up strongly. In fact, the share price in the month – $167 last month, $179 so, up $12 in the month. As you can see it moved very strongly. The bullish sentiment came because of the financial results from Alphabet, which is in the same advertising field that Facebook is in. So, Facebook moving up in sympathy to, as you can see, an all-time record.
Tesla – I just need to spend a little bit of time on this one before we finish off the webinar for today. Tesla’s share price is the only one in our portfolio that’s gone down in the last month. It’s gone from $340 to $320, and it actually got to a point at $360 at some point in the month. Why? Well, its numbers are coming out this week as well and the concern is that Elon Musk’s anticipation for the Model 3 has been a little overblown. You either love Tesla or you hate it. I love it. I love Elon. I think he’s done us proud. We’re up 60-odd% in the portfolio, on the investment here so there’s plenty of scope for the share price to correct before we start getting worried and I just wouldn’t worry. Here is a man, he’s a genius – he’s South African as well, which give us a lot of, if you like, sentimental support apart from anything else, on what Tesla is doing and they are transforming the world of motor vehicles. They’ve been the flagship in the same way that Steve Job’s iPhone transformed mobile telephony. Elon Musk’s electric cars, Tesla, are transforming the whole motor vehicle sector. They’re killing the internal combustion engine so, put these away. In 5 years’ time you can almost be certain that they’re going to be worth a lot more.
Metro Bank, there’s a picture for you, I met the chairman, Vernon Hill. That’s his book called, ‘Fans.’ I had a fantastic interview with him so, go onto Premium and go and read that interview. You’ve just got to be impressed by this man. He’s 72, he’s running his second bank. He started Commerce Bank when he was 26, he got a license. He built it into a $8.5bn business and now he’s doing the same thing with Metro Bank in the UK. The results came out and I just want to give you these numbers because it emphasises what an extraordinary growth story this is. The company has been going for 7 years. They’ve had their fifth quarter of profits so, it’s a bank. The first High Street bank in the UK in 140 years. They’ve been going now since 2010. The latest profits were £7.2m, up 77% on the same period a year ago. The year to date, they forecast they’ll show a profit this year. They’re looking at the moment, at somewhere near £15m. Last year there was a loss of £12.5m so, it’s almost like they’re hitting that hockey stick. That hockey stick where you lose money and then ‘boom’ you move into the green. That seems to be happening here. Deposits are the big thing that they focus on in this company. Up 47% in the past year and they pay 50 basis points, 0.5% for those deposits, and that’s down from 53 basis points.
The lending was up even stronger than that. Loans up 66% – I’m impressed by this business it’s like a Capitec and I did a little comparison. When Capitec was 7 years old, it was also listed on the Johannesburg Stock Exchange. The share price was R30 a share. Capitec you’ve got to pay more than R900 today, 10 years later. Metro’s share price is £35 a share. Who’s to say that in 10 years’ time it’s not going to be £900? Well, Vernon Hill said to me, ‘we’re a £3bn market cap business,’ he would anticipate that to get to £40 – 50bn, given the estimation of the market shares that they’re looking at. It’s the UK’s Capitec and we’ve seen the movie so, we don’t really have to guess too much for this company. The share price though, a little bit up this month, not worrying because it gives you the opportunity to buy more. In fact, I bought 50 more shares in the last month, in Metro Bank. I’m very happy with it.
Then Tencent Holdings, there’s Pony Ma, the CEO.
The share price of Tencent had a bit of a bouncy ride in the past month but this is one that we, as South Africans know quite well, given Naspers’ investment there. So, not a whole lot to report until we see their results.
Finally, Microsoft, wow. Hasn’t this been a winner for the portfolio? We’ve only bought into it 3 months ago. We’ve just finished our final bit of purchasing and it’s already showing us a return of almost double-digit figures. The reason is because Microsoft’s results came out far better than anticipated. Remember, this is a business that’s been around a long time. It’s got a legacy business but they moved into cloud computing at the right time. Their cloud computing area, which is now about $5bn of $25bn for the quarter, and it makes a margin of 57%. Imagine having a business that generates 57% margin? If they were to just trip the cloud computing basis out it would be interesting to see what that would be valued at. Interestingly enough the growth, year-on-year, is 90% and who were the 2 dominant players in cloud computing? Microsoft and Amazon – those are the 2 big players in this field and terribly exciting to be invested in both of those companies.
There’s the portfolio in Rand, just to close off with. Please don’t anticipate that 39% is going to be a standard procedure for us, indefinitely but it’s nice while we can look at that and see the big ones. Stu, shall we finish off with a couple of questions?
Thanks, Alec. I’ve got a question on fear, from Claire. She says that the market seems scarily high. Are you not worried or do you see a crash in the near future?
Again, it’s a very interesting question that because when you have been around for as long as I’ve been around, and that sounds terrible, but I’ll just show you. I don’t have too many wrinkles and things but I started in journalism as a 20-year-old, in 1980. At that time the gold market was flying. When that gold price, and it was an incredible start to my career because every day you’d see the gold price growing by $20, $30, $40. Every time there was a gold fix in SA we would stop because back then gold was by far the biggest export earner for the country. We’ve seen the deterioration of the mining industry, which is a very sad point. But I saw the gold market and I saw the boom and the bust, and I saw how people operated then.
Then in 1987, we had the first stock market boom/bust that I’ve witnessed. Again, I saw the same thing in 1997, where just before the emerging market crash South Africans went moggy. We also saw the Dot.com bubble in the USA, which fell off a cliff in 2000. So, and then of course, the 2008 Global Financial Crisis, where everything fell in a heap again. The point I’m trying to make is that there’s a certain psychology, there’s a certain mentality that one sees when markets get overheated. I’m a great believer in Alexander Dow’s, Dow Theory, which he wrote about in the 1800s. He was a Scot’s orphan who went to the USA and became one of the great financial journalists of all times. He started the Wall Street Journal and the Dow is named after him, the Dow Index, after Alexander Dow who started that one. What he showed in the Dow Theory was that the markets work in certain big cycles and the cycles are based on behavioural economics or the behaviour, the way that crowds behave. I’m not seeing the hysteria about shares that I saw in 1987, 1997, 2000, and in 2008 – nowhere near it. As a consequence, a big crash, it could happen. Anything can happen, who knows. There could be a nuclear bomb exploding but from what we do understand right now the market is nowhere at that space where it’s hugely overvalued.
One final point on this, which is really important. In SA we’ve got to understand because we have mining shares and we have other shares on the market, and this is in years gone by. Mining was by far the dominant sector of the economy and the mining shares were the biggest sector of the JSE so, they would operate in one way. They would have their own little mission if you like. Whereas the rest of the shares on the JSE could be operating in a completely different way. We’re seeing this in the USA today where you have these exponential companies, the ones we have in our portfolio, Alphabet, Amazon, Apple, Facebook, Microsoft, Netflix we don’t have in the portfolio but those are the kind of companies. They’re exponential businesses. They’re growing exponentially. They are thriving.
Then you have most of industrial America or middle America, which is struggling because of the Fourth Industrial Revolution. Things are changing, there’s dramatic changes. Banks – think of how banks have got to now deal, not with the Metro Bank in the UK and a Capitec in SA, but with challenger banks. In SA there’s a new one called Tyme that’s coming and backed by Commonwealth Bank of Australia who are a digital bank. They’re ‘Amazonising’ if you like, the banking sector so, what would happen to the bank share prices? Well, they’re not going to be surging in that kind of environment when they have these huge competitors coming along. Our experience as South Africans really positions us to understand this world very well because we can see that you can have one group that are on their own hectic mission, as the exponential companies. The rest of the marketplace I’m not sure exactly, what their future is going to be like. It’s a very interesting time to be invested in shares and to be picking shares. One final point there, when you have a look at Vanguard. The profit in Rand is 55% that’s pretty good but in USD it’s only 25% in 3 years. So, the overall market in the US has not exactly been surging ahead in the same way as the exponential companies are. I’m not worried.
Sorry, Alec there’s a nice question to finish off with from Steve. He says, ‘where to now, Alec? We’ve got $45 in cash, what’s the next move?’
The next move is that we monitor our holdings very carefully. I am looking at a new purchase, as I’m doing all the time. I’m looking for something that will outperform. It took me a heck of a long time to finally invest in Microsoft and Facebook. I was thinking of Facebook right in the early days, in 2014, and it just looked too expensive and that was a big lesson. Apple again, we bought in twice actually. We bought in two tranches, the two different periods and maybe we should have bought in thrice and bought even more when it got down to $90. But right now, we have got Vanguard and Berkshire, our two bankers, who are sitting on 14%, call it 15% of the portfolio. Call it about a 1/8th of the portfolio that we can, I’d be very comfortable to trade that in if you like, on two stock picks so, that’s where to from here. Right now, the important thing is, be patient. Ride your winners and don’t panic when you look…
If we had panicked at any time in the last 3 years on Amazon and said, ‘let’s take profits,’ we would be looking very sick today. It’s a similar thing in the SA market when people say, ‘we’ve got to take our profits on Naspers,’ because it has an even more impressive run than Amazon has had. My view on investing is when you get lucky enough to find a winner like this, don’t be dumb – stick with it. The reason you bought the share in the first place was you wanted to hold it forever, so we’re going to be holding it forever. But where to from here? If we see the appeal of another stock and as you’ll know, those of you who have been following the portfolio for a long time – I’m a pretty slow learner and I really take my time in doing the analysis on the shares because they must be owned forever.
There’s lots of things. The planets have got to align and in some cases, they take a little while to do that but we’ve got capacity. We’ve got the capacity of putting that 15% in. In essence, what we can do is once that’s done, is if you were to find a really good opportunity there’s nothing wrong with sizing that up against something else in the portfolio, where the opportunity is perhaps not as good into the future and then switching your portfolio. I’ve done that in the SA Champions for instance, where we got out of Blue Label and we went into Glencore. That’s been an inspired move. Then we got out of Wilson Bayley, and upped our holdings of Naspers. Both of those have worked out for us but both of those took quite a lot of research and analysis beforehand.
Thanks, Alec.
That’s our portfolio for today. I hope you’ve enjoyed the presentation. It’s been, as always, a real privilege and a pleasure to be with you. Coming to you from London, there we go – that’s a better frame of the picture and I look forward to being back in your company again next month. For all the Premium subscribers – I hope you’re enjoying the fact that we are now giving you, and we’re working hard on that, on our model. Felicity Duncan, those of you would remember her from the days when we worked together at Moneyweb. She’s now our editor. She’s doing a cracking job. We’re bringing lots of new content every day and in fact, we’re taking quite a bit of stuff now that we would have just put into the free site and adding value, by doing it on the Premium site so, we’re very excited about the future of Premium and thank you very much for your support and be sure that we’ll continue to work and to serve global South Africans, wherever they live in the world because we have a mission to promote democracy in SA by supporting free enterprise and attacking corruption, but you knew that already, didn’t you? It’s nice to make good investments along the way. Thanks for being with us and I look forward to be back with you again next month, Stuart.
Thanks, Alec and yes, we’ve got the SA Champions portfolio update on the 15th November, which you’ll find at the bottom of the Premium newsletter, which comes out daily.
