We then put another 15 percent into Google and 15 percent into Berkshire Hathaway.  Thereafter, eight percent each, into Amazon.com, IBM, and Novo-Nordisk.  If you like, we have 30 percent in the market (in the S&P500 ETF).  Then we have another 30 percent in two stocks, which we really believe very strongly in.  Berkshire Hathaway is almost a reflection of the way the American market will go.  Google is my favourite share in the whole world – not surprisingly – and then, another quarter of the portfolio in Amazon, IBM, and Novo-Nordisk.  We still have a little bit of cash left to make further investments.  I refer you to this table because it gives you an indication of what happened in the last month.  The Rand/Dollar rate is down by two percent, which of course, is to our advantage because we invested on the 3 rd of December.

As far as the market investments are concerned, not much changed in the S&P500 Index in Rand terms – virtually unchanged.  The Rand has helped to offset a slight decline there in the timing.  Google is down.  It’s a share that has fallen out of favour.  We’re going to get into more detail in a moment.  Amazon.com continues to fall but that’s been our laggard in the portfolio.  I’m not worried about it at all.  Berkshire’s a little bit better in Rand terms.  IBM and Novo-Nordisk – neither here, nor there, so that’s the overall look at the portfolio.

Let’s start with the individual amounts.  The big story of the moment is oil.  You pay your money.  You take your chances.  You have your bets.  Increasingly, what’s happened on the stock market is that the oil price has currently had a negative impact on shares.  The reason for that is some of the very big shares that are listed on international markets (remember, we’re focusing our attention on the United States of America  – that is where our portfolio is primarily invested), the S&P500 does track what goes on, on the American stock market.  You have ExxonMobil and a number of other majors that are part of the indices in the United States.  Those share prices have been under enormous amounts of pressure.  Not surprisingly, the oil price is down (as we spent quite a bit of time in our last webcast) from $115.00 not even a year ago, to the current price, which is now looking to get closer and closer to $40.00 per barrel.  Will that continue into the future?  Well, I’m not going to go into details now, except to say that when you have a supply and demand situation that is determined by market forces rather than being determined artificial cartels; at some point in time, it finds its level.  I would not be trying to catch this falling knife i.e. the lower oil price.

BNSF – the big railroad – are benefitting because many of the customers now are starting to stockpile oil, so they’re moving oil around the country.  Geico, the biggest online short-term insurance company in America, which is a wholly owned Berkshire subsidiary (a little bit like Outsurance in South Africa).  With a reduction in the cost of running a car, the view there is that more people will be able to bump up their insurance etcetera, so that’s on the positive side.  The negative side for Berkshire is that they own quite a lot of shares in ExxonMobil, which has fallen but its only fallen back to the level at which Warren Buffett bought into the shares, in 2013.  They also have a big stake in Lubrizol.  You will remember that that was the David Sokol scandal of a couple of years ago, where he bought shares in Lubrizol.  He was lieutenant.  Many people tipped him to take over from Buffett in future.

He bought shares in Lubrizol after recommending to Buffett that Buffett actually buy it for Berkshire Hathaway.  It was quite an insider-trading scandal.  David Sokol departed.  Warren Buffett bought Lubrizol.  Lubrizol is not a great beneficiary of a lower oil price but isn’t really, making that much of an influence either.  Looking at Berkshire overall, the benefits there of oil outweigh the disadvantages.  A couple of their points for the company, which have held back its price in the last month, have been Tesco (getting into more and more trouble).  I don’t know why people are still burdening Berkshire with this one, but Warren Buffett did buy a big stake in Tesco.  He has sold that stake. In fact, he sold it at the first hint of trouble.  The other big loser in the Berkshire portfolio (but a tiny part of it) is BYD, which is a Hong Kong based company that makes electric cars and batteries.

It’s been battered.  I remember, at one Berkshire Hathaway AGM: Charlie Munger telling the whole audience why BYD was such a fantastic company to buy.  I think Charlie would love to take those words back again.  Just to close off with Berkshire Hathaway, Buffett said at the last Annual General Meeting in May that he would be quite happy to buy back the shares from the company at 1.2X book.  Berkshire currently trades at 1.5X book, so you are getting a margin of safety.  If you remember the smart way that one invests: you buy shares or you know there’s a bottom – you know there’s a floor – and the floor here is 1.2X book.  If there were to be some chaotic event, you would know that Berkshire Hathaway doesn’t have that much downside.  It has a lovely floor under it.  There is Warren and there is the share price graph in the last month, of Berkshire.

Comparing it here against the S&P500, the blue graph is Berkshire outperforming the S&P500 (nicely done) and he’s been beating it hands down in the last little while – has Mr. Buffett.  After some years of underperforming the S&P500, Berkshire Hathaway is now steaming ahead at a much more rapid rate.

They weren’t driving the car.  He said to them ‘what are you doing in the front seat’ and they said ‘can you imagine how people on the highway would freak out if they saw a car driving along with no driver’.  That’s the only reason why they make sure that these driverless cars that Google has now been having, and have driven hundreds of thousands of kilometres over the roads in California with only two accidents…  Incidentally, in both of those cases, the man in the automatic driving was overruled by the chauffeur and both of them were back-ended into other cars as result of driver error, and not the car’s error.  Brynjolfsson then took that information and wrote this book, and the driverless cars are now…  In the last month, there’ve been negotiations between Google and General Motors, Ford, Toyota, Daimler-Benz, and VW to produce driverless cars in the year 2020.  Think about that and think about what a game-changer that’s going to be for all of us.

The other thing that’s happened in the past month is the launch (by Google) of what they call Google Domains.  It’s quite a profitable operation – the sale of domain names – by Godaddy.com.  You might have even bought one there, yourself.  Well, if you go and have a look at Google Domains, Godaddy.com is in trouble and they’ll be knocking that one out of the market.  That’s what Google’s able to do: apply its ingenuity, apply its expertise, and apply its massive cash pile to enter into new areas where it can disrupt, change, and make profit out of it.  What about on the downside?  Well, the only downside about Google is that the stock continues to underperform, and there you see it.  In the past month (Google being the blue line and the NASDAQ Index being the red line), the Google stock underperformed quite poorly.  As you can also see, that’s where we started a month ago, and it’s currently down here.

It has come off its bottom, but I think that if you’re a long-term investor (and we encourage you to do that in this portfolio) then this should be something that would make you smile.  I love the point that Piet Viljoen makes by saying that ‘if you had a hamburger that became half-priced, most of us would go out for dinner twice a week, rather than once’.  In the share market, if the price falls we all get nervous about it.  Well, Google has done okay in the past months, but it’s even better value available today.  Moving on to the next graph…and by the way, you can send through questions.  Simon is waiting.  Simon, with your short hair, I don’t think anyone’s going to recognise you when you go on TV next time.

SIMON BROWN:   I should be so lucky.

ALEC HOGG:   Good stuff but anyway, if you have any specific questions, please tap them through and we’ll get to them immediately.

They weren’t terribly successful when they brought out their telephones, but this seems to be a lot closer to home for Amazon.  I’m quite optimistic that the Prime Internet Video Service is going to be more successful than some of their other ventures were.  What I like about this is that Bezos keeps trying.  He has a fantastic base.  Amazon is a USD90bn company when you start looking at those kinds of turnovers, but he doesn’t make any profit.  This is making some of the short-term investors rather irritated because they say that they’d like to see dividends.  They’d like to see profits coming through, please.  Bezos says ‘I’m having too much fun, investing’.

Shall we move on to the next constituent of our portfolio?  Big blue – big value.

That transformation has of course, played very well for Microsoft, thereafter.  What Ginny has been doing is refocusing IBM onto the Cloud.  Now Cloud Computing is the next best thing in the computing space.  You think ‘well, IBM makes a lot of mainframes, so they’d be putting the mainframes into companies.  If companies are no longer going to be buying mainframes (in other words, putting their documentation and information into the Cloud) then surely, IBM would be vulnerable.  In fact, it’s quite the opposite.  IBM has invested $1bn in producing (and this came out in the last months) a new model, called the Z13.  It’s the most sophisticated computer ever built and it is the perfect computer for the Cloud so it’s a big bet on the Cloud being the place where computing is moving towards.  Cloud revenue at IBM was up 50 percent in the nine months to the end of October and Ginny and her team are focusing on this one.

I’ll be off to Davos tonight indeed, and paying a lot of attention this year at the World Economic Forum, to those issues – the issues of triple bottom line, which is increasingly becoming important for companies.  Novo-Nordisk has an advantage in that regard.

So, that’s the portfolio, Simon.

SIMON BROWN:   Alec, we have questions.  Folks, if you have more questions, pop them in the Q&A box.  The first one is from Ernest and it’s a great one.  He says ‘Berkshire Hathaway’.  He has it booked for long-term.  What about leadership going forward?  Charlie Munger, Warren Buffett: between them, they must be 170 years old, or something like that.

ALEC HOGG:   174.

SIMON BROWN:   174.  Next set of leadership?  They can’t carry on forever.

ALEC HOGG:   Yes, Warren is 84.  Charlie’s 90.  He’s asked this question at every Berkshire Hathaway AGM and I’ve been going for the last ten years.  He keeps explaining, as you and I would, ‘well, I have a mind full.  I have an envelope in my drawer.  If I were to pass away, the Board would get the envelope and they would open it and know who the successor is’.  I like what Charlie Munger said two years ago.  ‘Warren Buffett is the most rational of beings’, said Charlie.  ‘Why would he not pay attention (in the same way) to his succession, as he has to everything else in his life?’  To have built his business to the degree that he has – that’s his life’s work.  Why would he risk allowing it to fall over just because he dies?  He spent a lot of time on this.  He thinks about it a lot.  One of the good examples that he did was that he built in two portfolio managers from a cast of thousands as you can imagine.

You wanted to work for Buffett, not necessarily in Omaha, but that’s where they ended up.  These two portfolio managers have both beaten him in their performance in the portfolio and he’s been progressively giving them more and more money.  He has the same thing going on in the company itself.  Succession: some short-term views would be ‘well, when Warren goes, Berkshire Hathaway will be sold off.  It will have an asset-strip’.  This is no Phillip Frame.  This is no Byzantine webmaster at the middle of a complicated operation.  This is a man whose greatest contribution to Berkshire is the allocation of capital and he has selected those who can allocate capital when he’s gone.

SIMON BROWN:   That’s what conglomerates are about, Alec – the allocation of capital.  Brian Joffe comes to mind – locally.  A couple of folks are asking similar types of questions.  ‘I can’t afford to buy all of them.  If I have to go and get one of them, which would be the one’.  Some folks are saying ‘would it be fair, just to start with the Vanguard’.

ALEC HOGG:   Absolutely.  I would certainly recommend…  In fact, on Twitter the other day, somebody asked me what my share is for 2015 and I said ‘the Satrix 40’.  If you have to buy one share or one equity, it would be Vanguard.  As much as I love Google and as much as I love Berkshire Hathaway, they could have poor years.  Anything could happen.  We don’t know what the future holds.  When you are in the market – in the major ETF, which reflects the market – that’s the one to go for, so Vanguard’s the one.

SIMON BROWN:   A couple of questions coming around the exchange rate.  Ed puts it quite succinctly.  He says ‘what is your long-term view on the Rand/Dollar’.  I don’t know if you’re prepared to put your head on the table, but the question (broadly) is that ‘over the longer-term (let’s talk decades), we would surely expect to see Rand weakness and therefore, that’s always going to give a bit of a kicker to that portfolio’.

ALEC HOGG:   I think that if you have a look at any young democracy through history, it has growing pains.  The United States even had growing pains, but they’ve refined their economic processes now, to one where they’re a flexible economy.  If things go wrong, they bounce back quickly.  Longer term: they grow much more rapidly because they have smart governance.  They have democracy where everybody understands what democracy’s about.  They speak about things.  They have arguments over stuff like WikiLeaks.  They’re at a different level of consciousness.  South Africa is a young democracy.  We have many expensive lessons that we are learning and will learn in future.  Because of that, the Rand will be weaker against the U.S. Dollar, in time.  It’s rational.  It’s logical.  In addition, point-three percent of global GDP is generated in South Africa.

America is 75 times the size of the South African economy.  Why would you go for a little cork in the ocean when you have the whole world to choose from?  Longer term: no question in my mind that the Rand, relative to say, the U.S. Dollar (because that’s where our portfolio is concentrated), will be weaker.  That’s why we have our investments there.

SIMON BROWN:   A question around ‘what about beyond America, sort of European, etcetera’.  In a sense, Google, Amazon, and IBM are global companies, rather than American.  They might be domiciled in America, but the really are global.

ALEC HOGG:   They are global companies, but they’re American-managed and if you have a look at European management (with the best will in the world), the Americans are in a different league.  To them, management is a science.  They have the best business schools.  They have the best graduates from those business schools and they are able to apply the science of business so much better than any other (broadly speaking) companies from other geographies.  Novo-Nordisk of course, is Danish so there are exceptions.  You can’t just say ‘well, it’s an American company so it’s better’.  Many European and even South African companies would compete with any American company, but these are global operations in every sense of the word.

SIMON BROWN:   When I think about it, all big companies these days, to some degree…but I like your point about American management.  I’m not seeing any more questions coming up and we’re bumping for the half-hour mark.  Ladies and gents, we’ll leave it there.  Alec, you’re off to Davos this evening.

ALEC HOGG:   Tonight, yes and we have our presentations.

SIMON BROWN:   They week after next, I suppose.

ALEC HOGG:   It’s just around the corner.  We get back on the Monday.

SIMON BROWN:   Tuesday, Wednesday, and Thursday…

ALEC HOGG:   Tuesday, Wednesday, and Thursday.

SIMON BROWN:   Durban, Cape Town, and Johannesburg.  I’ll be at the Johannesburg one.  We will have another webcast coming up through February.  I’m not sure of a date.  We will fix that up when Alec is back from his travels.  Travel safe, have fund, and we’ll chat next month.

ALEC HOGG:   Thanks Simon and I’m looking forward to seeing the Standard Bank clients at the post-Davos, face-to-face…  What would you call them now?  Seminars, rather than a webinar but there’s value to both of them and I thoroughly enjoy that.  I go there, listen, make my notes, and try to compress it on the plane home so that by the time we get to those presentations, there’s some sense that comes out of it.

SIMON BROWN:   Folks, there are still some seats open.  If you log onto Online Share Trading, you’ll see under the courses as I said, Tuesday, Wednesday, and Thursday the week after next.

Source: http://www.biznews.com/global-investing/2015/01/20/alec-hogg-updates-on-biznews-coms-global-share-portfolio/