Alec Hogg takes us through the performance and current position of the Biznews.com Global Share Portfolio Webinar, which is proving to be highly successful. If you’ve just joined in on this journey, not to worry. Hogg provides a comprehensive breakdown of how the shares are doing and how the companies, split between the likes of Apple, Amazon, Berkshire Hathaway, Alphabet, IBM and Novo Nordisk are performing. The portfolio is up a staggering 49%.

Right, Stuart has pressed the button and we are here for the 10^th December edition of the Global Share Portfolio Update. We’re coming to you from Biznews.com’s office at the Johannesburg Stock Exchange. I’m Alec Hogg.

Stuart: It’s our last one for the year Alec?

I think so and in fact, it’s quite nicely timed because we started this portfolio on the 5^th December, a year ago. If you now have a look at the portfolio, after the past year, in our most recent, the end of November, we took a figure for the year. It looks even better. Yes, we can see how much it’s up. Well, we won’t give away the secret just yet but anyway, you can engage with us, please do. Put forward your questions. It is an interactive session. We have some slides that we’ll take you through obviously we want to tell you how the portfolio has done and what the companies in the portfolio have done. Thereafter, to make your own decision, whether or not you would like to follow us into these shares, the whole intention of the Global Share Portfolio is to give South Africans an opportunity to de-risk themselves from the insanity that appears to be going on the economic sphere in this country.

Last night we had the decision by President Jacob Zuma to fire one of the most prestigious members of his cabinet. A man, who in two years has endeared himself to the business community and to the international investment community – everybody knows that Nhlanhla Nene had a very tough job but somehow he managed to steer the ship in a good way. His mistake, it appears, certainly from a career perspective is in attacking a strange decision by the Chairperson of South African Airways, to interject a tiny finance house, in between a long established deal between SAA and Airbus. If you go onto Biznews and read Russell Loubser, former CEO of the JSE and a former director of South African Airways – his take on it, ‘it was really just a way of plundering money’.

Nene said no. He boycotted or stopped that deal from happening and, hey presto, he gets fired and replaced by somebody who probably won’t say no the next time they’re asked to do these things. Cry the beloved country.

Let’s get on to today’s portfolio though and, as you can see our decision a year ago, to take a bet against the Zuma administration effectively, because we took a bet against the share price of South Africa, has worked out pretty well on two fronts. Firstly, the South African Rand has depreciated by 34% in the past year. It’s a scary state of affairs when your value of your currency, you share price, of a country falls by one-third in a year. Can it go further? Of course, it can.  On the other hand, what was of great advantage to us was that we invested all of our portfolio into the United States. We found six stocks, as also put a slug of the portfolio into the SNP500 index.

The philosophy really is one-third of the portfolio, roughly 30 percent in the SNP500 index, so you’re buying the market in the United States. As you can see from this graph, it’s done precisely nothing in the past year, so the SNP500 in US Dollar terms is flat. However, in Rand terms it’s up 34 percent. It just shows you the value of finding the right offshore investments.

Alphabet, which is Google, they changed its name in the course of the year. We acquired 56 shares in that company, on the 5^th December 2014. That is up by 41 percent, in US Dollar terms, so clearly that’s lifted the portfolio. The real star of the show is you can see there is Amazon.com. The 50 shares that we bought in that company a year ago have doubled in value, and it is very hard not to make money when  you’ve got one of your stock picks doing that well. Overlay this with the South African Rand and, as you will see from this chart. The South African Rand is at 15.12, as against 11.27, when we began the portfolio on the 5^th December. The return of the portfolio in the past year is 49 percent. That’s staggering. In fact, when we made the investments and we recommended that you follow us into this portfolio our intention was to have a Rand hedge.

Have a way of finding an ability to offset the economic idiocy, which is being followed in certain respects in South Africa, and then being reflected in the share price of the country, which is the South African Rand. If you like, we went short on the Rand but the other intention was to open up the international community, to South African investors. Start showing you that there are shares, many more shares that sit outside of South Africa, than inside the country. There may be 100 investible shares here. Outside of the country, there are something to the order of 20,000 investible shares. Clearly, open up your horizons, exchange control is pretty much a thing of the past, for most individual South Africans. The idea was go offshore and start earning as learn.

We’ve taken the Warren Buffett portfolio, where everything we buy is being held forever. That doesn’t mean we’re not going to make any changes to the portfolio. We certainly, when we find another opportunity, another stock picking opportunity, we’d be quite to sell some of the index tracker, of that SNP500. For the most part, those shares that we have bought have been carefully considered and we do believe that they are the kind of stocks that you should be holding for the long term. Of course, coming to the party today, a year later and looking at Amazon.com you’d be shaking your head and saying, “My goodness, should I be paying $664 a share, when you guys bought in at $327 a share. Well, the reality of this is that if you know the company well, and you make your investment, you should be holding onto it indefinitely.

That’s the way we like to invest, we invest for the long-term, and although the intention was that, we would hopefully beat inflation over the past year. This kind of a return, of 49 percent – my goodness, it isn’t to be expected to be repeated every year unfortunately. For those of you, who’ve been with us right from the beginning, pat yourself on the back. Moving onto those prices in Rands and this is where, as South African investors, you really get a good understanding of how the Rand/Dollar exchange rate has lifted anybody who took money offshore a year ago. As you can see there the profit, or rather the depreciation of the Rand has been 34 percent. Each Dollar that you bought a year ago is worth 34 percent more in Rand terms today. Translate that into our portfolio, and we really have three stocks that have done extremely well. Amazon.com has shot the lights up. In Rands, it is up a 172 percent.

Sorry Alec, just on, the performance of the portfolio – Jaco asks. “Is it too late to get in now?”

Not at all, Jaco, I would be a little cautious to just jump on and buy all these shares but what you need to do is to spread your investments over a three-month period. What that does, by buying them over three months, is that you average yourself out and you take the market timing element out of the equation. The problem that you have, if you just jump into the market on any one day is that the stock Market and the currency Market can be moving very dramatically, one way or the other in a single day. By taking it over three months, in other words say you’ve got R100 000.00 that you want to invest. You would take the first R33 000.00 and invest it now. In a month’s time you invest the next R33 000.00 and a month thereafter you invest the third. That way, unless you are terribly unlucky, you’ll miss the spikes between the three and you’ll average out at your purchase price on both the stock prices and on the Rand/Dollar exchange rate, at an average over that period.

No, it’s not too late in fact it’s never too late to invest offshore. Unless we see some dramatic changes, in South Africa on the political front, the Rand is almost in terminal decline. You don’t know where it’s going to go to from here because it’s now broken all the barriers that were resisting further falls, and we really just don’t know where it’s going to go to. Only the good Lord knows where the future is but, at the moment, the way this economy is being managed, and particularly after last night’s news, which saw the Rand, in fact at one stage lose something like 75 cents against the U.S. Dollar. Just on that news. Can you think how much that’s cost the country, and the man who made the decision sits happily in his ivory tower, unaware, presumably of the damage that he is causing to us, anyway it’s not for us to second guess. We’re in the investment game and as far as investing is concerned as long as those kinds of decisions are being made, just stay away.

Neil asks, “What do we buy through?”

Well, there we go. Standard Bank Webtrader – there it is at the bottom of the graph. The reason why we have this portfolio or launched this portfolio a year ago was twofold. First of all, we started seeing some very concerning things happening in the management of the South African economy, here at Biznews, and we felt that it was time to start telling our community that now was an aggressive move offshore, which was the best way to protect your capital. Up until this point, incidentally, I’ve always been philosophically of the view that you should not invest offshore because as a developing country we need all the money we can get. When you get to a stage, when the people who are running that economy are doing such a bad job of it, you don’t follow them like lemmings over a cliff. You have to make your own plans, and that was my rationale there.

Standard Bank Webtrader is a magnificent platform. They give you the ability to invest all over the world and it’s pretty simple. It’s like the normal I think it’s an award Standard Bank online trading system for the South African. It’s a similar way that you can invest offshore. In fact, that first million Rand you don’t even need to ask for Exchange Control approval. That you can just put in immediately. It’s when you go over a million Rand, into these international stocks that you have to start asking for approval. It’s cheap. It’s a, well cheap, it’s a low-cost way of buying international shares. You can buy anyone’s you want and literally you can put your, like you would do with an online trading portfolio. You put in your order at the price that you think is right and you wait. You wait for the seller to come back to you and acquire your stock in that way.

I see we’ve got good attendance and good interaction today, Alec. Vernon asked, “What’s the portfolio value in Dollars, as well as in Rands?”

We started off with $200 000, as our starting point. I’ll just go back a little bit there. There it is, the cost there was $200 960 you can see. The $960 is the difference between the cash value of R12.50 in that portfolio, and the dividends that we’ve received. The total investment has been, let’s call it $200 000.00. Today that investment is worth, as you can see next to it, $226 000.00, so it’s gone up pretty nicely – 13 percent. Fourteen percent, if you add the dividends onto it. From a Rand perspective, at the time that we made the investment, it was two-point-three million Rand. In fact, was a little bit less than that because we added Apple, as you can pick up there on the 22^nd July. It was around two million just over two million Rand because at the time we started was 11.27 to the Rand that two-point-two million Rand is today worth three-point-four million Rand, so an improvement there of 49 percent.

Don’t expect it to happen again next year. You say that with a straight face, ‘like 49 percent’ like it happens every day. I don’t know how many portfolios that are available to the public make this kind of a return in a year but we’ve taken the Buffett approach, and we’ve really been, we think, pretty conservative. We’ve taken stock picks in six stocks that we like, in fact the first… Then we’ve put a third of the portfolio into the Index Tracker. As you can see the Index Tracker has done nothing. It’s on zero. It’s thanks to the Rand that the portfolio has appreciated as much as it has. If the Rand had gone the other way, we wouldn’t be looking too clever or, indeed if the Rand had been zero. If there had been no depreciation, the Rand against the US Dollar, then our portfolio would be up 14 percent, which is about right. If you can make a 14 percent, return when long-term share prices rise by between six and seven percent, you’re doing well.

In essence, we’ve beat the market. Well, we were 14 percent up and the market was zero, so that was a very good performance but, on the other hand, because of the Rand it’s spectacular. There we have a look at the costs of the prices that the opening, in other words the prices we paid for these shares, in South African Rands, and the prices in South African Rands today, and clearly Amazon.com, which cost us R3.700 a share, to start with. It is over R10.000 a share today. Not too many shares on the Johannesburg Stock Exchange that have come even close to that kind of a return. We were of the opinion, at the time we bought into Amazon that the company was being undervalued. I’m a great believer in Jeff Bezos, of course, everybody is today, but I’ve been a consistently great believer in him.

The reason, I guess, was because at the time that I started moving into the internet and founded a company myself, which was a Dot.com, a survivor of the Dot.com crash. At the time, Amazon.com was the poster stock for most of us and we watched what Bezos was doing. Indeed on Biznews, we’ve built the business one of his focus areas, which is put the customer at the front and centre of everything you do. We’ve seen our success at Biznews and we believe that if you’ve got a company as big as Amazon and with the history that it’s got, how can you go wrong if you are always putting your customers first? We loved Amazon and we were lucky to get in at a very cheap price. Alphabet, which is Google, is a stock that is the best business model in the world and there it’s gone from R6.000 a share that we bought in at, to just over R11 000.00/share today – 89 percent improvement in Rands.

Then Novo Nordisk owns around somewhere between a third and half of the global insulin market. We know what is happening to people around the world. They’re eating badly, so they’re getting fatter and they’re getting diabetes or more of them are getting diabetes and, as a consequence they need insulin and what Novo Nordisk, which is a Danish company does is it invests heavily into research and development into ensuring that it has the latest products. On the other hand, it also keeps its price increases down, a fabulous company. Berkshire Hathaway, Apple, and IBM are three that if you haven’t bought into the portfolio yet. Congratulations, you can buy them cheaper than we bought them in at, in Dollar terms anyway. In Rand terms, unfortunately that’s not the case. The Rand depreciation means that even though Berkshire Hathaway is down, as is Apple and IBM, from the time we bought in, in Rand terms, we still got in relatively cheap and that’s a nice graph, while we answer the next question, Stu.

Peter Mansfield asks about stop losses. He said, “Considering the aim of holding stocks forever, is the purpose of the portfolio, do you even bother with stop losses?”

Peter, stop losses are for traders. I’m glad you’re joining us here today. It’s nice to have a friend on the webinar. I’m sure there’s lots of friends on the webinar but Peter is a good friend. The whole idea of stop losses is when you’re a trader. This is not a trading portfolio. We want to invest forever. If you find that the share price falls, for instance at Berkshire Hathaway, Apple, or IBM were to fall still further then I would be sorely tempted to sell out some of the Vanguard SNP500, in other words the Index Tracker, and buy some more in those three stocks. Rather than triggering a stop loss, I would rather be buying more of them, if I’ve done my homework, which I’ve done. Quite often, we get asked, “Would you like to buy this share or that one?” I can’t tell you because I haven’t done my homework on them. When you’ve done sufficient homework on a small portfolio, as Warren Buffett says, “Keep all your eggs in one basket but watch that basket carefully,” and that’s what we’re doing.

If Berkshire, heaven forbid, Warren Buffett were to go crook on us or Apple or IBM were to suddenly, become companies that are no longer offering value. In other words, if something like a Tesco were to happen there, we would reassess but that would only be because the directors acted criminally, and we wouldn’t want to invest in those companies in the first place. Isn’t that a lovely graph? It just shows you that Vanguard, which is halfway between the six stocks, three on the left, which have clearly outperformed it, and three on the right, which have underperformed but because of the Rand exchange rate, on the far left, everything is in the green. Dividend receipts as well. IBM is a good payer of dividends. Novo Nordisk is a good payer we’re expecting a nice dividend to come through soon.

It’s usually paid around about this time of the year. Vanguard pays quarterlies, and then Apple has been a dividend payer as well, as well as buying back a lot of its shares.

This one might be for Standard Bank themselves. Craig asks, “What’s the minimum amount you need to invest?”

Craig, yes, I think it is for Standard Bank but your minimum, your absolute bare minimum would be something like $25 because each of your trades costs $25. The best way to do this is to have a look at what your cost of trade is and then to multiply, the way I do it anyway, then to have a look at the minimum amount that you should be investing, to make that cost of trade worthwhile. If say it’s, I think it’s $20, so then you’re talking a cost of, wow, because the Dollar has now fallen, unfortunately, R300, so a R300 trade. If you make a trade of R3000.00 then it’s ten percent you’re paying in stock commission – that’s too high. You should really be looking to maybe go at least R10 000.00, as your first investment, and that will bring down the cost of three percent, which is still high but not too bad. If you go to R15 000.00, then you’re getting to more kind of one, one-and-a-half percent levels, which is probably the level that you should be looking at.

I would say to you, what you should rather do is build up a cash pile. Make a trade of at least R15 000.00, when you’re doing that in these global portfolios, or if you’ve got R50 000.00 to invest, then rather select three stocks in the portfolio and invest in those three, than to spread your investments over the whole portfolio for now. It just makes sense but clearly, you’d like to get the same balance that we have in this portfolio in the long term.

James Wells asks, “Why IBM? What’s the business case?”

Right, well James thanks for that. We’ll get into a little more detail in a moment, but I can maybe just quote to you from Warren Buffet. In his most recent report, it’s called the 10Q that they put, in the United States they come out with quarterly results and they have to submit these reports to the Stock Exchange Commission, (SEC), and there everybody can get hold of it. In that report he talks about IBM because he’s now got an investment, or Berkshire Hathaway has got an investment of $12b in IBM, it’s one of the big four. Berkshire has got a portfolio of $110b, incredible numbers. It would, very comfortably would pay for the whole public service in South Africa for maybe a year and a half, given where the Rand has gone to. Just imagine that. All those public servants would be paid for a year-and-a-half, through the Berkshire portfolio, which was started from scratch.

Of that $10bn, $12bn is invested in IBM, and it is one of the big four that make up 50 percent of the portfolio in all. The others, by the way, are American Express, Wells Fargo, and Coca-Cola. He says that, of IBM, they are sitting at a moment at a loss for Berkshire of two-billion Dollars, so how often do you get the opportunity to buy into a share that Warren Buffett has bought two-billion Dollars cheaper? He says that IBM continues to be profitable and generates significant cash flows. We expect that the fair value will recover and, ultimately exceed our costs. They are 15 percent down at the moment, in the investment that Berkshire Hathaway has made. I have done a lot of analysis on IBM, for obvious reasons. It is an important part of our portfolio. You can’t just say because Warren Buffet is investing in it that he is always going to get it right but my sense and I’ve done a lot of work in this.

In fact, I’ve got a new book coming out on Buffett early in the New Year, is that he gets it right most of the time, and his thinking is more important. What is his thinking in this one and his thinking is that IBM has gone from an old business that was really going nowhere, and it has moved into an area where it’s taking the best advantages of being that old business. Remember, IBM serves virtually every one of the ‘Fortune 500 Companies’ in the U.S. In fact, it’s the same thing globally. They’ve got relationships with all these businesses. What they’re doing within there is they’re developing new revenue streams, which are growing at 30 percent a year, and then taking their existing client base, with which they’ve got big relationships, through the hardware, often IBM would be selling these big main frames, which are now going out of favour.

Remember the Think-Pad laptops – they were sold to a Chinese company. IBM still has that relationship, so they can take the companies that they have the relationship with, and show them analytics and how the analytics can be used to help their business. It’s a brilliant company with a fabulous business model, I believe. Moving into the right direction, and dirt-cheap at the moment, so that’s why I like IBM. Should we go onto Vanguard? These are the graphs that we go through every month. Vanguard, as you can see – this is the Index Tracker. It’s like the Satrix 40, but its called Vanguard SNP500. It tracks the 500 biggest shares on the New York Stock Exchange, and it gives, in the past year, it’s been up by 0.6 percent. That’s literally, you can call it flat-lined over that period, but of course, in Rands it is up 34 percent, thank you very much.

We like this one because it’s a bet on the U.S. market and the U.S. market is a bet on the strongest economy in the world and the most flexible economy in the world, which is recovering really well.

A question you get, I think, at every webinar Alec. Elon Musk’s companies – thoughts on Solar City, Tesla.

Solar City is starting to look very interesting, very-very interesting. It’s come back a long way. I’ve been doing some work on it. I love their business model. I know there are sceptics, who say that Solar City is only there because it’s been subsidised by the Federal Government, and that in fact, they accuse Elon Musk of being a genius, in knowing where to get subsidies from. I disagree with that entirely, having read the book by Ashlee Vance. I think that Elon Musk, the greatest shame or the biggest drawback of Elon Musk was that he left South Africa. Had he stayed here, Adrian Gore from Discovery did an analysis once, which said if, Apple… If Steve Jobs had been born a South African and been able to build Apple in South Africa. It would have more than doubled the GDP through his lifetime. There’s a similar situation here, with the way that Elon Musk is going about things.

Starting off with Solar City, which he’s put together with his cousins, Lyndon and Peter Rive, from Pretoria – they are now the biggest installers of solar panels in the Unites States. Where their business model really works is that they have a financing side on basically, a back-to-back loan with a finance house. You install the solar panels. They get paid ‘ thank you very much’ and off they go to do the next installation, but the homeowner repays the financing of those solar panels with the savings that they make from their electricity bills. It’s just an obvious model, isn’t it? If someone came to you tomorrow and said, “I’ll replace all of your lightbulbs” and we had something like this in South Africa “and they will cost you less than the saving that you are going to make in your electricity payment to Eskom”, would you say yes or no?

That’s just extrapolating that theme. The model is being used in many other parts of the world now. The Japanese have actually picked up the model and are doing it there. Even the Chinese went over to analyse Solar City. I like Solar City as a result. It’s a great business model. It’s got fine minds in there and the share price has come back a long way. It was over-hiked but we’re getting to a point now where it’s starting to offer value. Tesla is a longer-term prospect – still very hyped. Lots of people love Elon Musk (for good reason) and there’s a lot of the Musk premium in that share price still, at the moment. I guess for the moment, you’re going to battle to find a margin of safety there. In SpaceX… I don’t know. Can you buy SpaceX shares? Are they listed?

I’m not sure. I don’t think so.

Anyway, it’s not one that I know well enough to be able to pass any comment. I don’t even know if they’re listed so clearly, it’s outside of my area of expertise. Of the three, Solar City would be the most appealing, anyway.

Neil asks, “What happens when the Fed decides to start increasing rates?”

It’s a very good question, Neil. I wrote a book years ago, called ‘Shares: A buyer’s guide’. I spent quite a lot of time analysing the Dow Theory. Richard Russell, who was the global expert on the Dow Theory passed away in fact, in the past month. The Dow Theory newsletter though, he’d been writing for something like 50 years. How does the Dow Theory work? It was put together by a guy called Charles Dow who started the Wall Street Journal. That’s why you get the Dow Jones industrial average. It was in fact, Mr Dow and Mr Jones who started the Wall Street Journal. They started this average and it still survives till today. He died tragically, very young, did Charles Dow but before he passed on; apart from the Wall Street Journal he also put this theory together. He said that because people are involved, markets move in very clear trends.

You get [I think] five trends that occur in any cycle and in the final trend, you have a blow-off as we saw in South Africa 1987 and 1969 (a bit before my time). I certainly saw. I was right up close in 1987. We had another one in 1997/1998 and another one in 2007 – all the 7’s. We’ve got a stock market in South Africa, which is at level that’s pretty high at the moment. We had a piece on Biznews this week to show that the price-to-earnings level of the Johannesburg Stock Exchange is very high. Why is that? Since 2007 and 2008 when we had the crash – the bankruptcy of Lehman Brothers – the Federal Reserve in the United States was sitting with a big problem. Does it repeat the mistake that they did in the 1930’s and suck money out of the system, and go into a depression?

Well thankfully, they decided not to do that mainly because the man who made those decisions – Ben Bernanke – had done his thesis on the 1930 depression, so he knew what not to do. He didn’t really know what to do, but he knew that you didn’t suck money out of the system so they went the other way around and they pumped money into the system. As a consequence of this, it pushed up prices all over the world. Imagine: you have a tide that some superhuman from outer space comes in and just pumps money into our sea for a period of time. It would lift the whole sea and clearly, those people who benefit from a rising tide, (which is commodity prices and stock markets) would enjoy the upswing. That was what happened when quantitative easing was introduced by the Federal Reserve. Now it’s stopped.

They’re not creating any more money and in fact, they’re starting to suck money out of the system. Warren Buffett is there on your screen on the left-hand side. That’s one of these old pictures of him with one of his favourite people, Rose Blumkin who died at 104. You can see behind her. She used to sell a lot of carpets, did Rose Blumkin, until the age of 103. As Warren Buffett says, “When the tide recedes, you get to see who’s been swimming without trunks.” Now, around the world we’re already seeing this. In Argentina, the socialists have been kicked out of power, almost with a massive swing in the voters there because socialism works when you can spend other people’s money. When you have to work for a living, it’s not so easy anymore. The only way to spend other people’s money is to have willing taxpayers or willing lenders around the world.

It was very easy when there was all this money being pumped in the system, for socialists or people with crazy economic policies to not just survive, but to thrive. However, as the tide has gone out, so have their fortunes. A similar thing happened in Venezuela, which was a very poor economic model. Chavez has been going there for the last 16 years. Chavez’ successor has been kicked out of power with a massive swing of almost two-thirds majority for the previous opposition, many of whom had been in jail. The tide is going out and as the tide goes out, those who have been swimming without trunks get exposed, both politically and from an investment perspective. Companies are also coming under the cosh. We saw Anglo American the day before yesterday, announcing that it’s going to cut its workforce from 135,000 people to 50,000 people.

It’s going to cut the size of the business in half by either closing or getting rid of its assets. That’s an incredible reflection of a company that overdid itself when the tide was coming in and now has to readjust to survive. Quantitative easing will affect the bad companies a great deal. Whether it’s going to affect the companies in our portfolio, I doubt because we’ve actually bought them on the basis that they will be able to thrive in any economic conditions.

Alec, there’s a few administrative questions, which I’ll pass on to Standard Bank but there’s one here from Shane who says, “Should I move my money from the S&P into IBM?”

That’s a good question. I would say I wouldn’t move all of it, but I would certainly move part of it. If you don’t have anything else invested…if all you’ve got is in the S&P500 Index, then I would certainly be looking to make investments into the three stocks that are at the moment, very appealing to us. They’re giving you a huge margin of safety and also, trading well below fair value. That’s Apple, IBM, and Berkshire Hathaway. Yes, I would perhaps structure your portfolio in a way, depending on how much money you’ve got. Remember, use that R15 000.00 minimum investment as a starting point. You don’t want to overpay in your commissions, but I would certainly be doing that. Don’t keep all your money. There’s no need to keep all of your money in the S&P500 Index if you have a good understanding of individual shares that are offering great value, and giving you a big margin of safety. Those three are certainly in that category.

Just to show you: there’s Berkshire Hathaway. It’s done pretty much nothing in the past year. That’s the S&P500 (the red index). We know that that was point-six percent. There’s Berkshire, down 12 percent. Would you be buying S&P today or would you be buying Berkshire Hathaway? I think there’s your answer – very easy. You’re getting Warren Buffett at a 12 percent discount to a year ago. Alphabet (Google) has been a great performer, but it’s a great business model. Would I be worried about Google’s future at the moment? No. There hasn’t been a whole lot happening in the past few weeks on Google. However, one bit of good news for them is one of their competitors in the search field – Yahoo! – is really on the rocks now. Yahoo wanted to sell or unbundle its stake in Asia.

The share price is dwarfed by the holding that it has in Alibaba. It then came to the conclusion (or shareholders did) that you’d have to pay too much tax, so now Yahoo! Is stuck. It’s reversed that decision, which is not very good for Yahoo! Shareholders. They just don’t know where the future is going to go. Of course, that’s not bad for Alphabet (Google) because there’s one of your competitors. It’s also moving aggressively into self-driving cars, which could be the next, big thing. It’s very likely. It’s expanding around the world through the Loon system. Google wins when more people are on the Internet and one of the ways they’re doing this is by putting balloons up in space. Not the balloons that you’d have at a party, but very high quality balloons, which can then put Internet into areas that it never was before, including in Africa.

It’s up 43 percent – sure. It can come back Of course it can but this is the stock that you want to hold for keeps.

Amazon, similarly. Amazon’s still doing fantastic things. In the past few weeks, the big change there… In fact yesterday, they announced their new drone. What Amazon’s going to be doing – again, refining its business model – is it wants to take the product that you order from it, and deliver it to you to your home, through a drone or without having to use expensive human beings to do it. As the reality of Amazon’s power in the retail market becomes more and more apparent and as people understand the exponential benefits that it can give you, it continues to grow. You can see in the past quarter since the beginning of September, it’s a stock that has continued to do well. It’s now starting to make a bit of money and it’s had a huge bet on the Cloud.

Now, if you ever hear about the Cloud, know that Amazon Web Services is by far the dominant player in that place. Lots of others including IBM, are trying to get more involved in that area but Amazon’s just way ahead of the game.

Let’s move on to Big Blue. Talking about IBM, I’ve given you some insights there. Here, you are buying at 15 percent cheaper than Warren Buffett bought in at. Could you ever have a better opportunity? Probably not. Talking about Buffett and Berkshire by the way: in the past quarter, Bill Gates (the richest man on earth) invested more money into Berkshire Hathaway. He’s worth ± $80bn. $10.5bn of that is in Berkshire Hathaway shares and of Gates’ portfolio he’s got 15 other shares, which between them, have about $7bn. Then he’s got Berkshire at $10.5bn and he’s got Microsoft, which of course he started, at $16.5bn. Talk about having a few eggs in your basket, but watching them carefully. If it’s good enough for Bill Gates, surely it’s good enough for you and I.

There’s Novo Nordisk. It continues to have a pleasing performance against the S&P500 Index, outperforming it in the past year by nearly 24 percent. It had a good past month and this is one that you just put in your bottom drawer and forget about because it’s being extremely well managed. It’s a company that continues to deliver through thick and thin.

Apple, a business that I believe is offering massive value at the moment. Maybe because it’s so big, analysts find it difficult to understand Apple. This week, it won a court case against Samsung, which has been going on for a long time. Samsung was sued by Apple because of some of the licensing agreements/patents that were taken out in 2012. Apple believed that Samsung had been copying it. Samsung said it wasn’t so and in fact, that Apple had been copying it. Well, Apple won that and Samsung paid them $548m. Lots of Rands, but I guess in Dollar terms it will just add a little bit more to the cash pile that Apple already has.

There’s the final graph that we have, which gives you the prices at opening and the prices today in Rands. As you can see, our portfolio has been helped a great deal by the view that we took on the Rand that the Rand would weaken in the past year. Not in anyone’s wildest dreams would we have anticipated a 34 percent depreciation but then, not in anyone’s wildest dreams would we have anticipated some of the dumb decisions that have been done in the past year by those who influence the share price of this country (or the exchange rate). If you have a look then at the six shares that we own and the Index Tracker – nicely divided. Good performances are Amazon, Alphabet, and Novo Nordisk. Those three have been extremely pleasing in Rand terms.

Even the S&P500 Tracker (the Vanguard VOO) is 34 percent up. Incidentally, the cost of that Tracker is five BIPS (basis points). One-twentieth of one percent. That’s how efficiently they run it and how big it is. Down the bottom, even though Berkshire, Apple, and IBM have underperformed in U.S. Dollar terms, in Rand terms they’re showing us a healthy profit.

Just two final questions, Alec. Peter asks if you’ve investigated Alibaba.

I’ve watched Jack Ma in action in Davos. In fact, he’s been there the last two years. I’ll hopefully be watching him again very closely this year. He is an exceptional entrepreneur. The Chinese delegation though tell me that Tony Ma (the man who runs Tencent) is as good, if not slightly better. Jack Ma is the showman. Alibaba is a good company but of the two… I have a very good friend who in fact, was a financial journalist with us here in South Africa – John [Mulcahy? 15:40]. We’re going back to ancient history, but that was at the Rand Daily Mail that we worked together all those years ago. He then went off to the South China Morning Post, went into stockbroking, and was head of research for a big Hong Kong stockbroker. He’s been involved in that area for 25 years and his assessment is that Tencent is a better company than Alibaba.

I haven’t done the analysis on either of them to the degree that I’d have any confidence in making an investment recommendation and, apart from all of that, you do have an easy way into Tencent through Naspers here in South Africa. What I can tell you is that for the last two to three years, I’ve been a Naspers bull and one of the investment gurus here in South Africa whom I respect extremely highly (Sy Jacobs from 36ONE)… On a recent roadshow that I was involved in, I asked him what would be his one share that he would be buying at the moment and he said, “Naspers”. If you have the option between Alibaba or Tencent; based on what John [Mulcahy? 16:49] has said to me and based on what Sy has said to me, I would certainly be leaning towards Tencent but I’d also want to be doing my own homework on it.

A final question from Shane. He talks about his Xmas bonus, which is what Matthew Lester’s recent article is on. He says, “Should I wait until January, considering the Rand is weakening as is?”

I made a mistake a couple of months ago. Somebody asked a similar question and I said, “No. I’m sure the Rand’s blown out now. Just wait a little while before you go in.” My view at that time was that the underperformers in the portfolio can buy any time, but the outperformers… Maybe it would be better. You could save a bit on the Rand. I’ve changed that. I made a big mistake there. I should have shut up and just said, “We’re not Rand fundi’s.” None of us can predict what Jacob Zuma’s going to do tomorrow. He might decide to [who knows] declare war on Zimbabwe. Anything can happen. If you are prepared to fire Nhlanhla Nene and replace such a key position with a guy who (with greatest respect)… There must be 1000 others in the ANC who could do the job better than this fellow.

If you’re prepared to do that then you’ve got to start wondering what the thought processes are going to be employed that will have an impact on our currency/share price. Anything can happen and in South Africa, it tends to do so. The view would be ‘try and take out the currency risk in the same way as you would take out the market timing risk – by investing over three months’. If your Christmas bonus – hopefully you’re very well-paid and you get R45 000.00 for argument’s sake – then you’d invest R15 000.00 in the cheapest of the three shares as we see them at the moment, which would be IBM now, R15 000.00 in Berkshire Hathaway in a month’s time, and R15 000.00 in Apple in the month thereafter.

It would be nice if you could put five into each but the problem is that because of the cost of trading (and it is in U.S. Dollars because you’re buying U.S. Dollar shares), it’s going to cost you. $20.00 is nothing. It’s very cheap in an international scale, but when you put back into Rands you’ve got to be aware of that. My feelings on these things: don’t try and second-guess the Rand. Don’t try and second-guess share prices of particularly those stocks that are now offering great value. You should be in a position to smooth out your investment and once you’ve got them, put them away and try to forget about them. Try not to trade them because the biggest cost to any investor is trading in and out of shares.

If you want to go and trade, have fun. Put money outside in a trading portfolio. We all want to have our fun in some way. Do it there. There’s nothing wrong with that but when you’re talking about an investment and certainly, Buffett-type portfolios that we have here with our Global Share Portfolio from Biznews, then the best thing to do here is to try, make your investment, put them away, don’t even watch the share prices, come back to the webinar every month, and I’ll give you an update. It’s my job to see how things have been developing in that period.

Alec, I see we are running over time, but we have a final question from Maureen. She asks, “Would you sell Anglo shares now?”

Would I have owned Anglo shares in the first place? That’s probably a better question. Philosophically Maureen, when you are buying shares in a company listed on a stock market, your investment has to be because you believe that the people there will leverage your investment/allocate your capital in a way that will give you a better return than you’d get from the bank, at a lower risk. That’s really where you’re starting. The problem with resources shares – and I know there are many in South Africa who have done spreadsheets from here to eternity, who will say I don’t know what I’m talking about – is that to me, the problem with resources shares you eliminate that huge issue. You eliminate the ability of the human ingenuity to leverage your investment through allocating capital smartly and to give you a good return on investment.

That’s what you’re doing when you’re investing in shares. You’re investing in human ingenuity. The reason for that is that the movement in the commodity prices far outweighs any brilliance of the managers. That’s why I would never buy Sasol shares – ever – because the movement in Rand/oil price massively outweighs anything that the best Sasol managers could achieve or in fact, destroy at that company. It also makes you wonder why they have to pay these guys so much money if in fact, they really are bit players in the company’s fortunes. Would I own Anglo American shares? No, because that’s my philosophy. If you’ve got them, there must have been a reason why you bought them in the first place.

If you bought them because you believed that they were offering good value then surely, the fact that they have depreciated so much means they must be offering even better value today. That would be the rational way of approaching it. The other way to look at it is every single investment that you own…you must look at alternatives to that investment at the point in time, at the price that Mr Market is putting them on. If Anglo American is heavily depressed because Mr Market has become very concerned about them and at some point in time Anglo American will return to fair value (whatever that might be or, those resources, and whatever geniuses can work that out), then maybe stay with it.

If you’re going to invest in shares, the first place to start is to remember that you’re actually investing in human ingenuity and not in some dumb, inanimate object. Otherwise, just go and put all your money in gold.

Alec, a nice one for the happy holidays coming up. John wants to know. Your new book: what’s it called and when is it coming out?

John, tomorrow it goes to the printers. You might recall that I did a very short book on Biznews. It’s available on Biznews. It’s called, ‘How Warren Buffet invests on the Johannesburg Stock Exchange” or ‘Invest on the JSE like Warren Buffett’. Jonathan Ball publishers convinced me to take that and to expand it from around 10,000 words to 30,000 words so it gives you an idea of the size of it now. It goes to the printers tomorrow. I’m very happy with it. It’s called, ‘Invest like Warren Buffett: Global Edition’ and it will be retailing at R140.00. I’m delighted at that because it means they’ve got a pretty big print order. The price of books often depends on how big the print order is. Of course, the size of the book as well but if you have a large print order, you can make it better value. It will be retailing at R140.00 in the New Year.

I’m not sure when we’ll get our first copies. We will be putting an eBook onto Biznews. I will be doing an audiobook and we will be pricing it in line with the printed copy. I know that with books, a lot of people like to read eBooks, but many more are still happy to have that piece of paper in their hands. I look forward to you being one of the first purchasers of it.

I think that’s it from this side, Alec.

Stuart, thank you and thanks for indulging us. I see most people stuck with us. Only a couple of people dropped off. I think we’ve taken off your lunchtime. We’ve got to go and get ourselves a salad or something now to fill the hunger pangs. Have a wonderful Festive Season. If you celebrate the birth of Christ and Christianity, just remember that all religions are just about doing unto others as you would have them do unto you. If we can do that, we’ll all be in a better place. I look forward to being back with you towards the end of January. We will give you an update on that and we look forward to serving you again as we have done in the past year – even better in 2016 – here from Biznews.

Yes, thanks Alec. A great 2015. Hopefully, 2016 as good if not better. Have a good holiday, everyone.

Great in a way. If you happen to be holding Rands… Well, who knows? Stranger things have happened. Cheers everybody.

The post Biznews’ Global Share Portfolio for Dec – up 49% for 2015 appeared first on BizNews.com.

After the “for sale” boards went up outside Independent Newspapers, many within SA’s media industry started doing their sums. Eventually the Irish owners extracted their best price from an outsider, Sekunjalo’s Iqbal Surve’, who was prepared to pay roughly double what industry insiders valued the business. At the time, I asked Surve’ why he felt it was worth so much more than the rest of us – he felt it was his ability to apply insights gleaned through relationships with media and technology leaders around the world. So far that advantage has not been publicly exposed. Although Surve’ is adamant that the company’s value has appreciated since his purchase, on the facts of declining circulations and tight advertising, it’s hard to quantify how the trained medical doctor reaches that conclusion. More so after reading this superb analysis by Politicsweb founder and publisher James Myburgh. It’s been my privilege to have worked closely with James over the year (including some early support from his esteemed website) and to my mind there there is no smarter person nor better researcher in SA media. His other duties keep him away from the kind of in-depth articles at which he excels. So each one, including this brilliant assessment of Surve’s company, is to be savoured. The big question Myburgh asks is how independent the company can be with almost a billion rand in a growing debt to the State Pension Fund. A must read. – Alec Hogg

By James Myburgh*

South Africa’s press is once again under renewed pressure from the African National Congress government. At its National General Council the party resurrected an old threat, and called on Parliament to conduct an inquiry into “the desirability and feasibility of a Media Appeals Tribunal” as well as impose an “Empowerment Charter to promote Broad Based Black Economic Empowerment” on the print media sector.

The South African Communist Party meanwhile has repeatedly singled out South Africa’s largest and strongest media group, Naspers, for attack. At its recent Media Transformation Summit the Party declared:

“The position and status of Naspers in particular, with unrivalled cross-media reach and dominance, demands urgent attention. South African media cannot prosper while a single entity has such a stranglehold on its future. Nor can its content production sector, its electronic and traditional media distribution networks – all essential components of a democracy supporting media environment. Breaking up the Naspers monopoly is vital – and may require drastic solutions. These could include outright nationalization, or a comprehensive breakup, as was imposed on the Bell monopoly in the US.”

The ANC government currently suffers from a severe lack of political and moral authority and its ability to act cohesively on this matter is hindered by the continued fracturing of its leadership. However, South Africa’s newspapers have found themselves weakened by long-running and ongoing decline in paid circulation, declining editorial quality, and the desertion of many advertisers.

Over the next several weeks Politicsweb examine the state of South Africa’s press through the lens of the circulation figures of the Audit Bureau of Circulation. In this first article we look at the newspapers of the Independent Media group.

Independent Media

In August 2013 the Irish owners of the Independent News & Media South Africa (the old Argus group) sold the group to the Sekunjalo consortium led by businessman Iqbal Survé for €150m (R2 billion). At the start of their twenty year ownership of the group Tony O’Reilly, who had been hand-picked by ANC President Nelson Mandela, re-positioned the titles editorially from their traditionally liberal political stance to a far more pro-ANC one, something that reached its high point during the Mbeki-era. The main concern of the Irish owners though was to extract as much flesh as they could by cutting their South African operations to the bone, with profits being repatriated to Ireland and little being re-invested in SA.

In the pre-internet age it was possible for newspapers, sitting in a dominant position in their particular market, to dramatically push-up profits by cutting down on editorial costs and quality. As the great American investor, and newspaper owner, Warren Buffet observed in 1984:

“While first-class newspapers make excellent profits, the profits of third-rate papers are as good or better – as long as either class of paper is dominant within its community. Of course, product quality may have been crucial to the paper in achieving dominance….Once dominant, the newspaper itself, not the marketplace, determines just how good or how bad the paper will be. Good or bad, it will prosper. That is not true of most businesses: inferior quality generally produces inferior economics. But even a poor newspaper is a bargain to most citizens simply because of its ‘bulletin board’ value.  Other things being equal, a poor product will not achieve quite the level of readership achieved by a first-class product. A poor product, however, will still remain essential to most citizens, and what commands their attention will command the attention of advertisers. Since high standards are not imposed by the marketplace, management must impose its own.”

During the first ten to twelve years of Irish ownership this model still applied. The group was able to cutemployee numbers from about 5 000 in 1993 to 1 700 in 2012, with only modest declines in circulation initially, something which allowed for the extraction of massive surpluses. Yet as internet access became progressively more widespread in South Africa the circulation of most of the group’s titles entered into a trajectory of increasingly rapid decline.

As can be seen from the graph above all the group’s ABC-registered daily titles – with the exception ofIsolezwe and the Diamond Fields Advertiser (which had a small circulation to begin with) – had seen serious declines in core circulation with the fall of The Star in the over-traded Gauteng market particularly marked.

The Sekunjalo consortium was thus spending R2 billion on trying to catch a falling knife. This provoked particular controversy at the time given the key role of the Public Investment Corporation (PIC), which manages the Government Employees Pension Fund (GEPF), in financing the purchase, especially in the context of the new owner’s declared closeness to the ANC.

It was reported at the time that the PIC had taken a 25% stake in Independent News & Media South Africa on behalf of the GEPF. This share was above the stakes the GEPF held in other media groups, but not inordinately so. At the time the deal was done the PIC held a 19,2% stake in the Times Media Group and 17,22% in Naspers. China International Television Corporation (CITVC) and the China-Africa Development Fund (CADFUND) took a 20% stake in the company through Interacom Investment Holding Limited, with Sekunjalo Independent Media (SIM) consortium holding the 55% balance.

It was subsequently reported by the Mail & Guardian that SIM’s share in the company had been largely funded through a PIC/GEPF loan. Precise details remained obscure. In its 2014 annual report the PIC said only that it had,

“… participated in the financing of the acquisition of 100% of the largest English language newspaper publisher in South Africa, owning 18 major newspaper titles across three key geographic regions, namely Gauteng, Western Cape and KwaZulu-Natal.

The company’s primary business is the publication of newspapers, and also provides printing and distribution services to third parties, publishes magazines and utilises its digital platform to provide news content, as well as a platform for classified advertising.

Read also: Allan Greenblo: Print decline, diminishing Democracy. Wielding newsroom axe. 

The business was a Level 5 BEE contributor prior to investment by the PIC in 2013 and as a result of the investment, it is now a Level 2 BEE contributor, making it the first majority black-owned media house in South Africa.”

More details of the loan can be found in the annual reports of the GEPF. In its 2013/14 annual report the Fund disclosed that it had extended a direct loan to Independent News & Media and the “amortised cost” of this amounted to R791m at the end of the financial year. This was secured by “Borrower cession and pledge in security, guarantee from Sekunjalo, pledge and cession of shares.” In its 2014/15 annual report, released last Friday, the GEPF reported that the amortised cost of this loan now stood at R896m (R105m up from the year before).

On the face of it this suggests that the PIC financed around 62,5% of the original purchase – through the purchase of the 25% stake (worth R500m) and a loan of about R750m amounting to 37,5% of the purchase price. Furthermore, the increase in the reported loan amount between 2013/2014 and 2014/2015 suggests that Independent Media has yet to begin paying down the loan, and compound interest has been accumulating on it. Politicsweb contacted both the GEPF and the office of Dr Surve asking for clarity on this matter, whether these inferences were correct, and for details of the loan agreement between the PIC and Independent Media / Sekunjalo.

In a written reply Dr Surve stated, in his capacity as Executive Chairman of Sekunjalo Investment Holdings, that:

“As you are aware, we are bound by confidentiality agreements in relation to the investment of Sekunjalo into Independent Media. As the Sekunjalo Group however we are delighted that our investment and that of our partners PIC / GEPF, CITVC / Cadfund has shown a substantial growth in value and that Independent Media as part of our broader investment into media is a high growth area for our group.

Whilst Independent Media is a private business, we are delighted that we have outperformed all of our competitors in the print media space in 2015 by a wide margin including receiving a greater share of the advertising revenue in the private sector. We are also delighted that Independent received the Global Media Award for Innovation from INMA the (International News Media Association) at its annual meeting in New York in May of this year.

This recognised the significant investment that Independent has made in new media. Whilst Independent core print business showed successful revenue generation, we are particularly proud that we now have positioned the business to be a modern content driven media business that is able to offer multiple platforms to our key customers as part of a 360 degree solution offering.

Independent has this year alone launched a pan African media title, a pan African website, vernacular publications, labour publications, Young Independent as well as a significant number of revenue generating events which have positioned the group for continued success and growth in the years ahead. All the credit for the success of Independent has to go to an amazing group of people that has embraced the new strategy, innovation, work ethic and ethos to create a modern media success story.”

In an emailed response the GEPF stated:

“Like other financial institutions using best practice, all our unlisted investments, including Independent News and Media South Africa (INMSA), go through an independent annual valuation before they are reported in the annual report. Whilst the actual loan amount has been disclosed in the annual report, it is useful to note that the terms of INMSA loan remain confidential. That said, it is further instructive to note that the independent valuation indicates that PIC continues to find value in the investment.”

Independent’s ABCs

Overall, 43 daily and weekend newspapers, along with the Mail & Guardian and Ilanga (which are categorised as weekly newspapers), are registered with the ABC. Of these sixteen titles are owned by Independent Media. (The Daily Voice tabloid has never been registered with the ABC, and the Sunday Independent was de-registered in 2014.)

Before dealing with the performance of these titles it is important to draw a distinction between the different classes of circulation reported by the ABC.

There are three basic classes. The first is core circulation. This can be defined as sales falling under the categories of Copy Sales, Individual Subscriptions, Business Subscriptions and PDF Replica. These are copies purchased by individual readers or businesses, for their own use.

The second class are categories where newspapers are bought, ostensibly by third parties, and passed on for free to other users. Travel & Commercial subscriptions, Third Party Bulk sales and Print Media in Education (PMIE) sales fall into this class. In all these categories the newspaper is supposed to be paid 50% of the cover price, although barter deals are allowed for Third Party Bulk Sales and Travel and Commercial subscriptions. Finally, in the third class, is the category, introduced fairly recently, of “sales below 50%” of the cover price in any of the previous categories.

As in previous analyses this article will focus on core circulation. This is the key class to look at for three basic reasons: Firstly, the individual purchasers of the product are also the actual users of it. Secondly, the core circulation categories are less open to manipulation by the practitioners of the dark arts of circulation management. And, thirdly, non-core circulation – which can involve big once-off or short-term deals – can distort a proper understanding of underlying readership trends over time. This is both when this artificial stimulus is added and also when it is removed.

In the context then of an across-the-board bloodbath in core circulation the Independent Media titles have not performed particularly badly in the third quarter of 2015 as compared to the third quarter of 2014 (see table here). Indeed, the group’s three Isolezwe titles (the weekday, Saturday, and Sunday editions of the paper) were the only ones to report meaningful increases in such circulation. That said, twelve of the group’s sixteen titles reported declines of over 5% in core circulation year-on-year.

The Cape Times – which saw an extensive purge of journalists and columnists following the takeover by the new owners, and a dramatic editorial re-positioning – reported a 1.1% decline in total circulation and a 9.3% decline in core circulation. The difference was largely accounted for by an increase in sales in the PMIE and Sales below 50% categories. See graph below.

As seen from the above there has also been some decline in reported copy sales since 2013. But while business subscriptions have remained fairly stable there has been a significant fall in the number of individual subscribers – from 10 985 in the 3^rd Quarter of 2013 to 8066 in the 3^rd Quarter of 2015 (a 26% decline).

If one looks at the change in circulation between the 3^rd Quarter of 2013 and the 3^rd Quarter of 2015 it is evident that the new owners have been unable to arrest the decline in the circulation of their non-Isolezwe titles. See Table 1 and 2 below.

Table 1: Change in circulation Independent Media daily titles (Source: ABC)

***

Table 2: Change in circulation Independent Media weekend titles (Source: ABC)

Again with the exception of the DFA and the three Isolezwe editions all the daily and weekend newspapers registered with the ABC have experienced double digit declines in core circulation between the 3^rd Quarter of 2013 and the 3^rd Quarter of 2015. In total the core circulation of the daily titles has declined by 13,4% over this two year period, and the weekend titles by 12%.

When it comes to its online presence Independent Online continues to trail behind Media24 and the Times Media Group. According to Effective Measure Independent Online sites were accessed by an average of 160 458 unique browsers per day during the third quarter of 2015 (1 July to 30 September 2015). This is ahead of Caxton’s online publications (151 267) but well behind TMG’s (309 311) and Media24’s (590 274). See graph below.

Conclusion

The continued fall in circulation in most of Independent Media’s core newspaper business does not in itself reflect badly on the new ownership as many titles of other better resourced newspaper groups have seen similar or worse declines. It does however raise questions about the probity of the PIC’s decision to wager +/- R1,25 billion of government employees pension money on the financing of the 2013 deal. This is especially as it was entirely foreseeable back then that the trend of ever-declining circulation would continue. Given that this trend is not going to reverse itself, particularly given the rapid expansion of access to smartphones, it remains unclear how the group’s newspaper business will ever be able to generate sufficient profits to allow the PIC’s loan to be repaid from internal resources.

It has been speculated that Independent Media would go The New Age route of harvesting state and parastatal funding. In October this year Karima Brown, the Group Editorial Executive of the group, complained that government was still directing most of its advertising revenue to Media24 and the Times Media Group, even though the titles of these groups were openly hostile to the ANC.

According to an IOL report “Brown told SABC Digital News in an interview on Thursday that the ANC and the government complained about the lack of transformation in the media and about the media taking the side of the political opposition and ganging up on the government. Yet it gave the bulk of its advertisements to the newspapers which were most critical of it, neglecting those which were balanced” (i.e. Independent Media).

Brown was further quoted as saying:  “If you look at the Sunday Times, for instance, which is part of the TMG you will often note that the ANC government is reflected as presiding over a failed state, as wholly corrupt, that everyone in the ruling party is corrupt or potentially corrupt. And yet the bulk of the ANC’s advertising money goes to the TMG group. So the ANC must also put is money where its mouth is and look at supporting initiatives around media diversity.”

It will be interesting to see how the group will position itself in the upcoming battle for control over the ANC at the party’s 2017 national conference between the Zuma-ites and the SACP/COSATU supporters of Cyril Ramaphosa. Brown herself is close to a number of SACP ministers and it was Independent Media that broke the story of Nhlanhla Nene’s impending dismissal, two days before it actually happened. This was supposed to have been part of a more widespread purge of mostly SACP cabinet ministers by President Zuma, which appears to have been aborted for the moment.

The ability of the Independent group to assert its independence from government, in future, will be severely limited if it has not been able to start paying down its loan to the GEPF, or even the interest on it. It is thus a matter of critical public interest that the terms of the loan agreement between Sekunjalo, Independent Media and the PIC, and the full sums originally loaned and currently owed, are finally declared.

• Dr James Myburgh is the editor and publisher of Politicsweb. He earned his doctorate at Oxford University. This article appeared first on Politicsweb.

The post James Myburgh: How independent is Surve’s Independent with R900m PIC debt? appeared first on BizNews.com.

In China, debate rages around which of the Ma’s (Pony at Tencent; Jack at Alibaba) is the greater wealth creator for shareholders. There’s no such debate in South Africa where Naspers’ Koos Bekker – thanks to the Tencent investment – is in a class of his own. With Tencent having conquered much of China and Africans leapfrogging straight into mobile internet, it was only a matter of time before Pony Ma and Bekker pressed the button on their plans to replicate Tencent’s Chinese success on this continent. As the FT’s Andrew England reports in this piece, that strategy has now begun in earnest. Their immediate target is Facebook. The biggest losers, though, are sure to be the likes of MTN, Vodacom and other Africa-focused mobile operators whose profitability is boosted by soon-to-be extinct SMS charges. – Alec Hogg

By Andrew England

One of China’s largest internet companies is intensifying its efforts to crack the African market with a bid to disrupt Facebook’s WhatsApp with a rival messaging service.

Tencent has teamed with Africa’s largest media company, Naspers, to introduce its social media app across the continent. The service, WeChat, has more than 650m active monthly users in China, and it is cheaper than SMS.

The Chinese-South African joint venture is betting on the rapid growth of smartphone sales to young people, who are increasingly using their mobile phones to shop, bank, search for jobs, listen to radio and order taxis and takeaways.

Naspers holds a 46.5 per cent stake in Tencent, making it one of the highest profile examples of South African and Chinese companies joining forces to expand across the continent. Its initial investment of $34m for the shareholding has paid off spectacularly, helping Naspers become South Africa’s biggest company by value and its chairman Koos Bekker to become a billionaire.

Brett Loubser, the head of WeChat Africa, said the average African would have their first ever experience of the internet through their mobile device.

“They’ve missed the entire desktop, PC, laptop, whatever thing, and because of that, I think we’re seeing innovation come out of Africa from a mobile perspective that is just leagues ahead of anywhere else on earth really,” said Mr Loubser.

WeChat offers users services far beyond the simple messaging functions available in WhatsApp.

In an apparent bid to tie in other services to its system, WeChat has also launched a $3.5m venture capital fund to invest in new tech companies offering services that the app could offer. It has already invested in Money for Jam (M4JAM), a micro jobbing (casual work) service.

It is also introducing a “digital wallet” service in partnership with Standard Bank, Africa’s largest lender by assets, which is part-owned by China’s ICBC bank. This enables users to conduct financial transactions and make payments using mobile phones, even to recipients with no bank account.

Mr Loubser declined to say how many users it had in Africa, but he acknowledged that competition was intensifying. World Wide Worx, a Johannesburg-based technology research company, estimates that WeChat, launched in the African market in 2014, has about 6m registered users in South Africa, compared with about 14m active WhatsApp users.

“Given that WhatsApp is eight years old, we’re five years late to the party, and I think where we are at right now we are happy with,” Mr Loubser said.

He added: “WhatsApp has possibly the highest market penetration of any country on earth in South Africa. Fighting that as a newcomer is really tough, but in other African territories, smartphone penetration is pretty much non-existent: that’s an open market.”

WeChat’s short-term focus is on building its presence and offerings in South Africa, the continent’s most industrialised nation, where it has a team of 31 staff and scores of services available on its platform.

But it is also active in Ghana and Nigeria, the continent’s most populous nation, where it has a team of three and is working with Nigerian start-ups such as Jobberman, an online employment service, and Traclist, an online fashion shopping service.

(c) 2016 The Financial Times Ltd.

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By Loni Prinsloo

(Bloomberg) — Naspers Ltd., Africa’s largest company by market value, invested a further $250 million in Indian Internet-travel group Ibibo to strengthen the firm’s market position in hotel bookings and add new technology.

“The Indian e-commerce market, and the online travel segment in particular, offers exciting growth prospects for us as a group,” Naspers Chief Executive Officer Bob Van Dijk said in an e-mailed statement on Thursday. The company has backed Ibibo since it was founded in 2007.

The investment in Indian Internet is the latest evolution of a South African business that started as a newspaper publisher and is now an investor in emerging-market startups including Hong Kong-based Tencent Holdings Ltd. The Cape Town-based company’s shares were little changed on Wednesday at 1,814.78 rand, valuing Naspers at 796 billion rand ($51 billion).

The post Naspers buys Indian – $250m Internet travel startup called Ibibo appeared first on BizNews.com.

By Ilya Khrennikov

The post Naspers $1.2bn Russian Classifieds bet pays off – fuelled by economic crisis appeared first on BizNews.com.

A friend in academia who studies these things says the ANC is using the old Apartheid Government’s political playbook. He likens Jacob Zuma to PW Botha – a seriously flawed but powerful central character with no scruple about using State resources to enforce his will. ANC electioneering, too, is a carbon copy of the fear-driven “Swart Gevaar” (Black Danger) campaign Botha’s National Party used to good effect. There is much similar in their “Media Capture” strategies, witness the absolute control of the national broadcaster – and advertising support for sympathetic newspaper groups (for Perskor and Naspers substitute INM and Gupta Media). The National Party went too far, though, when using taxpayer money to create The Citizen newspaper – the expose’ of which was dubbed the “Info Scandal” and terminated the careers of numerous leading Nat politicians. Mindful perhaps of that danger, instead of tapping Treasury the ANC dipped into State employees’ retirement funds to support an Iqbal Surve-led consortium’s purchase of Independent Media. The quickest way to sow the seeds of destruction is to overpay for an asset – and in this case the inexperienced buyers coughed up R2bn for a business worth at most R1bn. As veteran journalist Ed Herbst shares here, judging by the only publicly available source, it’s now a case of pensioners’ good money being thrown after bad. – Alec Hogg  

By Ed Herbst*

“Conducted in parallel with the extremely dangerous phenomenon of ‘state capture’, the process of consolidating our democracy is endangered by ‘media capture’ and the incremental obliteration of critical voices.”

Helen Zille in an open letter to Dr Iqbal Survé, owner of the INMSA newspaper chain

As a reporter who interviewed Info Scandal personalities like Dr Connie Mulder and Eschel Rhoodie in 1977/78, I was intrigued by the following paragraph in Allister Sparks’ magisterial new book, The Sword and the Pen:

Around that time Rhoodie had also met a former CIA agent whom he described only as a ‘Mr Brown’, who told him that ‘the only way to control the media was to own it or to own some of the senior people in it.’ A sliver of advice that shaped Rhoodie’s entire career. (P361).

That related to the establishment of the Citizen but does the current situation in post-apartheid South Africa not reflect an even more egregious situation in that pensioners’ money seems to have been allocated by government agencies to purchase an entire newspaper chain with no apparent expectation of the money ever being paid back?

I ask the question because of what happened in parliament on 12 April at a meeting of the Finance Standing Committee, when the Public Investment Corporation (PIC) and the Government Employees Pension Fund (GEPF) handed out documents relating to their Annual Performance Plan for 2016.

Dr Daniel Matjila, Chief Executive Officer, PIC and Mr Abel Sithole, Principle Executive Officer, GEPF then took the Finance Standing Committee members through the documents and responded to questions.

Not all the questions it would seem.

Reporter friends who were present told me afterwards that David Maynier, Democratic Alliance Shadow Finance Minister, specifically put to Dr Matjila the question first raised more than four months ago by James Myburgh of Politicsweb and, subsequently, by myself on this website: Has Sekunjalo paid back any portion of the hundreds of millions of Rands advanced by the PIC for the purchase of influential newspapers such the Cape Times, the Cape Argus, The Star, Pretoria News, Sunday Independent, Diamond Fields Advertiser, Daily News, The Mercury, the Sunday Tribune, and the Zulu daily newspaper Isolezwe?

Read also: James Myburgh: How independent is Surve’s Independent with R900m PIC debt?

Two things struck me about the minutes of this meeting. The first was that the members of the committee received no documents prior to the meeting. The second was that Maynier got no response from either Dr Matjila or Mr Sithole to his question about whether Sekunjalo has made any attempt to pay back any portion of the multi-million rand loan made more than two and a half years ago or any of the rapidly-accruing interest.

I append the relevant sections of the minutes in italics below:

Discussion

Mr S Buthelezi (ANC) asked whether it was possible to receive the documents of the meeting prior to its occurrence, as the Committee could not have an intelligent discussion without the documents beforehand.

Mr D Maynier (DA) said that several Members had raised the question of the GEPF’s investment mandate, and it would be useful if the Fund could present a copy of its investment policy/mandate to settle the questions and provide the Committee with a proper opportunity to evaluate the investment performance.

Did the GEPF, in terms of investment policy, prohibit the PIC from holding sub-grade financial investments?

He raised the issue of questionable direct loans. On page 98 of the GEPF’s Annual Report of 2015, there had been an amount of R11.8 billion in direct loans. If the PIC was responsible for investments, was the GEPF then responsible for the administration of these direct loans? According to the Annual Report, there appeared to have been a direct loan of R896.4 million to Independent News and Media South Africa, but he could not find this company on any record. Why had this loan amount increased by R104 million, and what did this considerable increase reveal about this company?  (my emphasis)

Mr Maynier said that the Committee needed to evaluate the GEPF’s performance against its mandate, but this was hard to achieve given that the Committee had never had sight of that mandate.

Mr Maynier referred to the PIC’s mandate as the ‘elephant in the room’. He asked whether investment decisions were politically motivated, as the PIC’s mandate did not flow from an investment mandate.

The minutes do not reflect an answering response to Maynier’s question by Dr Matjila and Mr Sithole and one has to ask the reason for this, given that it is a matter of significant public interest – most specifically to its 1.2 million active members and its 360 000 pension beneficiaries, their families and dependents.

On its website INMSA lists the following shareholders:

• Sekunjalo Media Consortium – majority shareholder
• The Government Employees Pension Fund (GEPF) managed through The Public Investment Corporation (PIC)
• Interacom Investment Holding Limited – China International Television Corporation (CITVC ) and China-Africa Development Fund (CADFUND)

I know little about business and commerce but, under the circumstances, it seems fair to ask whether the Chinese investors have received any dividends in the past two and a half years?

As a reporter living in Cape Town, my sense is that the two newspapers headquartered in Newspaper House in the city’s CBD, the Cape Times and the Cape Argus, are haemorrhaging talent, corporate memory, institutional knowledge and expertise at an unsustainable rate.

Read also: Senkunjalo executive chairman Dr Iqbal Survé resigns, explains why

In the past few months alone Philip Weideman the chief sub editor on Weekend Argus, Melanie Gosling one of the country’s finest environmental reporters and Henri du Plessis, veteran news and motoring reporter have asked for and, to their financial detriment, been granted early retirement. Others are simply resigning and taking their talents elsewhere. On the political front Newspaper House has recently lost two experienced reporters. Cape Times political reporter Babalo Ndenze now files from parliament for the Sunday Times and one of the country’s most astute political analysts, Marianne Merten has left the Cape Argus and has joined Daily Maverick. One does not have to be clairvoyant to understand why this is happening.

Unsurprisingly, I am assured by insiders that these two flagship titles are not making a profit and, if they aren’t, what percentage of newspapers in the Sekunjalo stable are? Despite claims of significant investment by Sekunjalo, the circulation figures of the Cape Times – if one subtracts the significant number of giveaways – has been mired at around 30 000 a day since the 2013 takeover. This is half what the other Cape Town morning newspaper, Die Burger, sells and in a burgeoning city which is home to more than three million people that makes it effectively irrelevant to advertisers. Where, then, is the money going to come from to generate an adequate return for the civil service pensioners who depend on the PIC and the GEPF for their wellbeing and their quality of life in their twilight years when their medical costs will increase exponentially?

This is not a new concern. Back in 2013 Anton Harber wrote: “This is a high-risk, high-price investment in a declining industry – not the kind of thing one normally spends pensioners’ money on. We will be eager to hear from the GEPF how this fits in with their strict mandate.” He did not get an answer then just as David Maynier did not get an answer a fortnight ago and three years later.

More light will hopefully be shed on these matters in a weeks’ time when, on 9 May, the Labour Court in Cape Town will be asked to decide whether the former editor of the Cape Times, Alide Dasnois – whose front page tribute to Nelson Mandela on 6 December 2013 was heralded by Time magazine as one of the best in the world was – allegedly in breach of contract – wrongfully dismissed soon afterwards.

Dasnois will be represented by Cheadle Thompson & Haysom Inc.

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From Niall Beazley*

Are you guys aware that MWeb is forcing their longer term clients to move their website, domains and email addresses to a new Unix Hosting Platform?

The email below shows the content of what was sent. The email is not clear as to its intentions and suggests that if you are not sure, you can call MWeb and ask. Please call MWEB on 087 700 0777 if you have any questions.

If you call MWeb they will tell you it is a problem created by Microsoft!

The reality is that they want all longer term users of their Microsoft Hosting Platform to move to something newer – We have had our account with MWeb since the early 2000’s.

The problem is that it will take between three and five days or possibly more for the data to be moved if you agree to do so. The choice is to be left behind on a platform that is no longer supported, protected or looked after by MWeb. What choice?

So the real header here is MWeb is going to move your website domain, email addresses and data from their Microsoft Hosting Platform to a Unix Hosting Platform. The COST to you is a complete loss of business communications for a minimum of THREE TO FIVE DAYS.

Take it or leave it…..

Have a nice day.

I would think there are a considerable number of clients affected by the above who have considerably more to lose than our SME – but what is the percentage effect on all business clients that MWeb and Naspers are not even prepared to consider?

I had a frustrating half hour or more conversation this afternoon with an apologetic technical guy whose hands are tied and could not express more his own frustrations at his senior executive team.

They have no idea of when they are going to do this and the likely problems it may cause to each individual business. He suggested that there were a lot of business clients affected and I pointed out that most account users would not fully understand the implications.

• Niall Beazley is a director of Vision Catcher (Pty) Ltd. He is a member of the Biznews community.

The post Mailbox: Unilateral MWeb has got my goat – and they blame Microsoft! appeared first on BizNews.com.

Value was a phrase first coined by Benjamin Graham (the father of value investing) but was modernised by Warren Buffett. Buffett’s championed the term, which has been at the root of the fortune he’s amassed with investment holding company Berkshire Hathaway. But how does one determine value, and more specifically intrinsic value? In this the very first Easy Equities, Biznews webinar, publisher Alec Hogg looked at the Intrinsic value of a stock, and applied his calculations to a couple of South African equities. It’s an informative webinar that goes a long way in giving a basic understanding to what the ‘value’ of a stock is. – Stuart Lowman

Welcome. I’m Alec Hogg and this is our Inaugural presentation for EasyEquities, the partner of Biznews in this special seminar for you. I think we just need to make sure. Stuart’s with me in the studio.

Yes, good afternoon, all.

Stuart’s our Managing Editor at Biznews and he’s going to be picking up your questions. Are people connected there, Stuart?

Yes, Alec. We have about 46 at the moment. The question bar is just on the right-hand tab there. You can just plug the question in there and we’ll answer them as they come through.

Yes, so if you have any questions, please do that. This is interactive. I’m going to take you through a presentation but the idea is to stop me when you see anything that doesn’t make 100 percent sense. Stuart will be there to check that questions are coming through. Let’s get into it.

Intrinsic value is a big word and it’s quite a complicated subject, so I’m going to unpack it for you in a way that we can all understand.

According to Benjamin Graham there are two secrets to investing, which you can read in his book ‘The Intelligent Investor’. It’s the one book, which Buffett says you should read before anything else to do with investing. Those two secrets are quite simple to understand. The first one is to have a margin of safety before you buy a share and the second one is to understand this fellow, called Mr Market. Starting with the second one first, Mr Market is the guy who determines the share price on a daily basis. If you buy a house, nobody tells you that ‘your street is a bit cleaner today, so your house is worth R50.00 more’ but in the share market there are people trading all the time, and they will make the company’s value different on a daily basis, which of course it really isn’t. That’s the way that markets operate. Graham says, “Understand that that share price is there. The recording of the share price is there to serve you. You aren’t there to serve it.”

When Mr Market gets terribly enthusiastic as he does from time to time (we saw it in 1987, 1969, and in various stocks on a daily basis), then the price/value of that individual asset will be excessive (too high). You don’t buy. That’s not the time to buy. You wait for Mr Market to get depressed (for the price to get very lose) and that’s the time you buy. How do you know when the price is high or the price is low? Well, that is determined by intrinsic value, which we’ll tell you in a moment. The second point about the other secret to investing is to make sure that once you’ve worked out this intrinsic value…once you’ve got it in your head (what the company’s actually worth) then give yourself a margin of safety. We’ve got Mr Market, who’s a volatile manic-depressive without any medication, and then once you’ve established that you can take advantage of his erratic moods, and then you have to have this margin of safety. That means you give yourself a cushion…give yourself a reserve between what the company is worth and where you should be buying. The margin of safety: we like to work on a figure of about 20 percent. It’s a very good cushion.

Off we go to Warren Buffett and Charlie Munger. The way Warren Buffett describes intrinsic value – and remember this is where it all starts… Whatever share you buy, you need to understand before you make the purchase what the company’s actually worth. If you were buying a house for instance and going to a house, which is maybe worth R3m and because there’s a lot of activity in the area, somebody says it’s worth R5m (or they quote it at R5m) and you just accept it… Of course, you wouldn’t do that. You’d have a look at the real value f that property. Similarly, with shares. You need to understand what the shares are worth. Buffett says a share/a company is only worth this: the amount of cash that it can give back to you in your lifetime (in the lifetime of that company, as it were).

If the company is generating cash back to you then you can take the value of that cash into today’s money terms and that will give you what is called the intrinsic value. The difficult that comes in here is exactly how much tomorrow’s money is worth today. That brings in something called net present valuing of companies or of those cash flows. It can be a bit complicated. The other thing is, how long is the company going to last for? Buffett says, “The value of that company is the cash flow until judgment day”. We don’t know when judgment day is coming. If you’re investing in the U.S., you might think of judgement day in terms of ten years. If you’re investing in South Africa (because it’s a higher risk), then maybe you’d bring that down to five years. Think of it this way. You buy a little company around the corner. That company is generating R10, 000.00 per month in profit – R120, 000.00 per year.

What is it worth to you to pay for that little company? Well, if you’re going to be able to acquire it today and sell it in a year’s time… If the guy said to you, “Well, you can buy it for the next year’s profits (R120, 000.00) then obviously, you’d buy it because in a year’s time you’d be able to sell it on again. It’s what we call ‘the terminal value/the on-sale value’ after bringing in the cash flow, and the cash flow you have is R120, 000.00. Sell it for another R120, 00.00 in a year’s time. Actually, it’s worth R240, 000.00 each year. That’s what you’d be prepared to pay for it. If you think, “Well, I don’t mind hogging onto the company for two years” then you can get another year’s cash flow in it – and of course, that cash flow is going to grow every year – but let’s just keep it simple. Then it gets to R360m. It’s worth buying the company for, so you understand the concept. It’s the cash you get from the business and then the terminal value – in other words, what you sell the business for after a period of time.

I use five years in South Africa to be conservative. I need to know that it is a very, very conservative figure when we’re looking at the intrinsic value. The reason we have to have intrinsic value is that we need to have a feeling or an understanding of what that company’s worth…not to let Mr Market confuse us. I hope this is all coming through. Are you getting it, Stuart?

Yeah, it’s all good my side, thanks.

All right. I’m going to start off with the first of these Wilson Bayly…because it always works better when you use examples. This is the share price that Wilson Bayly Holmes-Ovcon (to give it, its full name)… It’s the country’s leading construction business, since 2009. As you can see, it’s done pretty much nothing. In the last seven years then, what has happened to this company? Well, they’ve done terribly well. The profits have grown. The company’s base has expanded. I looked at this and thought, “Well, what is this intrinsic value of WBHO? Was it overpriced in 2009 so that the share price hasn’t moved at all, or is it under-priced today? Are there other issues that might have come to play?”

Remember, there was a Competition Commission hearing where the construction companies were forced to pay quite big fines even though in this case, I think it was about 5000 contracts, which WBHO had where someone in the business had been naughty on six of them. It just shows you. It was more of an outlier than a problem within the business. This is the way I worked through it. I took some assumptions. Now, we’re trying to get to Warren Buffett’s approach of cash flow. He starts off with a thing, called free cash flow. Without confusing you too much, you can pick this up in the income statement. Alternatively, it’s best to work from an annual report. Remember, you don’t have to do this on a daily basis. You can do your analysis on a company once you see the annual report. Just look at it down the bottom. You’ll see there – at the bottom – it says ‘free cash flow calculation’.

We take the net income in the company (in other words, the profit after tax). We add back depreciation. What this means is that we add back the book entries, if you like. If you’re running a company, you get profit, which is your after-tax profit. You’ve paid the Government, your employees, and all your suppliers. In Wilson Bayly’s case, it was 513-million (what remained in 2015). Then you add back the book values, which have reduced the profit and that’s 296-million. What amortisation and depreciation really means is that if you make a capital investment, you can write it off over a period of time – over a number of years. Like if you were to buy a car and you had your own business, you can’t write off the total purchase of the car in Year 1. You’ve got to do it over the lifetime of that asset. Companies do the same thing. You’ve already spent the cash. The cash is gone. Where does that cash go?

Well, there it is – capital expenditure. You would then reduce because if you’ve got a cash amount that comes from profits, you write back the book entries but then you’ve to take into account what you’re spending on capital expenditure to remain competitive. That’s exactly, how you work out the free cash flow. After that, it will tell you how much you’ve got that you can actually, manage or that you have got to apply and to allocate. There it is. In Wilson Bayly’s case – 482-million. I put that into the top there. I anticipate that this company will grow at ten percent per year, which is not unrealistic because they’ve grown much faster than that in the past. Then I discount the future cash flows by a figure. If you think the company’s going to grow faster, you can put 15 in there. If you think it’s going to grow slower, you can put five in there. I discounted back…in my case, I used 7.8 percent because that’s the long-term growth of companies on the JSE – 7.8 percent.

I would discount that money back basically, to say that if Wilson Bayly can’t grow faster than 7.8 percent, why am I buying it? I can just buy the ETF via the Satrix 40. I’m bringing that back to today’s terms. Then you put that into this calculation here. It starts off at 482 (as you can see from the top). You add ten percent, less 7.8 down to the bottom and in Year 5 (remember we’re not going to Year 10 as you would internationally, because we’re trying to be conservative) we’re sitting at a number of 526-million. That will be the value at which, you work out your terminal value. In other words, you’re going to sell the business on in Year 5 and that brings you here to this one. NPV Year 5 x 12. Terminal value: R6bn. NPV’s of all five years (that’s the cash flows in all five years, because you’re going to hold this for five years): R2.5bn.

Then, how much cash is on the balance sheet of this company today? Clearly, that cash is not disappearing. That’s also what you own. There it is – nearly 4-billion. You put it together. In this case, you’ve got an intrinsic value of R12.8bn. Then you divide it by the number of shares in issue – R63m here – and it gives you an intrinsic value per share, of R203.00. It sounds complicated but if you work through each of the steps, one-by-one, you can actually work on this net present value quite comfortably to get yourself to a position. We’re saying that Wilson Bayly’s intrinsic value is around R200.00 per share. Remember, you must go with a range. Don’t say it’s R203.22 and I’ll buy the shares up to that point. No. I might be out in my calculations. It might not grow at ten percent. The discount rate might be lower or higher than that, so you need a bit of a range.

In this case, I’d go with a range of say R180.00 to R220.00 just to keep yourself really comfortable. I know that that’s what the business is worth through my own homework that I’ve done and as Warren Buffett says, “If someone walks through the room, you don’t have to know that they’re 315lbs exactly to know that they’re fat.” In this case, is that a fat pitch? Is that a good opportunity if they’re worth R180.00 (minimum) to R220.00 (maximum)? Well, if you look back at the share price this is a company, which is trading today at R114.00 per share. Of course, it’s good value. Do you see where we started on this? We had a look back over the period – a fairly predictable cash flows that you can get from a big business like Wilson Bayly. The company’s share price hasn’t moved anywhere in six years.

I would assert that the reason for that, having done my homework here, is that Mr Market has gotten all depressed, whereas the intrinsic value of this company is around R200.000 (as you can see in the figure there), he’s only pricing it at R114.00 today. That’s the kind of company I like to buy. Would you be paying R200.00 per share for the company? Of course not. We need the margin of safety. You bring that in. You take another 20 percent off it, take it on R160.00, and it still leaves a very nice fat margin between the current share price of R114.00 and R160.00. What do you do? You don’t buy it today at R114.00 and think you’re going to sell it tomorrow at R160.00. You buy it today at R114.00 and you hold.

Alec, just a quick question from Sadir. He asks if you can please explain the discount rate again.

What we’re saying here is that your company (in this case, Wilson Bayly) has – this year – generated R482m in free cash. Next year, R493m, then R504m and then R515m as a present value in today’s money terms. If you take the actual figure, of course it’s going to be higher than that because you’ve got inflation that comes into account as well. I’m using 7.8 percent as a discount rate to take away inflation because that R100.00 you have today is not the same as R100.00 tomorrow. Next year’s R100.00 is going to be worth less because you’ve got inflation and we all know that. It’s just a way to discount the future cash…to discount the money you’re going to get in future, back to what it’s actually worth today. Remember, when you’re buying a share, you’re using 2016 money but you’re going to be getting cash from that share in 2020 terms. You can’t say 2020 money is the same as 2016 money. It’s going to be worth less.

Quickly Alec, Steve wants to go back to the terminal value calculation.

Steve, terminal value is simply…When you invest in shares it’s all about buying the company. Think of it as buying the company. Of course, we buy a very small, little slice of it but imagine you’re buying the whole company. You’re buying the whole company today (Wilson Bayly) and you then to have to try and work out what it’s going to be worth at some point in the future. Hopefully, you’re going to hold the company forever but we presume that you’re going to sell it at some point in future because we’re working on the cash that you get into your hand plus this terminal value. In other words, what you sell it on for – that’s the value of a company. You can’t just work on the cash flow. You can’t say, “Well, okay. This company is going to generate cash from here to judgement day of whatever it is” because we don’t know when judgement day is.

We’ve got to take an estimate of when judgment day is going to be (and I hope there aren’t many people who are going to hold me to this, that in five years’ time, it’s all going to happen). It’s just a figure of speech that I’m trying to use here. In a South African sense, I like to use five years. Clearly, if you use ten years then your valuations would go up significantly, because you’ve got an extra five years of cash flow plus the terminal value would be much higher after ten years than it would after five years if the company keeps growing, which we presume we’re doing our homework and buying the right ones. It’s a way of saying ‘this is the cash I’m going to get in the next five years. Then I’m going to sell the company in five years’ time and that’s what I would get in cash there’.

There are three things, which make up the value in this model of the value of a share. (1) The cash flow you get in the next five years, using a South African conservative sense. (2) The cash that’s already in the company (and in this case, they’re sitting on nearly R4bn). (3) What would you sell the company for in five years’ time? I hope that makes a bit more sense.

Just a follow-up from Steve. He asks why NPV x 12?

Good point. When you get to the terminal value… In other words, when you get to five years’ time you’re going to sell that on a multiple, which is reasonable. When you buy a share on the JSE, you pay a multiple of the current earnings (or of the cash flow). What we’re saying is that someone else would be happy to buy this company at 12 years’ cash flow when you sell it on. Although we’re working on a five-year period to keep it nice and conservative, if you look at the average PE on the JSE it’s somewhere between 15 and 18, depending on which stock you’re talking about. That means you’re buying 15 years’ future profits. We’re getting even more conservative. We’re saying, “You’re buying 12 years’ future profits”. What I’ve tried to do here is keep it conservative. I’ve done about 50 companies in preparation for this webinar. I’ve looked at their intrinsic values and I only came up with a handful that were worth acquiring at this stage.

Remember, I don’t play at all in the resources field. I don’t believe that resources are investments. I knew quite a lot about horseracing. In fact, I bred horses at one stage. If you’re going to go and buy resource stock… My suggestion is ‘rather go to Turffontein’. There’s quite a good ratio between Number 6 in Race 4 and Number 4 in Race 6, coming home. You can go and play on those kinds of odds. When you’re buying a commodity, you are taking away your great advantage of investing in shares. Investing in shares is leveraging human ingenuity. The management of a company should be taking a certain amount of assets, leveraging them, and making them produce a better return for you. If you’re buying a resources company, all you’re doing is buying an inanimate, dumb object – albeit gold, chrome, platinum, or whatever – hoping that at some point in time, you can sell that inanimate mineral to a greater fool (and hoping it doesn’t go down).

That’s really, what I did. I went through about 50 of these companies and came up with a handful of them. Mr Market is real dumb. He’s real crazy. He’s manic-depressive but from time-to-time-, these shares do get out of kilter with the intrinsic value and sometimes they’re a lot lower. Your secret is to buy them when they’re lower and these are the ones I’m focusing on today.

On the discount rates, we understand what it is now but he says, “Why 7.8?”

I use that one Sadir, because that is the 100-year return on JSE shares. If you take the last 100 years then on average, your growth would be 7.8 percent. You can use any kind of figure you want. You can take an estimate of the inflation rate, if you like. I just believe that that’s the best one because if Wilson Bayly is not going to be attractive at a 7.8 percent discount rate then you must just rather buy a Satrix 40 because that will give you 7.8 percent over the long-term. It’s important. Please remember. Investing is very, very different to trading. Investing means that you buy the shares and you hold on forever, or until Mr Market goes silly as he does sometimes.

If a company issues or buys back its shares, does the intrinsic value change?.

Yes, it does and that’s a very important point. When companies buy back their shares, you have to check that they’re buying it back below intrinsic value. Sometimes, some executives are very naughty. They will be buying back shares in the company to boost the share price because they’ve got share options coming up. You have got to assess, “Is this a company that actually knows what it’s doing? “ If it’s buying back its shares at below intrinsic value, it’s adding value to the shareholders overall. Warren Buffett’s very big on this. Remember, he’s got a portfolio of about $120bn. Four of those stocks make up about two-thirds of it and of those four stocks; they all buy back their own shares. IBM, Coca-Cola, Wells Fargo, and American Express. They’re buying back the shares at a lower rate in his mind.

He’s worked out his intrinsic values and he says, “It’s good that they’re buying back shares because they’re doing it below intrinsic value.” If that happens, then the company’s applying its cash the way Buffett says, “It’s buying Dollar bills for less than a Dollar.” There’s no better investment that you can make as a company. My own experience… I listed Moneyweb in 1999. People were all over me. They wanted shares [unclear 0:22:07.0]. A couple of years later, those shares were trading at 17 cents. What did I do? I had quite a lot of cash in the business. We bought back shares at 17 cents. That’s a good deal. We did that a few times through the history of that little company. It’s easy in a little company. There’s always the concern though, that you’re actually buying out your partners. I was never really comfortable about buying out partners in the business but if they really wanted to sell their shares, I guess that was their story.

A claim from SANRAL: does it affect the market price on Wilson Bayly Homes?

A claim from SANRAL? No, he’s got the wrong company. It’s another one.

I think they’re looking for signs across the border on the roads issue – the damage to roads.

I’m not sure. I really don’t know any of that. I think that you’ve got to look past the immediate short-term noise. I did see that SANRAL were claiming… Are you sure it Wilson?

It was more than one.

Is it more than one?

Yes.

Okay. Those are issues that you need to then assess in it. I think we’ve got a big enough margin of safety here. Remember, Wilson Bayly has an interesting point. It gets about half of its revenues from Australia now so you’ve actually got a lovely Rand Hedge there as well. Here’s another one – Blue Label. Last year, after the Berkshire Hathaway AGM, I spoke to a group of people at Standard Bank and said to them, “Blue Label looked just, unbelievably cheap at the time.” It was R7.50 and this goes back to when Blue Label was listed in 2007. You can see there. On the first day it listed, it got to R8.00 and a year ago, it was trading [unclear 0:23:50.7 level. All of a sudden, in the last year, the shares have really caught fire – belatedly. It took them nearly ten years for people to understand the value of this business.

I looked at it again and thought, “I do remember that Blue Label has a sound business model. They’ve got a lovely moat. It’s hard for other people to replicate what they’ve got there. Now that it’s gone up to R16.00, is it still value?” I did the intrinsic value calculation and here, I’ve been extremely conservative again. There we go, with a growth rate of ten percent, a discount rate of seven-point-eight. This company generates free cash flow of about R1bn per year. They sell airtime and prepaid electricity, etcetera, in South Africa, Mexico, and India – expanding rapidly in Mexico and India, so they’ve got more than 300 thousand distribution outlets, lots of little transactions with very small margins. I worked on their R1bn free cash flow and my ten percent growth rate, with that discount rate and saw what would happen to this company.

Where did it come out, and there it is you can see the intrinsic value per share, R29.35, so although Blue Label has done very well in the shares or its share price has risen strongly in the past year, it’s still at a lovely discount to its intrinsic value, in my opinion. I’d buy it at this level, in fact, I’d be very happy to buy it right up until probably R22.00 per share, at which point your margin of safety is now starting to get a little bit tight. I hope that you kind of understand, and you can do these calculations yourself on many stocks. Another one I did was Imperial. It came out really, nicely. There’s the Imperial story. Since 1994, it’s a 20-year story, it would have been nice to have been, bought at around there and, of course there the share price went up, and it’s come back again. I know the new Chief Executive, Mark Lamberti quite well. I’ve got a very, high regard for him.

I’ve seen the Imperial operations internationally and I’m most impressed that by the way that they can compete with the Germans in logistics. My goodness, if anyone can compete with the Germans, in fact by the market leader in Germany, then you’ve got to be doing something right. I did the intrinsic value calculation there again. On this one, they generate free cash flow of just over R2bn per year. Again, using a ten percent conservative growth rate, now particularly if you’ve got big international interests, (the way the Rand is going) that’s very conservative and then a discount of seven-point-eight. Put the numbers in, there they come out. You have an R40m intrinsic value on this share or R199.00 per Imperial share that’s my calculation. I go back to where the share price is and if it’s trading at R145.00, where it is at the moment, you’ve got a nice margin of safety.

Firstly, you’ve got to like the business you’ve got to like the business model. You’ve got to believe that they’ve got a good moat that the business is going to be around for a long time. You don’t want to buy into something where it’s going to fall over next week. It’s a good, solid company. It’s a good brand. Then you work out the intrinsic value to tell you what it is worth today. Clearly, at R220.00 a couple of years ago, you would be paying over the intrinsic value and let ‘mister market’ do that but today, at R145.00, it’s a good, long term holding, remembering that you’re going to hold these shares forever.

Robert de Vos said he missed the NPV definition.

NPV – that is, Robert, it’s taking your cash that you get into the future, and discounting it, into today’s money, so in very simple terms. R100 today or a R100 note today is worth more than a R100 note will be worth, this time, next year, in your buying power because of inflation, so it’s just to try and get next year and the following years R100 notes and to work out what are they worth in today’s money terms. I hope that makes sense.

We’ve done this and this is the most, simple one. This is the one that you go and play around with, start doing it on your whole portfolio. The best thing about investing is to understand where you are and why you are doing certain things. Once you start playing around with these numbers, you get better at it all the time. Nobody is an expert. Even Buffett gets it wrong sometimes but over his 50 years his intrinsic value calculations, I can assure you, are pretty sophisticated. Remember this is the greatest game on earth because it changes conditions, circumstances change. Read those annual reports. Look at what the companies are doing, and then you can work that intrinsic value out.

I’m going to give you, there’s another way though on valuing a share, which is a lot more difficult and this is a concept that is only now starting to be, understood. As human beings, we think in linear basis. We think ‘well we’re going to have one child this year and maybe another child in two years’ time’. It’s very hard for us to think what happens to those children, and their children, and their children, etcetera. Each child that you’re fathering today their generations, in 100 years’ time, they might have 50 people who come from them. If they’ve got maybe more wives, then of course it will be more than 50 people but it’s called exponentiality and exponentiality is something that human beings really battle with.

Moore’s Law. You might have heard of how Moore’s Law works and it was interpreted by Gordon Moore back in 1964. He was at Intel, and what he said was the way that things are developing at Intel, where they made silicon chips for computers, was that every year to 18 months, we will be able to produce something that has got double the capacity, double the power, for the same price. When you start putting that into your spreadsheets the numbers become scary, this is the share price graph of a beneficiary of exponentiality, called Amazon.com. As you can see, going right back to when it was in the mid 90’s, when it was founded, it initially didn’t do a whole lot on the stock market. Then it had that run up in the Dot.com boom. Then the Dot.com bust and it went down to where it was ten years before, and slowly started building up again.

During all of this period, Wall Street looked at Amazon and said, “Jeff Bezos, you don’t really know what you’re doing because you’re not making any profits.” Well, if you understood the Amazon story, and it’s a little bit like Blue Label by the way, a similar kind of thing, where investing heavily in infrastructure. Not worrying too much about the profits but building for the next generation, building for the next year, and what Amazon has done is that it’s transformed retailing in the world. Indeed, that started catching on around about in 2010, where the smart investors got into it. Now, the not so smart investors are trying to jump onto the bandwagon as well, and realise ‘my goodness this is a phenomenon’ and it was assisted, in the last couple of weeks by Warren Buffett. That is where the share price was, the share price was about $650 a share, before the Berkshire Hathaway AGM. It is now $717 a share. It’s a big jump, six percent.

At the Berkshire AGM – that by the way, is a picture of Jeff Bezos, the guy who started Amazon. At the Berkshire AGM on numerous occasions, Warren Buffett and Charlie Munger referred to Amazon.com. They spoke about the Amazon effect. How Amazon has transformed retailing and e-commerce. How Walmart came to some of the Berkshire subsidiaries and said to them ‘look we’re struggling because of Amazon’. Remember, Walmart is the biggest retailer in the United States, a huge company, but they’re starting to have their lunch eaten by Amazon, so they went to Berkshire’s subsidiaries and said, “We need you to pay us quicker, and we will pay you over less time,” in other word, improving their cash flow because they’re struggling. Now, when you get that kind of a conversation going at Berkshire Hathaway, where 40 thousand people go to Omaha to listen to what Warren Buffett has to say.

It’s similar to a conversation he made a few years ago about Google where he said, although he’s not investing in Google because he can’t work out the intrinsic value. He does think that their business model is impossible to break, and his best friend is Bill Gates, who clearly is at risk with Google. The Google share price then started running because value investors bought into that story. They’re doing the same here. He mentioned that we can’t outdo Jeff Bezos, and in another discussion point, he said that the value of Jeff Bezos, to Amazon is priceless. Those are the issues that start coming to play in exponentiality and we had a South African example of this in Naspers. This goes back 20 years, or just over 20 years. You can see the Naspers share did pretty, much nothing for half of that period and then what happened in the late 90’s was that this man, Koos Bekker, decided to do something very different.

He saw that the future of media in South Africa was maybe not that good. He did start MWEB and get into the internet field but he felt that there were bigger opportunities if he went global. He and the late Antonie Roux, had a strategy that they called ‘throwing mud at the wall’ and essentially was that they must go and look at emerging markets, where they could find assets, internet assets that looked like they could win. Of course, they could never pick the winners. Nobody can at such an early stage but they bought a company in Russia, called Mail.ru, which has done very well but the spectacular deal was when they acquired 50 percent of a little Hong Kong company, of 30 people, called Tencent. They paid about $30m for it, at the time. It’s worth 100 times that today, and so is the Naspers share price because that investment in Tencent has been a phenomenal success and the Naspers share price at the moment, as you can see that exponential growth, is due to the exponential growth of Tencent in China.

It was an internet company in the biggest, most populous nation on earth, starting off early on, and South African business is the biggest shareholder. It’s been called the most spectacular, private equity investment in history and that’s why the Naspers share price has done what it has. Some people will look at this and say ‘my goodness but it’s got to fall’. Anything that goes up will go down, and they might be right, but it’s not based on what Naspers has done. It’s based on Tencent and Tencent, in an embryonic market like China, has got a preeminent position. In fact, Pony Ma, who is the Chief Executive of Tencent, is regarded, in China… It’s between him and Jack Ma, the man from Alibaba.com – they’re not sure who he greater entrepreneur is, but that is how the high esteem, with which it held, so exponentiality is something never to discount. It’s impossible to work in intrinsic value on it.

If you find a stock that you believe is going to be growing exponentially into the future. The one that I’m doing my work on at the moment is Facebook. Being in the media industry, I get Facebook. I understand what Facebook is doing. I understand the virility of it and it looks, to me like it’s unstoppable, in the same way as Google is unstoppable and, I guess, in China Tencent is unstoppable, which means Naspers is unstoppable. I’m doing my work on it now. Finding the right time to buy into that stock, if you had bought Naspers, say in 2006, around about this level, at R1000.00 per share, well you wouldn’t believe that it could double again in the next few years, but that’s what exponentiality does. It’s very hard to do a valuation of these companies, until you can sit down and put it on a spreadsheet and say ‘well if it does keep growing at 35 percent a year, what are the numbers going to look like’? Koos Bekker, South Africa’s great entrepreneur.

Alec, just a few requests on if the webinar will be available after this?

Yes, we will. We’re going to be transcribing the entire webinar. It will be on Biznews and I think we’re going to put it on the EasyEquities platform as well, so you’ll be able to read and listen and watch again, at your leisure, if you have to rush out now and go and get that hamburger or salad for lunch. I’m just going to close off with the ‘Cigar Butts’ and this is a big part of the investment strategy that Benjamin Graham began with in the 1930’s. What is a ‘Cigar Butt’? Well, as you can see there, this one’s probably got one last puff. We used to call it a nip, when I, many years ago when I was a young guy and used to smoke. I didn’t have much money, so you’d smoke half the cigarette and then stop it, so that you could have a nip of your cigarette a little bit later. Well in the 30’s, what happened those days with the rich guys, as a status symbol would smoke these big, fat cigars and wanting to help the less fortunate they would flick the last bit of the cigar away, when there was still at least one puff left.

That became a terminology for shares that had been really bombed out but have got at least one little uptick in it. I started looking for some cigar puffs and came up with two. I don’t know if South Ocean is going to be just a one-puff benefit. I think it could be a lot more than that but here’s a ten-year share price graph that shows you it’s a company that manufactures electric cables and lighting equipment, so very basic infrastructural related business in South Africa. It’s got a problem with the Competition Commission looking into it but again that’s not going to kill that company. It will hurt it but it won’t kill it. What will kill it is bad management. As you can see this business has had a pretty rough ride over the last ten years, and indeed since 2012, when it was R2.00 per share, to its current level of in the R30’s. I had a look at the vital stats and you get this from going into the balance sheet and the income statement.

In other words put into Google South Ocean annual report and start reading, and some very interesting things come through here. They’ve got a new Chief Executive, called Koos Bekker, not our Koos Bekker or the Naspers’ Koos Bekker, but this is Koos Bekker, who is a chartered accountant and he’s just taken over from August 2015. That’s always a good sign. Then I had a look at the market value of this company – it’s R56m. Remember buy the company and not the stock, so if you want to buy the whole of South Ocean today, and you had R56m and the owners of the shares were prepared to sell it to you that’s what you’d be able to buy it for. Would the owners of the shares sell it to you – very unlikely because the tangible net asset value and that is a very important thing? When you’re looking at the balance sheet or at the financial statements of a company always look at tangible net asset value and not net asset value.

There could be a lot of goodwill and a lot of nonsense in there, so the tangible net asset value is nearly ten times what the market value of it is at the moment. What that says to you is you can actually buy this company for R56m. Liquidate it and get yourself R556m, or R559m to be exact. That’s already telling us that these shares are a little neglected. Then you look at the size of the revenues. Now, if the whole company can be bought for R56m, the revenues are R1.7bn a year. Already that says to me ‘hang on a minute I don’t mind buying those revenues for R56m’ and the net cash that it’s generated in the past year was R33.5m. As you go through the notes of the accounts, the accounts themselves can be very confusing but look for that number that says where’s the net cash, where do they talk about the net cash? Here we are, buying a company for R56m, when it’s giving us cash this year of R33.5m.

Hopefully, the managers know what they’re going to do with it, we’ve got the new Koos Bekker there, who presumably wants to impress so he’ll take that R33.5m and allocate it properly. What they did last year was they reduced their overdraft, as you can see there, from R109m to R74m, and there is a risk here. There’s a Competition Commission investigation into the electrical cables business, but at R56m, you’re buying a share there, well I think you’re not really doing… You’ve got a ‘cigar but’ that’s probably worth a whole lot more than that. Is the share price down where it is reflecting reality? No, it’s reflecting disaster and it’s not a business, in my opinion anyway that is going to hit disaster, not with the cash flows that it is generating, a nice, little one to go and do your homework on.

Another one is Esor. Look at that share price – R9.00. That was about seven years ago, and it is now 29 cents. You can pick it up on the market today, so it shows you that this is a company that really has had its share of challenges. Again, I had a look at the statistics. They’ve done quite a lot of changes there. They sold out a big part of the business – the Franki part of the business. You can see in fact, on this graph here where it falls quickly. That was with the sale. They paid quite a big dividend at that time, about R38m, and Esor is a restructured (as they call it, back to basics) business. They cut their headcount in the past year by about 20 percent. That’s quite apart from the Franki pile getting rid of that and that is always a good sign. When a company is prepared to button down, do the necessary, take the retrenchments, take it on the nose, and streamline their business for the future.

Where are their revenues? At R1.4bn, the market cap of this company is R115m. Okay, already I was getting quite interested because if they can do things on an R1.4b revenue stream and your market value is only R115m, you’re getting yourself quite a nice business. Then you have a look at net current assets and what this is, you take the (looking at the balance sheet), you take the money that’s owed to the business today, and the money that it owes, so it’s essentially the debtors, we all understand that – people who owe you money, the accounts outstanding. As against the accounts, you’ve got to pay. The difference there is about R180m. Then you’ve got cash of another R36m on top of that, sitting in the balance sheet, and there’s odds and sods that carry on. For a market cap of R115m you’re getting net current assets, stop it today, liquidate everything, you’ll get R313m.

Actually, more than that because when you take all their plant and equipment, property and everything else they own, the tangible net asset value is R584m. Hello, now I’m interested. How about the cash flows, well in the last year there’re a lot funnies in the figures because there were retrenchments and they some money in from selling certain things and they got the working capital down by, well as you’d expect. If you’re starting to make the business more efficient, you reduce your working capital, but they generated a cash flow last year of R98m and that reduced their gearing, in other words the debt level, to 24 percent. Don’t worry too much about that excepting if your debt is 24 percent of your equity then you’re not exactly over borrowed. It’s when you get to 100 percent plus that you’ve over borrowed, so I look at the whole thing and I say to myself, “My goodness this is a stock that is well worth it’.

It’s on the recovery path. It’s got lots of assets there. It has been around for a long time. It’s priced for disaster. Let me read a little bit more about it and I think this is another ‘cigar butt’. How far will the ‘cigar butt’ take you – maybe to R1.00 or maybe to R2.00? Who knows? Certainly, it’s got value in this business that is a whole lot more than the 27-odd cents that it is trading at, at the moment.

Alec, just  a quick comment, South Ocean is up 38 percent in two days on low volumes.

We’ll stop it. Then don’t get crazy. You know what’s happened was I did a road show, post Warren Buffett, and clearly some people have now thought exactly what I told them not to do. I said, “Don’t go, and buy the share. Please, do your homework. Understand what is going on in this business. Just don’t rush into now. Just sit vas.” Hold it a little while. It is obviously, it’s still value at that level, but what tends to happen in these cases is that somebody decides to share tip and they rush in, hoping that they can sell the stock to a greater fool. You don’t have to buy anything. You take your time. You identify opportunities and really, this is just to show you an opportunity that is possible. It’s not to say to you go and buy the stock. What you now know is these are the things to look for. Please don’t go rushing into this as a share that you can add to your portfolio.

Maybe take a small slice of it. It’s still… If it’s gone up 38 percent that means that the market cap would have then gone to, say R80m or R90m. Tangible net, add value of R550m. I can still live with that and I think you can too. That’s my story for today. I know we’ve gone over a little more than the half-hour that we anticipated but I guess, this is quite a complicated subject, and it’s a lovely basis from which to start understanding investing. Investing is easy, it really is easy, and EasyEquities makes it even easier because they make it really cheap to do the investing. These are kind of the ground rules. Read that book of Benjamin Graham. Read my book on Buffett as well and I know if you’re with Easy and you’ve done your [inaudible 0:46:49.2], you’ll be able to get well we’re sending it to quite a few people in the email. Just read the book, understand it better, and it will give you those basics because this is the greatest game.

When you understand equities and you can buy them and make long-term investments, for low costs, and just leave them there. Don’t trade them. You will always be a winner. Thank you for being with us. Stuart thanks for fielding those questions and we will have everything on. It will be transcribed. We’ll get the presentation onto the Biznews site and also onto the Easy sites, if there’s no more questions, Stuart…

No that’s it. It’s gone all quiet this side.

All quiet, great. I’m glad we could answer all of those. There’s our contact details on Facebook, Twitter, LinkedIn or you can always drop me an email. It’s been a privilege to be with you today. We’ve had a good turnout of people live and I hope, if you are accessing this after the event, you also find that it’s been worthwhile. Thank you.

The post Webinar: How to Calculate the Intrinsic Value of a Stock appeared first on BizNews.com.

Compensation and Reward in the Financial Services Industry is aligned with the old model. Roland Rousseau believes that these need to change in order to allow the model to adapt to the changing times and technologies.

This discussion is sponsored by Absa, a member of Barclays. David Williams is with Roland Rousseau, who’s Head of Barclays Risk Strategy Group at the Absa Investment Conference. Roland, you’ve got a panel discussion today that you’re chairing and it’s a short topic that you’ve got to deal with – ‘Active is Dead?’ Is it?

Well, let me start with something Winston Churchill said many years ago. He said, “Everyone tries to do their best but that’s not good enough. What we need to do is what’s required.” So what is happening in the investment industry is we’re all trying to find the best fund manager. We’re all trying to beat a benchmark. We’re all trying to chase past performance but that’s not what’s required. That’s doing your best, so what is required is actually somebody who can manage client’s risk, rather than chasing higher returns to beat a benchmark. The industry is going through a major rethink as to the value proposition of how you should invest, so the concept of Alpha is a technical description of what is skill. Is skill beating a benchmark because I can show you many examples of how I can beat a benchmark without skill? A very quick example would be if you came to me and said, “Here’s a benchmark of 50 percent equities and 50 percent bonds, please outperform that.”

I will go and put 65 percent in equities and the rest in bonds, and I’d play golf for three years because I know that equities, over time, beat bonds but that’s a higher risk than the benchmarks. So I’m generating not through skill because I’m playing golf every day, and excess return I’m just generating excess return by taking more equity risk. This is how most skill is badly measured, is people say he’s at the top of the ranking he must be good, but you don’t always want the person who generates the best return. You want somebody who actually is consistently delivering a proper risk adjusted return, which is the correct definition of skill. It’s not ‘did I beat a benchmark’. It’s not ‘did I win an award’? So the approach now is to say ‘can we lower costs for clients’ absolutely. ‘Can we lower risk’ yes we can because all the evidence shows this.

‘Can we all outperform’ no because it’s a zero sum game, so for every winner there has to be a loser, and if you listen to Charles Ellis, who’s presenting at the moment, he’ll tell you that it’s actually a losers game, chasing Alpha, because when you introduce costs – there are more losers than winners. His view is very much that Alpha is better.

If this is the case, is the industry resisting this? Are they catching up? What’s happening?

Okay, a very good question. The trend is that we have in any industry, the music industry, the publishing industry all of these industries have been majorly disrupted and some people have not survived that disruption, or some companies have not survived that disruption because they were sort of resilient in sticking to what they’ve always done. Those are the ones who are going to have to be very careful because if they’re going to sell this so-called Alpha or the skill, when we are going to uncover that that’s just excess risk, and not specifically skill. Then they’re going to have a problem, so we probably, like in any other industry, are going to see some major new entrants, who are going to disrupt the existing incumbents, so it’s again this whole robo-advice space.

Read also: Roland Rousseau: finding the investment manager’s ‘Uber’ – to manage risk

Is the Uber coming to the investment management industry? The Uber is not going to sell past performance. Uber is not going to say I won an award. Uber is going to say ‘I will show you that I can lower your risk for you’ because all the scientific evidence shows that it’s easy to lower risk. If you take the top 40 shares on the stock market, 20 percent sits in Naspers. That’s not a very, well diversified portfolio, so I can just equally weight the shares, and I get lower risk, right. So it’s easy to lower risk but nobody is doing it because we pay people to outperform. We want somebody to beat everybody else, but what’s happening is they’re taking on additional risk that’s unnecessary, so let’s remove the unnecessary risk, and those are the winners in the industry.

What have you done in your business to change this?

One of the things that is new to South Africa, not just us but several banks are working on, is what can we provide to help people manage risk better? The way to do that is to, first of all break down this concept of risk, because what is it? Some people say its volatility. Some people say it’s something else, so academic research has shown us that we can breakdown risk into risk factors. There’s political risk. There’s economic risk. There are all those kinds of risks but if I can just take equities for example, we’re even breaking down equity risk. There is something called value risk.

Warren Buffett is a value investor but value investing is risky but it’s a good risk, so there are good risks and bad risks in the market. You want to take value risk but you could be wrong for long. That’s why it’s risky, so for the last five years value investing hasn’t worked. Ninety percent of fund managers have underperformed the market in the last five years because they’re all doing the same thing.

Isn’t the point of value investing you’ve got to take a longer horizon?

Correct, but the thing is your clients are not wanting in this day and age to sit for five years, or even longer, waiting for that very short period of sharp out performance, and then long periods of underperformance again, because that’s what happens with value. It’s a very cyclical payoff. Can we build a portfolio that doesn’t just have value in it and yes, you can by having a Momentum index, so indexation. The move to indexation is actually to access risks. It’s not about passive. It’s not about giving up on active. It’s about empowering somebody who is active to choose which risks they want and when, because at the moment you’re stuck with your fund manager, who is a value manager for all eternity, and you’re going to have very uncomfortable nights of sleep for very long periods of time. Can we build more diversified portfolios and portfolios that can adapt to changing market conditions more quickly, absolutely?

Read also: Webinar: How to Calculate the Intrinsic Value of a Stock

Yes. You mentioned award, people go for the behaviour that is rewarded.

Correct.

Whether it’s your peers or your employer or the industry itself, what is rewarded will happen, so isn’t it time to change the rewards?

Absolutely, so the topic of the debate today is ‘Is Alpha Dead?’ and I would say the way we are incentivising people is dead. Not the need for skill. We need skill but the skill is not to beat a benchmark and win an award. The definition is, for example, imagine we paid fund managers to lower risk because actually that’s what clients want. They don’t want you to beat the market with excess risk by buying and putting all your money in resource companies, which have done exceptionally well now, and you’ve beaten the market. But you actually want that kind of return in your portfolio because it’s incredibly risky, so if we just change the way we pay professional investors to lower risk the whole industry will be turned on its head because they don’t know how to do that at this point, so we need a whole new way of thinking. That’s where the disruption is going to come in.

Who’s going to come to market and say ‘I can lower your risk please reward me on that basis’, so it’s nothing wrong with awards. It’s the awards are chasing something that is not in the client’s best interest necessarily.

How long is it going to take because it sounds to me like whatever people feel about it now, this is the way it’s got to go?

This is nothing new internationally. We are probably ten years behind in South Africa because you have seen. Right now in Europe, there are actually court cases for people to say there’s legal action being taken against active fund managers because they are taking active fees and they’re delivering passive performance. They’re saying ‘pay me a lot of money for me to beat the market or beat my peers’ but they’re not. There’s actually class action lawsuits happening, so you can see that this is not something that is going to happen. It is happening internationally. I don’t think that will happen, necessarily in South Africa, but you can see that people are very dissatisfied with the value proposition that they have received from an investment institution.

Read also: Armien Tyer: An investment cocktail – Mixing value with macros for survival

As an outsider it seems also what’s changed, let’s say 30 years, 50 years ago certainly, active meant you had better information. You had better insight. You knew more people. You knew more companies. Now there’s this never-ending flood of very good hard data and information, so everyone has got access to that.

Correct.

Active is there’s much less space for active to be active, if that makes sense.

That’s true, so one of the key disruptions is, like in any other industry the photographic industry has been disrupted by technology but isn’t it ironic that in investment management industry we still do what Benjamin Graham suggested in 1936, the first man to suggest value investing? We still do that, 100 years later, which industry is still doing what they did a 100 years ago? There has to be a major disruption coming and it’s going to be technology. The answer to your question is the activity going to move from humans to machines. Machines can manage and monitor and measure risk much better than humans can because humans are just not suited to take 20 variables at once, in their mind, and understand that is the oil price, the Rand, interest rates, the Fed – all of that in combination. How is that impacting my portfolio? No human can solve that problem but we have the technology.

It’s just that fund managers still sell the romantic notion of a human. It’s like flying in an aeroplane. The pilot has to be there. The pilots do nothing in aeroplanes nowadays. They just sit there in case something goes wrong. That’s what we’re going to see in the investment management industry.

I’ve been speaking to Roland Rousseau, Head of Barclays Risk.

The post Roland Rousseau: Is Alpha dead? Shifting incentives beyond benchmarks appeared first on BizNews.com.

By Ted Black*

A remark at the end of my last ROAM article that looked at Nampak and its critical number, made me smile. It suggested there was little correlation between its Cash ROAM result and market value … “rather like a starry night in June” was how he vividly put it.

Instead of one company, let’s build on his good analogy and apply the same approach to the JSE. Here it is on a “Starry night” in 2015.

Out of 139 firms in commercial, mining and industrial sectors, the correlation between the cash productivity of assets and market cap is the same as Nampak’s – a moderate one at 0.6.

Take out two big outliers – Naspers with a very low Cash ROAM but high valuation and Kumba with the opposite situation, and the correlation improves by a point.

However, that isn’t the real issue. Is the link still strong enough to lead to better questions for managers? That’s what matters.

If the overall market, industry and sector influence a firm’s share price more than its own performance – then the correlation with market cap may not be that strong in the short term. But what happens over the long term?

In the end, doesn’t a firm’s value fundamentally derive from the cash productivity of its asset base?

What can be more valuable to society – employees, suppliers, customers, shareholders, and the wider community, than a company run by ethical people who generate and reinvest cash at the highest rate they can into future opportunities?

So let’s dig a bit deeper and look at a sector of the night sky – Food Producers.

The correlation is high – 0.9. For management, the message is clear. A higher Cash ROAM will most probably lead to a higher valuation in the sector. But which number in the Cash ROAM equation – one ignored by most financial people and as a result most management – can have a big effect on valuation?

Wait for dawn to arrive and look at two companies within the sector in the cold light of day. They are RCL Foods and Astral. First are their relative Cash Operating Margins – the number that is always looked at and is the prime driver of short-term movements in the share price.

There is little difference in their Cash Return-on-Sales (ROS%) over many years – around 1% on average. This number seems influenced strongly by external market factors.

But what about the other number in the ROAM equation – the sales productivity of the asset base (ATO or Asset Turnover)? Unlike the ROS%, this is an internal measure of market strategy and management ability.

The gap is a big one – 100% – and wider because today RCL Foods’ diversification strategy has almost quadrupled its asset base since 2013. The climb back has started.

Combine the two numbers and we get the Cash ROAM.

For thirteen years out of fourteen, Astral has had a higher Cash ROAM based mainly on its higher asset productivity. This is the effect on relative Value-of-the-Firm (VOF).

Since listing in 2002, Astral’s relative value has always been a lot higher than RCL Foods.

So going back to Peter Drucker urging us to train and develop at all levels, what is Rainbow’s critical number … the one that many firms should focus on but don’t attach enough importance to?

• Ted Black runs workshops, and coaches and mentors using the ROAM model to pinpoint opportunities for measurable, bottom-line, team-driven projects. He is also a freelance writer with several books published. Contact him at tblack@astrovoice.co.za.

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Like any pioneering invention, Bitcoin is taking a while to capture the mass market’s attention. But for early adopters, it’s becoming their hedge against politically-inspired uncertainty, especially in nerve-jangling South Africa. Last week, when President Jacob Zuma tightened his grip on the country’s levers of power, the value of the untraceable, anonymous and globally transferrable Bitcoin jumped 21% in Rand terms. The cryptocurrency is being increasingly embraced around the world as a store of value by people suspicious at the motives and actions of those who control fiat currencies. The rational approach for the rest of mankind is, at the very least, to investigate why these pioneers find them so appealing. – Alec Hogg

By Gareth van Zyl, Fin24

Johannesburg – Demand for cryptocurrency Bitcoin has soared in the last week with prices surging just over 20% on South African linked exchange BitX.

The price of a Bitcoin on BitX has risen from R7 443 at 14:00 on May 26 to R8 998 at 10:00 on Thursday June 2.

South African founded but Singapore headquartered BitX offers a Bitcoin wallet service that allows users to buy and sell Bitcoins.

BitX also operates exchanges for the cryptocurrency in several countries that include South Africa, Malaysia, Singapore, Nigeria and Indonesia.

Business development lead at BitX, Werner van Rooyen, explained to Fin24 this week that Bitcoin – like any other product, currency or commodity – is driven by demand and supply.

“On the demand side, there has been a large increase in Bitcoin transactions on the Chinese yuan denominated (CNY) Bitcoin exchanges over the past few days, which has played a role in pushing up the price there,” said van Rooyen.

Read also: Bloomberg View: Banking’s rocky future as China, UK mull official “Bitcoin”

“When the price increases enough on one exchange, it soon starts pushing the price up on other exchanges around the world as people start to arbitrage, including South Africa,” said van Rooyen.

BitX’s van Rooyen further outlined two other trends affecting Bitcoin prices over the past few weeks.

The first centres on Bitcoin’s blockchain technology – the cryptocurrency’s public ledger which confirms and shares batches of transactions.

“Some financial institutions are starting to realise that the application of ‘blockchain technology’ is quite limited, so they are starting to look into Bitcoin again,” van Rooyen told Fin24.

Van Rooyen also pointed to “more demand from investment institutions and private wealth managers wanting to buy and hold Bitcoin as part of their portfolio or for their clients.”

“Generally speaking, cryptocurrencies and blockchain technologies are becoming more mainstream and better understood. Not just by banks and governments but increasingly by investors, businesses and consumers,” said van Rooyen.

Read also: US Regulator: Bitcoin now officially a tradable commodity, like gold, oil

Bitcoin halving event

Another key supply factor affecting Bitcoin’s price is what is called the ‘halving’ event, said van Rooyen.

Computers on the cryptocurrency’s network that process transactions are ‘rewarded’ for doing so in a process dubbed Bitcoin mining.

At present, 25 Bitcoins get released for every group of processed transactions known as blocks but this process is set to be halved in July.

This is a process that has been built into Bitcoin to control the likes of inflation and devaluation effects on the currency.

Bitcoin is only designed to have a maximum of 21 million units, meaning that it is similar to limited supply commodities like gold.

The next halving event then is set to be Bitcoin’s second such event since 2012.

“This will limit the supply of Bitcoin being released into the network,” van Rooyen told Fin24.

Read also: Bloomberg View: How the Chinese fell in love with Bitcoin

“Most people who buy Bitcoin today, believe that the price will be more tomorrow. This is often based not just on the many current advantages that Bitcoin holds, but its future potential as a global payment system or store of value too,” van Rooyen added.

Meanwhile, van Rooyen could not disclose the exact user numbers for BitX but he said that the platform is performing “really well across all metrics” since its launch in 2013.

In July last year, Cape Town headquartered internet and media giant Naspers [JSE:NPN] initiated a $4m funding round for BitX.

“We’re active in South Africa, Nigeria, Malaysia, Indonesia and Singapore, with more countries launching soon,” said van Rooyen.

*Fin24 is part of Media24 which is owned by Naspers.

Fin24

Source: http://www.fin24.com/Tech/News/bitcoin-price-surge-on-sa-linked-exchange-20160602

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It’s a month where Brexit made her mark. Especially with newly purchased Barclays PLC, which is down 30 percent. But the Biznews.com Global Share Portfolio is built on Warren Buffett foundations, and the market noise doesn’t take away from the fact that all the stocks held, are well run companies, and held with the intention of forever. Despite the hiccup, the portfolio is still showing a healthy gain of 26 percent on an annualised basis in Rand terms. As always Alec Hogg takes us through the performance and current position of the portfolio, providing a comprehensive breakdown of how the shares are doing and how the companies, split between the likes of Apple, Amazon, Barclays, Berkshire Hathaway, Alphabet, IBM and Novo Nordisk are performing. – Stuart Lowman

Here we go with the June edition of the Biznews Global Share Portfolio. My goodness, what a rocky ride we’ve had over the past month. The good news is that the Portfolio has held up very well, relatively speaking. The bad news is the shock absorbers after the Brexit exit were not in play. We took quite a hit on our Barclays share that we only bought two months ago, but it shows you can never ever tell what’s around the corner for you, in investing. I guess that’s a good lesson for anybody. When you make your investments into a share portfolio, the unexpected does happen quite often.

Let’s just quickly go back on the Brexit shock and why it has taken the international markets by storm in the way that it has, and knocked down the S&P 500 Index. In fact, up until a month ago (or up until just over a week ago), the S&P 500 Index was tracking 2.5 percent higher for the past 12 months. It’s now down 2.7 so there’s been a five-percentage point drop in U.S. Dollar terms in the S&P 500 Index. If you happen to be invested there in Pounds, you would have taken a 15 percent hiding if you consider that the Pound has dropped by ten percent since Brexit. What happened? Well, the polls suggested that it was going to be a close-run thing. The inside information that I had from the Remain camp (in other words, those who were wanting Britain to stay within the EU) said that they expected to win it, but it was going to be very close.

They were nervous. The bookmakers had actually predicted a very comfortable win for Remain. As it happens, the bookmakers were horribly wrong. Just to put it into perspective, if you’d taken a bet on Remain just before the referendum closed, you would have gotten 27 times the profit that was being offered on a bet to exit. Why were the bookmakers so wrong? Well, in the aftermath of all of this, there’ve been all kinds of post-mortems. I spoke to Dan Brocklebank, who is one of the top guys at Orbis – the Allan Gray international operation based here in London – and he said, “Of course, the penny dropped afterwards if you consider that the money that was being bet on Remain came from asset managers (no doubt), hedge funds, and people who have quite a lot of resources. Whereas the money that was being bet on exiting or Leave, were lots of small bets.”

On the one hand, you had big volumes of money coming from relatively few betters and then a lot of small bets on the other side, which was clearly not going to be able to swing the money volume. When they go into the polling booths of course, everybody has one vote so the Remain camp were hugely outnumbered when you look at the number of physical bets that were being placed. On the other hand, the volume of money that they were throwing at it, was higher. We live and learn. The last election, when the Scots decided not to leave the Union (that as the U.K.) at that stage, the polls got it all wrong as they did in the last British election, but the punters got it right. This time around, the polls were a little more accurate and the odds were all over the place. That explains why the betting odds were so wrong and there was such a shock in the market.

What happened this time around… In the last two political events, the markets followed what the odds were saying and the odds as a result, did not prepare investors for their own drop. Thus, we’re seeing ten percent in the Pound and the sharp drop in the FTSE Index. Of course, the hardest hit in this situation are banking shares. They were hammered. We have the misfortune of owning a banking share in Barclays PLC which, as you’ll see when we get into the portfolio in a moment, was one of the hardest hit of the lot. It bounced back six percent yesterday, but it’s still more than 20 percent off where it was, ahead of the referendum. Why is that? A lower Pound and higher interest rates are not necessarily good for banking shares when you overlay a weak economy. High interest rates are not bad for banking shares generally, but when you overlay a weak economy, which means bad debts go up…it’s not a good thing.

What we need to do in this kind of circumstance where you have these external shocks, is to go back to basics. When you go back to basics, what is it that Warren Buffett would be recommending to us? Well, he’d be saying ‘before you buy a share, turn off/imagine what happens if you turn off the stock market for five (or maybe ten) years’.

1. If you were to do that; when we have a look at the other requirements, you’ve got to understand the business. It’s got to have favourable long-term economics. It’s got to have able and trustworthy management, possess an enduring moat, and trade at a discount to its intrinsic value. You add all of that together and when we apply Barclays, some people are now saying ‘my goodness, you bought Barclays two months ago.
2. Should you be panicking and selling it now that it’s down by two percent?’ Well, definitely not. In fact, it’s looking like a fantastic buy right now. Go through all of it.
3. In ten years’ time, will Barclays still be around? Well, it’s been around more than 100 years so almost certainly, yes. Do we understand the business? Yes. It’s mainly a retail bank in the High Street.
4. Favourable long-term economics? Definitely. No matter what is happening in the payments environment (and Fintech is starting to disrupt quite aggressively around the world), this is still a business that is based primarily in a country where people don’t change that rapidly. There’s a lot of regulatory protection as well for banks in the U.K. They’re in the business of borrowing and lending and that’s never going to go out of fashion. Able and trustworthy management: it wasn’t the case but when John Macfarlane took over as Chairman and he put in James Staley as the CEO, it ticks that box as well.
5. Does it have an enduring moat? Most definitely. Barclays is a High Street bank in the U.K. It has a very strong brand and in this country (and I’m talking to you from London, of course – that’s why I say this country), the turnover of the retail market is only one percent. In a year, you would have banking accounts that are held by people in Britain in the retail market. Roughly one in 100 people would bother to change their banking accounts. You’d think it would be much easier to get them opened. Well, it isn’t. It’s a tough thing to do but certainly, they don’t change their banking accounts and that means you’ve got an enduring moat sitting at Barclays.
6. Intrinsic value: Barclays’ shares are currently trading at 131 pence. They got down as low as 124 pence per share. They’re down 29 percent right now from where they were trading before the Brexit vote.

That is a massive discount on the tangible book value which, depending on where you look at it, in their balance sheet it’s 275 pence. In other words, that’s your real underlying net assets. If you were to liquidate the bank today, pay back everybody that is owed money, and get in all the money that you are owed, you would have a price-to-book here where the shares are trading right now, of point-six-seven percent. If you were trading at tangible asset value, you’d be trading about one-third higher than where the shares are at the moment. Price-to-book of point-six-seven. That’s a massive discount. There’s a margin of safety there. All the other boxes are ticked. This is a stock that, in the wake of Brexit, should be right on the top of your buying list. Is Brexit actually going to happen? Well, of course it is but it’s not going to happen without a struggle.

The British public have voted 52/48 percent to leave the European Union. In the Financial Times of London today, Gideon Rachman (who incidentally, has a South African heritage as well) – and he argues this very well – said, “It’s not the first time that you’ve had a referendum that’s gone against the European Union.” In 1992, Denmark rejected the Maastricht Treaty and in 2001 and 2008, Ireland rejected the two proposals the European Union had put forward – all in their first referendum. As a consequence of the rejections, concessions were granted by the EU and there was a second referendum in each case. Gideon is arguing that the Brits will possibly be allowed a second referendum. It’s a cogent argument and one that is shared by many people, including those who are watching the probable next Prime Minister of Britain – Boris Johnson – who incidentally, was a journalist at the time that the Danes voted against the Maastricht Treaty.

He was a journalist, employed in Brussels at the EU. That was in 1992 so he’s seen this kind of thing (this movie) from the front row. On the other hand, the problem with that thesis (one feels) is that the French, the Austrians, and Scandinavians are all – in polls – ahead of Brexit. All of those polls were suggesting that they wanted to get out more than the Brits wanted to get out. When you’re looking at where the EU is sitting, it becomes a very, very interesting situation in whether Brexit is going forward or not. Whatever… We can only work with the market as it is today and the reaction/knock-on effect of the British decision to leave the EU has to create uncertainty. Markets hate uncertainty. The Pound is down from $1.50 (just before the referendum).

Incidentally, the final exit poll that was done, said that the Remain camp would win 52/48. The final result was the other way around so the pollsters haven’t come out of this with much credit. Just about nobody who was prepared to predict it (and there were lots who did that), actually got this one right. London now, was one of the parts of the U.K., together with Scotland and Northern Ireland, which voted in favour of staying in the EU. It now wants more autonomy. There are all kinds of consequences that could come from all of this. The Pound is down from $1.50 to $1.32. Imagine, if you’re an American and you come to London, it would cost you $1.50 per Pound. Now, it would only cost you $1.32. David Cameron’s on his way to Brussels. He of course, has resigned as well. The U.K. Sovereign rating (and we know all about the decline in Sovereign ratings in South Africa) has been cut by S&P.

The last one that had them, had a Triple-A. Cameron’s successor is due to be named on the 2^nd of September. Corbyn, who’s the official opposition, has had his shadow cabinet abandon him in droves – 46 resignations from his shadow cabinet. There’s all kinds of controversy and turbulence, which the Brits are not used to. Remember, in South Africa… South Africa has gone through great change over the last 20/25 years. In the U.K., there’s been change but it’s been at the margins. It hasn’t been an uproar like this has happened so clearly, there is lots to digest, lots of uncertainty, and we see the markets reacting the way that they have. When you go over the water to the United States; even there, the uncertainty coming out of Britain (and remember, depending on the exchange rate, Britain is either the 5^th of the 6^th biggest economy on earth), that has had a knock-on effect in the United States no least because people are now very seriously believing that Donald Trump could be the next President there, and with all that that implies.

The Vanguard S&P 500 Index, in the wake of Brexit, has fallen by five percentage points and that means that after being ‘level pegging’ for most of the last 18 months since our portfolio has been running, it is now in negative territories. If you’d taken money in the United States, and put it into the market generally, you would be down three percent. Our portfolio – overall -is up seven percent in U.S. Dollar terms. If you want to think about a bottom-line number, the portfolio that we’ve put together and continue to stick with has outperformed the market by ten percentage points in those 18 months, and that is very gratifying indeed, in these kinds of troubled circumstances. When you go through the portfolio, it’s very easy to see it hasn’t been ‘even keel’ riding there.

Alphabet, in which one-third of the… The way we worked it out is we put roughly one-third of the portfolio into the Vanguard S&P 500 Index (in other words, into the market generally). Then we split 15 percent each into Alphabet (or the old Google), Apple, and Berkshire Hathaway.

Berkshire has performed in line with the market as you would expect, because Berkshire is a broadly based industrial conglomerate. It’s down by seven percent in Dollar terms, but its performed in line with the overall market, which is down by three percent. Nothing shocking there.

Apple, on the other hand, has been a terrible underperformer. That’s down by 26 percent whereas Alphabet (or Google) is up 25 percent so of the Big 3; one has performed with the market and Alphabet has offset the losses on Apple.

Generally speaking, we have a market position if you like, for most of it. Where the upside has come in this portfolio, has been through Amazon.com and as you can see there, in U.S. Dollar terms that’s up 111 percent since we bought into it. It’s our version of Naspers, if you like. In South African portfolios, it’s been the tiger. It’s been the one thing that’s pulled the portfolio higher and that’s what stock-picking is about. You try and find that one that shoots the lights. Very fortunately, in our case, we found that.

Novo Nordisk has been a good performer although, like most shares around the world, came under pressure in this past week since Brexit.

IBM has been an underperformer but again, it’s a value stock so that is not really a worry to us. You can keep accumulating IBM. Value shares take time to realise their potential. Then you have Barclays, which was directly in the tsunami of Brexit and that which we bought on the 29^th of April at £1.74… It was sitting at £1.90 ahead of Brexit. It’s now down to £1.37. That’s the overall portfolio.

Of course, this is in U.S. Dollar terms. What we need to consider as South African investors, is Rands. If you go back to the beginning of the portfolio… When we started the portfolio, we took a view that the South African Rand would be weak because the economic policies being followed by the Zuma administration were unlikely to lead to (a) growth or (b) as a consequence of that, an appreciation of the currency. In fact, the currency is locked through bad economic decisions and strategies into a sliding decline. Thankfully, not of the Zimbabwean nature but it has been falling and is likely, unless there’s some restructuring of the type that the Finance Minister Pravin Gordhan has called for urgently (but nothing seems to have happened), the Rand will continue to weaken.

That was our big bet. Our big bet when we started this portfolio in December 2014, was that the Rand would weaken. Take your money offshore. Put it into the international market and let’s try and find stocks over there that will outperform the market generally. By that criteria, we have to say that so far, the portfolio has been a successful exercise. On the one count, the Rand view has certainly come to fruition as you can see from the bottom of the table there. When we started the portfolio on the 5^th of December, the Rand was R11.27 to the U.S. Dollar. After clawing back some of the recent losses, it’s still at R15.20. Clearly, when you have your money in Dollar-denominated assets as we have here, it makes a huge impact.

As far as the Pound is concerned, when we bought into Barclays the Rand was at R20.88 against the Pound. The Pound is now 20.23 so even after Nenegate, the Rand had managed to claw back a little bit of that loss against the Pound. Pre-Nenegate in December last year, the Rand was trading at R18.00 to the Pound. It’s now at R20.00 to the Pound but the Pound itself has been the one under much pressure because of Brexit. When we then have a look down the far right-hand column (because this tells you whether or not it’s been a sensible investment in taking the decisions that we did to go big into a global portfolio from December 2014) … As you can see, even in Rand terms Apple has been a loser and Barclays of course, has been a big loser in Rand terms but outside of those two, the portfolio is still up by 37 percent.

Around 27 percent of that has been Rand-related and the total annualised return, when you take 18 months and divide it into 12, is 26 percent – all around, pretty good. Remember though, that this is a portfolio that we’re holding forever. If the stock market were closed today, we’d be quite happy that in ten years’ time, the companies that are in this portfolio will be in better shape than they’re in today. That’s the intention of the investment.

Getting into the individuals… There you can see the annualised return. Clearly, Amazon.com (in Rand terms) is 184 percent or 123 percent annualised but there’ve been some nice increases there, thanks to the Rand’s depreciation. Of course, with Barclays and Apple I would argue that both of those are offering massive value at the moment. If you have a little bit of extra Rand that you’re looking to put into the global markets, those (particularly Barclays) would be the two that you should be putting some of your money into.

As far as the portfolio’s concerned, it’s a graphic exercise. You look at this and you say, “Thankfully, you had Amazon. How did you find it?” Well, you need a bit of luck in investing and the good fortune that we had in Amazon was not only in buying it but in holding onto it. It also belies the argument that some people have to say that as soon as a stock shows you a little profit, you should be cashing in that profit. Well, if we’d done that, we’d be looking a little sick right now. What I can tell you (from someone now living in the U.K.) is that this is a world that has been Amazon’d. It’s incredible how often one would turn online for your purchases. If you’d do a little exercise and go onto Amazon.com and have a look at what is available rather than going the traditional route, which we as South Africans have where we go to the shopping centres, browse around, feel something, and eventually buy what we think is good value after spending a lot of time.

You can do that online, very easily and Amazon, through their Amazon Prime Service, which has millions of members (I’ve joined it as well) … Not only do they give you free videos to watch and free music to listen to but actually, they will deliver your product in a day. It’s incredible. That’s why Warren Buffett had as much to say about Amazon in his Berkshire Hathaway AGM this year. He mentioned Jeff Bizos and Amazon half-a-dozen times, saying that they were a little late to understanding and appreciating that but that the world has really been transformed. In the same way that Facebook has transformed the media world and Google has transformed the advertising, Amazon has transformed the retailing world and is continuously eating away at the retailing operations. The only way to defend against Amazon it seems, is to get bigger faster and that’s why Markus Jooste at Steinhoff has been expanding (or trying to expand) as rapidly as possible into Europe.

You might remember. Steinhoff had two attempted takeover bids contested. They weren’t complete disasters because although Steinhoff didn’t get them, they made a profit out of that exercise. I interviewed Markus two weeks ago and I think he was telling me that it was €40m. That’s not small money in anybody’s terms and certainly, in South African Rand, it’s good money. They’ve now had another run at a company called Town Land, which is based here in the U.K. It would fit beautifully into Pep ad the existing operations that they have in the retail market in the U.K. They believe that by being focused on the bottom end of the market and by getting scale quickly, they can offset the advantage that Amazon would have.

More money in anybody’s terms and certainly in South African Rands that has money, but they have now had another run at a company called Poundland, which is based here in the UK, would fit beautifully into Pep and the existing operations that they have in the retail market in the UK and they believe that by being focused on the bottom-end of the market and by getting scale quickly, they can offset the advantage that Amazon would have.

Of course, on the other hand you have to realise that they are trying to grow their online operations to deflect the Amazon effect. The companies that are really in the sights of an Amazon expansion and that continues to expand rapidly are those who would be the natural market for time-poor, money-rich purchases and they would be the people who you’d see shopping online more often. So that’s the numbers there. Let’s go through the dividends. There was a dividend that came in from the Vanguard S&P 500, 318 shares or units that we hold there with the 95 cent dividend, was paid another $300 added to the portfolio and I’ve been doing a lot of talking, the questions are open, Stuart, you’re still with us?

I’m still here Alec. No, nothing yet. I think there’s a cold front over South Africa. There’s a bit of, maybe some brain freeze around, but nothing yet.

I thought that only came from eating ice creams on Durban beach but anyway. I have been talking a lot about Brexit etcetera but we are now open for questions, so send them through. You just need to literally type them up and Stuart will stop me and we can take them from there. It’s going through the individual parts of the portfolio. Let’s go to Vanguard. Remember that is about a third of our portfolio is put into this as you can see there from this graph. Look at the most recent number. It was a sharp decline, similar to what happened, if you recall, in August last year 2015 you can see the big drop there.

Unfortunately, not quite of the same extent to that and then again, as we began this year we had a really, really awful January. In fact, January 2016 was the worst year for shares on record and the market clawed its way back up from being around ten percent down after January to being two and a half percent up just before Brexit and along comes Brexit. The S&P 500 in the past is down by five percent which makes any growth on that pretty good going. Berkshire Hathaway has followed the market down, not quite as badly but it has been an outperformer for most of this year. It’s done better in 2016 but on year on year it’s still kind of aligning itself with the S&P 500 index. We bought it 18 months ago. Over that period it’s underperformed but Berkshire’s one of those stocks you put in your portfolio and you don’t worry about it.

Alphabet, that’s Google, as you can see, wonderful outperformance. The share price of our holdings is in blue and the benchmark is in red. In this case it’s the Nasdaq, that’s where Alphabet is listed and as you can see an outperformance there of 35 percent and Nasdaq having done worse in the past year than the S&P 500 Index, in fact twice as badly. Moving onto amazon.com, in the past 12 months it’s up 60% and it really started running a couple of months after we bought it in December 2014. It’s interesting to see because in January this year the share price came down very strongly and some of the thoughts were, at that point, that the FANG, as they call it: Facebook, Amazon, Netflix, and Google, those four shares, which had between them pulled up the S&P 500 Index for 2015, if those four companies did not exist, the S&P 500 index would actually have been down in 2015.

That’s the power of those four. In January this year there was a view and it ran through to February as well, that the FANG’s days were over. We didn’t think so. Well, maybe some of the others are but we don’t think that Amazon’s days are over and as you can see there very clearly, the stock has appreciated strongly since bottoming out in early February, so thank you to the FANG’s, thank you to Amazon, Stu?

Question from Jaco, Alec. He wants to know if you had an idea of how long the market will take to heal from Brexit?

Jaco, there are assessments for the moment which suggest that the worst is over and often that does happen. If you have a longer memory, you’ll recall that these hits tend to come hard and quickly and Mr Market overreacts. When we started off in this webinar, to talk about the Buffett principles, turn off the stock market, or in other words, buy shares that you won’t worry about if you turn off the stock market that have favourable long-term economics who understand the business, able and trustworthy management and they have an enduring motive, intrinsically value, those six, it’s a similar thing when you think about markets generally because their prices are not necessarily the value that you get.

The prices are determined by day to day fluctuations in the mood, the way that investors as a whole perceive and they don’t always perceive things correctly. Mr Market is a manic depressive, he panics, and he gets over exuberant. In the wake of Brexit, there’s no question that he’s panicked, he’s very much panicked over banking shares and you would now find that, it appears anyway that the panic is starting to quell a little bit. The banking shares have picked up a little bit from their worst levels. The Pound is upped significantly from its worst level, David Cameron’s going to Europe, the market is discounting the worst possible negotiating scenario and none of the possible up side, which could be in the UK and this has been lost by many of the commentators.

Those who voted to leave the European Union were the Wrinklies, as they call them, the older people and their argument generally, most of them, is that they went into a free market environment and the free market that they voted for became a runaway train which not long ago wanted to become the United States of Europe with one constitution for the whole of Europe which they don’t like.

Therefore, the Treaty of Lisbon, that’s really what the referendum was back then, which the Irish voted against, that was all to do with trying to bring Europe closer because if you’re going to amalgamate all these countries, eventually you want a federation that is tight and includes everybody, whereas the Brits are saying and the Ireland mentality possibly played here, the older Brits are saying, “We actually don’t want that. We joined you because you offered us a free market and now you’re saying you want to rule it”.

That’s really what it all comes down to and that’s likely to see sanity prevailing because markets are driven by common sense in the end of the day. Mr Market has very little common sense and Mr Market has overreacted, so I would say, Jaco, we might have seen the worst. It’s very possible that we have and if you were to be a follower of Mr Buffett then you would be that this is the right time to be buying when everybody else is selling.

A question on the dividends; what do you do with them, the ones that are received?

In this portfolio we put them into our cash holding. Therefore, just to go back to arena, we would not take the dividends out for any reason. I’ll just take you back to the portfolio and you can see. There we go. If you have a look down the bottom there underneath Barclays you have cash and the cash holding and portfolio, $3234, at some point in time we will reinvest that, but one of the disciplines we’ve given ourselves here is that we only make investments when you are with us.

I’ve been very keen on Facebook and I’ve been toying for a while now with dropping some of the holdings elsewhere to reinvest that money into Facebook, but nothing has been strong enough and certainly with the recent reaction of the market to suggest that you should be shaving off some more money from some of the holdings. What we would probably do, as we did with Barclays, is reduce some of the stake in the S&P 500 holding there in Vanguard and we would then take part of that and then use the cash that we have there and invest that cash into Facebook, just waiting for the right time to arena, but no, the cash stays in the portfolio.

Question from Kirstie Thompson. She says she has R3.5m in cash; she’s 44 and has no debt. Is now the right time, if so into what?

Kirstie, there is no doubt that if you have Rands and that sounds like what your money is in, you need to be protecting yourself against continued decline in the value of the currency and that is the reason we started this Global Portfolio and I still feel very strongly that’s the best way to protect yourself. What I would do if I was in your shoes, is I would replicate this portfolio but do it progressively. Try to take out the impact of timing. If you were to put all of your money into these various stocks today, then you are taking a risk on two things: You’re taking a risk on the markets and you’re taking a risk on the currency. Rather stagger it if you are comfortable, over three months, that’s probably okay.

If you are more conservative you can stagger it over six months, but it isn’t a smart idea to just take a full punt at any point in time because you’re then opening yourself up to the risk of market variations. We started this portfolio so that the clients of Standard Bank Webtrader or in fact any South African, because Webtrader is a phenomenal product which allows you to invest anywhere in the world. It’s to give you an understanding of what’s happening elsewhere. It’s a model portfolio if you like.

You don’t have to replicate everything that we have but the basic idea here is to make these investments, then you start learning about it. We have tried our best to find the best possible investments that we can and by doing this monthly update it gives you an understanding of why there’s been performance or why the shares have changed in the way that they have. The worst thing you can do is give your money to somebody else and then come back in a year’s time and say “Oh my goodness, what happened in this year?” whereas this way around you are informed on a monthly basis on exactly how your money that you’ve invested is performing. I would suggest that you replicate this portfolio but don’t throw it all in at once.

LH has an interesting question: Where can one get the best interest rate offshore instead of equity or bonds? I’m not sure it’s a very easy one to answer though.

It’s an impossible one to answer because interest rates always reflect the risk. You can probably get five or six percent in certain of the investments that you find but they would be high risk. The one I really like and we’ve spoken about it a lot on BizNews because I did investigate it, is Quanta. It’s a property portfolio run by a South African. The company is shared by Mike Wiley of Wilson Bailey and Robbie du Toit, the South African who runs Quanta and his partner, Andrew Davidson.

What they do is they raise money from investors and usually through crowdsourcing, they then take that money and put it into bottom end property, so the very cheap properties where you’re talking from probably £50 000, which is very cheap in the UK up to maybe £1mn, around about there, which have been sold or are moving or are being transferred, or in the process of transferring and they then have that guarantee that they can move that property quickly. It’s a great business model. I went to have a look at it. In that sector of the market those properties move very quickly. Here in the UK they have all kinds of other reasons without going into it and they offer six point eight percent in Sterling terms, thus what you have there is you have a property portfolio that is moving quickly. That’s why they can offer a reasonable rate of interest.

They are borrowing to put that money into those properties from a more expensive source because the big banks are not keen for pretty obvious reasons, to support a little company like this. They want to do bigger deals and in fact, they’re competing with them. They would then kick back, if you like, a share of the interest they are paying or the higher interest rate they’re paying to the investors and with Mike Wiley from Wilson Bailey being the chairman of the company and a big shareholder in it you really know that you have a reputable, sensible people who are busy doing it. I went to go and see them, we have endorsed them, just put Quanta into Google and you’ll see, so that would be, to me that six point eight percent in Pounds but a week ago it looked like a fantastic bet at six point eight percent in Sterling, but Sterling has dropped ten percent against the US Dollar.

Therefore, if you had an investment instead in US Dollars at zero you would have done better than in Sterling for the moment. These are very tricky global markets and a tricky situation that we’re in at the moment. Let’s move on. IBM is our deep value investment. As you can see, like the others as a consequence of Brexit. It too has fallen and fallen quite sharply. IBM was one of the biggest hit there and it’s not surprising because it does have a big exposure to Europe and then exposure to the UK as well. IBM however, is one for the long-term. I don’t lose any sleep about that one. Nova Nordisk, now this just shows you how incredible Brexit’s impact has been.

Nova has been under a little bit of pressure lately but it took another hit as a consequence of Brexit even though this Danish multinational that sells insulin to diabetics, has a big chunk of the global insulin market, the market leader in fact, in that sector and that’s a very, very strong moat that it possesses but when the sea goes out the rising tide raises all ships, I’m afraid when the tide goes out it hurts all ships and then Apple. I love Apple, I just love the company. I know it well, I’m very excited about the value that is being offered by Apple at the moment and as you can see it’s usually underperformed but by my estimation they are missing the point on two things, that the investors are, first of all, downgrading or down rating Apple because of its sheer size.

Secondly, they aren’t paying attention to the enormous investments that this very, very secretive company has been making in research and development. It’s been escalating its RND investment dramatically over the past few years. Something’s going to come out of it. They’re secretive, they’re not going to tell us yet, but when it comes out it’s going to be something, or I would bet that given the whole culture of Apple and the ecosystem that it has, it’s going to be something quite special, is that the iPhone 7 that’s scheduled for coming out, I think it’s in September? Who knows but it could be autonomous cars, i.e. driverless cars which are starting to now become a very, very serious opportunity. It could be something in renewables. There’s lots of speculation but what you can be sure of is whatever the next big thing, Apple will be right there.

Alec, just on Apple, Bruce asks: Is Apple’s heyday over? It doesn’t seem to meet Buffett’s criteria. China problem’s questionable management, iPhone being outcompeted. He wonders if you shouldn’t lessen the exposure in Apple, maybe in favour of Facebook.

Yes Bruce, interestingly enough Buffett has actually being buying into Apple and his portfolios have been increasing the stake into Apple. If you have a look back at our chart, just over that last D there, that increase in the Apple share price and these are relative graphs, we don’t show the actual share price but relative to the S&P, that was a direct result of news that Buffett is starting to accumulate Apple, so no I would definitely not be selling Apple shares at this point. This is your classic value opportunity and much as I love Facebook, I would rather take money out of the S&P 500 index and put it into Facebook and we probably will do that next month. Let’s just see how.

You want to be sure, I’ve made enough mistakes of buying at the wrong time, and because we only have one day that we can buy them on, we’re going to have to be sure that we’re doing the right thing. On this one though, the one thing you would not do is you wouldn’t be selling Apple right now, not a single share and that Ladies and Gentlemen is bringing us to the end of our webinar today and to give you the conclusion to it, when we started off here the big bet was the Rand would depreciate. It’s gone from $11.27 to $15.20. The Rand profit, as you can see annualised 23 percent, so that’s been the major kicker to our portfolio generally.

A major kicker, the other big, big beneficiary that we had was Amazon and I have no reason, in the same way as I think Apple is offering excellent value right now, Amazon, I wouldn’t be worried buying the shares today, not at all even though we are in the privileged position of having bought them a lot cheaper than the level they’re at, there’s no worries on that side. Google or Alphabet, they are starting to enjoy the market’s appreciation of a slightly different approach to the way they run the business as far as expenses are concerned. Investors love to see the expenses being kept under control and with Ruth Porat, the new financial director there showing an ability to do that, to bring the nerds and the techies if you like into line, the market likes that. Nova Nordisk has had a bit of a setback in the last little while?

That’s to do with some of its patents around the world but it has a strong grip on the insulin market and one that wouldn’t be loosened lightly, The S&P 500 Index is, if you like, our bank. We just put a big part of the portfolio in the market generally for the S&P 500 and that’s given what’s happened in Rand terms there, annualised 21 percent, nothing to worry about. Berkshire has underperformed recently, that doesn’t worry me, and IBM is a big value bet, as is Berkshire by the way at the moment. Both of those have limited downside. Apple is a massive value opportunity and then, Barclays Bank I’m expecting a pretty rapid rebound when the realities of Brexit come back. I like the way the portfolio is balanced. We’ve got to find place for Facebook but that will come, I guess, in due course. Stuart, that’s us for today.

Yes, thanks Alec. No more questions this side. I think it was very interesting. Thanks a lot from Johannesburg.

It’s a pleasure and adios from London until next time. Thank you for joining us.

The post Biznews’ Global Share Portfolio June – Brexit leaves her mark appeared first on BizNews.com.

The global market buzzword is still Brexit as most try come to terms with what European life without Britain will be like. But others are not so sure with FT columnist Gideon Rachman leading the choir that says it won’t happen, and a second referendum is coming. Biznews’ Alec Hogg, speaking from London, is a regular contributor on the Kyknet show Winslyn, and here he’s speaking to Divan Botha for more on Brexit. – Stuart Lowman

Divan Botha: Alec Hogg now joins me via Skype to talk about the Brexit result. Hello Alec.

Alec Hogg: Hello Divan.

Alec, I always think to myself, the pollsters got it completely wrong and also, almost everybody got it wrong. Why?

Well, you have to go back two elections when the Conservatives won the general election in England by a landslide (or certainly, by a majority). At that point in time, the pollsters were all saying it was going to be a hung parliament – that they’d need to do a coalition. They got it wrong there but the betting got it right. The betting said that the Conservatives would win. When Scotland wanted to leave the U.K., it was the same thing. The pollsters said at that time that they weren’t too sure. It was touch and go, but the betting said ‘definitely, Scotland would not leave the U.K.’ This time around, the polls were all saying they weren’t going to leave the European Union. Brexit wasn’t going to happen and the betting was saying the same thing. Of course, as we know, everybody got it wrong. In fact, at 11 o’clock on the night of the vote, the last poll to come out said it was 52/48 for staying in the EU. That was the very last poll.

Alec you’re in London at the moment. Ordinary South Africans living and working in London: what’s the impact?

Divan, it could be good and I say this for a couple of reasons. They are members of the Commonwealth (being South Africans). Obviously, they would have the right visas. Commonwealth people are treated a lot better than immigrants from the European Union. They had a vote. In fact, anybody from the Commonwealth… As a South African, you got to have a vote into Brexit because you’re from a Commonwealth country. The second thing is South Africans are very hardworking. The job market is going to tighten up. There’s no doubt. Then companies will be looking for maybe, the more hardworking people. Thirdly, property prices are coming down. The Pound’s coming down. If you’re using South African Rands, they stretch further.

We see it a lot and we heard Wouter talking about it earlier. What’s the effect on South African businesses listed on the JSE but with big exposures in international markets?

Not a whole lot at the moment. We know that Markus Jooste is going to have a lot more firepower now from Steinhoff in doing the deals that he wants to do in the U.K. You might remember. He’s tried two already with London Stock Exchange-listed companies, which he’s withdrawn from but Steinhoff is now making a bid for PoundLand and the drop in the Pound suddenly makes Steinhoff’s Euro’s worth ten percent more. If anything, it’s a very good thing for South African businesses wanting to expand in the U.K.

I just had the head of the Independent Party specifically talking about Scotland. The Scots and the Irish very clearly said, “We’d love to stay in the EU.” What’s the expectation on the ground? It’s almost as though they’re saying ‘England isn’t really representing us’ or ‘the United Kingdom isn’t really representing us’. Are they going to vote for independence?

Well, the Scots have a look over the Irish sea and they see that the Republic of Ireland has done very well with all the money that’s been planted in there from the European Union. There’s also quite a lot of EU money that’s gone into Scotland. They had a plan and their plan was (very clearly) that they would again ask for a referendum for independence if the U.K. left the EU. That’s very much on track. Whether they go ahead with it or not is still up in the air. What they’re trying to do in Scotland right now, is some kind of a deal with the EU where they stay in, but they still stay part of the U.K. Don’t ask me how that works, but they’re looking for a way to have their cake and eat it, I guess. At the end of the day, it’s likely there’ll be another referendum in Scotland and this time around, the Scots might well vote to leave the U.K.

With David Cameron leaving at the end of October, do the Brits have any idea who’s going to do the negotiations between England and the European Union now? What’s the talk on the ground?

Osbourne, the Finance Minister who is extremely competent, is likely to be part of that delegation even though he said he’s not going to stay on as Chancellor of the Exchequer (as they call them here). Boris Johnson who led the Leave campaign and says that Winston Churchill is his hero, is almost certainly going to be the person leading the negotiations. He is the hot favourite to be the next Prime Minister but the problem with the Conservative Party is that not since the 1960’s has the favourite taken over as leader of a party. It’s very interesting. Of course, today we had two of the big media houses in London saying it’s likely that they won’t leave the EU. There will be a second referendum. That could happen.

Alec, I’d love to talk to you more. I think there’s so much uncertainty but we’ll chat again soon. Thank you so much.

Bye.

That was Alec Hogg of Biznews.com talking about Brexit.

The post Alec Hogg on #Brexit positives but calls grow for a second referendum. appeared first on BizNews.com.

In May 2014, the Financial Services Board took a decision which has introduced massive disruption into South Africa’s previously complacent share trading sector. Acting on concerns about a mushrooming over-the-counter market, the FSB introduced new regulation requiring the OTC operators to apply for a full stock exchange licence or cease trading. The consequence, intended or not, sparked a wave of innovation by businesses like Easy Equities; and the promised creation of half a dozen new competitors for the previously monopolistic Johannesburg Stock Exchange. The market’s Goliath is being exposed to the disruptions to the status quo which always accompany rapidly developing technology. Among the licence applications is one from dominant OTC operator, Equity Express, whose former COO Etienne Nel started his own business now poised to become the first new stock exchange to open its doors. His former boss, CEO of Equity Express Anthony Wilmot, has an even bigger plan and explains here why his company decided on a two pronged response to the challenge. Should they choose, existing clients will be able to continue in much the same vein through a new OTC Bulletin Board. Companies who prepare to go the listing route will be spoilt for choice with up to half a dozen new exchanges targeting cost-conscious businesses – including those whose JSE listings have not delivered the expected exposure or investment interest. – Alec Hogg 

Anthony Wilmot is the founder and chief executive of Equity Express. Your over-the-counter market was targeted by the Financial Services Board a couple of years ago. What brought that to the fore?

I don’t really know other than there was an interpretation of the definition of an exchange according to the Financial Markets Act. Their belief was that when we originally got permission to provide these types of services their interpretation of that definition had changed so the services we were providing fell foul of the definition. It meant we then needed a stock exchange licence to conduct our activities and hence, the start of the process from the FSB that all OTC markets needed to be regulated. The definition of an exchange is in the Act and it basically consists of three simple points. An exchange means a person who constitutes, maintains, or provides an infrastructure (a) for bringing together buyers and sellers securities (b) matching bids and offers for securities of multiple buyers and sellers, and (c) where such a match bids an offer for securities constitutes a transaction. The FSB’s view prior to their change of interpretation of the law was if you were doing it for a single counter, then you did not need to apply for licence. That, in essence, was the process. What brought on the re-interpretation of the definition? I don’t really know.

Up until that point, how many counters were being traded on the Equity Express platform?

At that point, we had 10. We lost one client because of an unfortunate incident – everyone’s aware of what happened to African Bank. We were looking after their BEE share platform. After the FSB’s announcement we lost PSG’s BEE partner because they felt it was too onerous. We always said to our clients that we were an agent acting on their behalf so it was actually their trading platform. The FSB made it clear to us that we were not allowed to conduct the exchange. In other words, the whole concept of a marketplace for buyers and sellers to sell multiple times. We had to interact with their shareholders individually. That effectively meant that we had lost a few clients and then the FSB contacted every one of our customers because of the fact that we were acting as agents. They said to them, listen, chaps. You need to regularise your affairs. Effectively, our clients have all been in correspondence with the FSB on this issue.

Read also: FSB’s edict that OTC trading of BEE shares is illegal: don’t panic – yet

At some point in time, you must have thought of different routes perhaps, joining the Johannesburg Stock Exchange or merging with them?

What the FSB did, which was very fair and reasonable, is they said to all of our clients in a letter individually that essentially they had four choices. The choices were this: Cease your illegal activity, in other words, stop doing what you’re currently doing. Interestingly, apart from our PSG client, none of them chose to do that. The next one was, apply for stock exchange licenses for yourselves. We haven’t had any clients really go that route because you can imagine that applying for a stock exchange license is quite onerous. As a result of everything that happened, a previous employee of mine left and started a company called ZARX and they have been very close to receiving a formal license. I think they’ve been granted one – conditionally – at this point.

The third option was change the basis on which you conduct your affairs to fall outside of the definition and I’m pleased to report we’ve made some significant progress there. The last one was list on a recognised exchange and that’s obviously code for ‘go to the JSE’ and we’ve had a few clients do that. We’ve lost a few clients that way. The big one everybody is aware of is YeboYethu, which is Vodacom’s BEE scheme that’s now moving to the JSE. The other big one, which had some problems at the beginning, was MTN’s Zakhele. They are now trading on the JSE. Sasol Inzalo: their very first, non-debt funded one was listed on the JSE since the beginning; but the one that carried debt, we looked after with Computershare.They’ve now gone to the JSE.

Effectively, we’re left with Multichoice and Media24 of the big ones. Then we have smaller clients where the number of shareholders is less. Some of them are restricted shares (BEE-type counters) and some are just open share where there are no restrictions on them.

What have you done to comply with the regulations? 

Obviously, from a business point of view, ceasing is not a solution for anybody so we didn’t really pursue that one. The second option was to go to the JSE. We couldn’t do that. So we were really left with two choices. Our biggest clients are the Naspers counters. We were really just wanting to know what they wanted to do. Once we were satisfied they believed there was a future in staying in an OTC-type market, we decided that it made sense for us to apply for a stock exchange licence. We put that license application in at the end of March and we’re waiting to hear from the FSB on that.

At the same time, we were also aware that our customers might want to remain unlisted. Listing has benefits but it also has disadvantages and OTC is not illegal in this country. We also contacted our lawyers (Edward Nathan) and we’ve worked extensively with them on coming up with a model that is outside of the definition of an exchange. We’ve also met with the FSB on that. We’ve shown them our model and they’ve concurred with our interpretation that what we’ve now come up with is outside of the definition of an exchange so we’re going to be offering those services. Singular Systems has put in a stock market licence application. We have six different shareholders in that process and so we’re complying with the FMA that says nobody may own more than 15 percent of an exchange.

Read also: Singular Systems: Changing SA’s investment landscape one BEE share deal at a time

That organisation is completely independent of Singular to the extent that any of our clients want to list on that exchange, will offer the services as a stockbroker on that exchange. What is good for us is obviously our technology, which we’re very proud of. It will continue to be used by the exchange in conjunction with Equity Express. If our clients don’t want to be listed, we can offer them a similar service to what we’re currently offering, an OTC-type service.

So you have two options, in other words. You could adopt the same route that Etienne Nel went with ZARX….

Correct. It’s something similar to what they’ve done. It’s not quite the same, but similar.

Read also: SA grants first stock exchange licence in 100yrs – ZARX to compete with JSE

Otherwise, clients can carry on pretty much as before on an OTC in a refined form.

Yes. The only problem is that it’s not nearly as efficient. Guidance from the FSB was that there were two key factors. There must be no matching, so our new offering does not do any matching. Buyers and sellers effectively advertise their intention on a website and then contact each other. In mechanical terms, in our new model they will phone each other to negotiate and once they’ve negotiated it, will come to us with their negotiated deal and we’ll process the transaction from there on forward.

That sounds like a long and involved process, Anthony.

It’s the only thing that’s allowed in terms of OTC. The hallmark of OTC is negotiation between the parties and they have to know each other. The moment you let a computer system match them, you’re in the world of exchanges and you need a license. That’s going to be the distinction.

How would what you are talking about, differ, say, to eBay?

Quite simply, eBay is literally an advertisement – and the moment you’ve advertised the parties talk. Everything that happens thereafter has to be done between the parties. With trading stocks, the big is as a buyer, how do I know I’m going to get my shares? As a seller, how do I know I’m going to get my money? Effectively what we’ve offering is a solution after they’ve negotiated. That can be quite quick. It’s literally a telephone call. Once they’ve negotiated and agreed on price and the number of shares, they have the ability to come onto the platform and load their confirmed deal. At that point, we make sure that’s all in place. Obviously, a seller can’t sell shares that are not in the register we’re controlling and neither can the buyer place the confirmed trade on the website without having cash available. The hallmark of what we’re currently doing, which is a cash-backed share-trading platform, will now change to being a cash-backed share-advertising platform.

The picking/matching of the participants is not done by us. They choose each other and the conclusion of the negotiation is also completely between them. If someone advertises on the platform they want 10 000 shares and they only do a deal for 2 000 shares, that’s fine. The point is when they come back to the platform to say we’ve negotiated then both parties have to confirm the transaction. The moment the second party has confirmed what the first party has loaded, we can deliver the script to the buyer and the seller will get his cash.

How different is it to eBay?

Completely different because with eBay you are literally advertising your intention. The seller has to contact whomever looks after the register and say, please transfer the shares and the buyer has to get the money to the seller. In between those two things, all sorts of things can go wrong. You could have a situation where the buyer pays the seller, thinking the seller’s got the shares. He then discovers the seller never transferred the shares. Now the buyer has to try get the cash back. That’s the problem. It’s the actual transfer of the cash to the seller and buyer knowing he’s going to get the script. That’s what Strate does – it ensures that for every delivery we transfer, there is settlement and proceeds for the shares exists.

Does the guy who’s buying have to put up any guarantees to make sure that he’s got cash?

Yes. He has to put money into the account and so he’s got to be good for cash. On our platform, he does not advertise a price. We’re only allowed to show quantities. That’s what we’ve agreed makes the most sense because the view was that if you’re advertising price and quantity, it’s too close to getting the whole match thing done. The feeling was that we needed to advertise quantities only and price is negotiated directly between the customers.

Should you get your new license and you start operating, why would anybody use the bulletin board option?

Remember, it’s unregulated Alec, so there are no listing rules. The issuers on an OTC can provide services to their clients on conditions that make sense to them.

So anybody, even small businesses, could list their shares with you?

Yes. If you come onto the stock market you are listed and the exchange is governed by the FSB and all the investment protections are there. It is a direct competitor to the JSE with investor protection. The OTC has no investor protection. Well, that will continue with our OTC service – it is not regulated and the companies that would allow their shareholders to trade between themselves are not giving any guarantees on anything, other than here’s a share. You can decide who you want to buy and sell the shares to and the prices that you conduct the transactions at, but we provide no form of investor protection. OTC has always had that. I can remember Magnus Heystek saying, “Never buy an unlisted share because you never know if you can sell it again.” The fact is demand for OTC does exist.

We’ve got clients that are interested in the OTC service offering. Their argument is what we’ve been doing all along is OTC. We’re not sure we want to list on the stock market. Listing is very formal and listing also means you’re subject to public scrutiny – much more than if you’re unlisted. That’s the subtle distinction but it’s quite a big distinction. The one is formally governed and the other is not.

What’s the difference for a company that is going to list on your proposed new stock market and the bulletin board?

Very simply, the one that wants to be listed might want institutions buying its shares – if they’re unrestricted – or any other participants in the market. There are certain people who only invest in shares if they’re listed. These issuers want to open up their shares to a wider market. They might also want the publicity of being listed. Remember, being listed means they’ve now got to disclose all their financial information and conduct themselves as a listed company with all the rules – similar to the kind of protection the JSE gives. Those are the types of people that are going to want to list so it’s really widening their investment ambit for their shareholders.

The people who want to go OTC are the ones where there are typically between 100 and maybe 1000 shareholders, where they currently have a company secretary managing the trading of their shares – and it’s just become too onerous for the in-house staff. These companies are just saying, “I don’t want to do it myself anymore. I just don’t want the administration and would like an environment where it’s more controlled than I currently have.  Once again, take as a simple scenario; shareholder A comes to the company secretary. The company secretary knows shareholder B wants to buy. He puts the two in contact. After that somebody has to hold their hands with the transfer of the cash and shares. It’s a lot of admin. For us, our OTC clients will be the clients interested in helping ensure the administration is done correctly behind the event. We’re providing security to both the buyer and the seller in the OTC environment. Once they’ve agreed to the price, the buyer will get his shares and the seller will get his cash. For a lot of people, that’s worth a lot.

The advantage that you did offer on your OTC was BEE. You verify whether a buyer is in fact, BEE so that it retains the BEE credentials of the company.

Yes. That won’t change. That service offering will be provided in both scenarios. If a restricted company were to list on our trading platform in the listed environment, they would appoint a company to provide the services for BEE verification. In an OTC environment, the same thing would happen – we can apply any restriction. We have some clients where the deal is that the company decides which shareholders can buy. The company vets the shareholder prior to any sale. One of our clients has those rules. Restrictions on the shares can be implemented in either scenario. That’s where we feel we’ve specialised in terms of the service we’ve provided.

Read also: SA’s flourishing BEE share exchange considers branching into other parts of Africa

In a way, you’ve actually got two bites at the cherry now and potentially, an expanded market?

Absolutely, because we’re not forcing our clients to choose. I don’t want to go to every OTC client and say, “You have to be listed.” I can now say to them, “These are the benefits of listing. If you want to be more public, you want a wider investment base, and you want to be listed with all the benefits of listing or if you don’t want to be listed but you still want to provide a service to your shareholders in a manner where the company secretary is not the one doing all the work; here’s a way for you to have that done.” Because the technology on both platforms is going to be extremely simple – particularly the controlling of the cash/pre-funded nature of the market – it will give our clients that are OTC the ability to migrate into a listed environment later should they so wish.

They could also go the other way around. If they are listed and they’re finding the cost too high and they want to keep offering services but not leave the market completely, they can go back to being OTC. We love it because it gives us the ability to offer both sides of the coin to our clients.

When are you likely to hear from the Financial Services Board on your stock exchange application?

That’s the Million-Dollar question. If I just look at ZARX’s experience, they published their rules sometime during July/August of last year and submitted their licence application in March. We’re now coming up to July. We haven’t had any formal notification from the FSB on how our licence application is going, but I’m of the opinion that it’s progressing well. If it’s the same sort of timeline, we’re likely to be publishing our listing rules and appointing stockbrokers, etc during the course of July/August – maybe even in September. ZARX were given their provisional license in March so for them, it was exactly a year’s process. I can’t imagine it would be any slower for us.

How are your rules likely to differ from what the Johannesburg Stock Exchange applies?

Well, ZARX’s rules were quite a lot lighter and I think our rules may be as light as theirs, if not lighter. Essentially, the huge difference between our application and the JSE: we’re giving the issuers the ability to make a few key decisions. The first one: An issuer will be able to decide which stockbrokers or which broking communities may trade their shares. Secondly, the issuers can also, from an electronic perspective, set down restrictions.

The post Equity Express: Leading the charge to disrupt JSE’s share-trading monopoly appeared first on BizNews.com.

To be white – and indeed, a white journalist – means in the mind of Independent Newspapers owner Iqbal Surve, that you view the world through a racist prism and one is rendered incapable of rational thought. He has cast aspersions on a host of journalists, in a recent column in his newspaper Business Report, simply because they have asked obvious questions about the deeply questionable financial underpinning of Independent Newspapers. Donwald Pressly, Editor of Cape Messenger, comments…

By Donwald Pressly*

There are a host of questions about Sekunjalo’s purchase of South Africa’s biggest English language newspaper – and online news – group, Independent Newspapers, which took effect in August 2013. There has been a lot of secrecy about how much money was involved, especially from the Public Investment Corporation, which manages the pension funds of teachers, nurses, policemen and women and public servants, the overwhelming majority of whom are black.

There apparently is much to hide. Why else would Dr Iqbal Surve, the owner of Independent Group who was previously the boss at Sekunjalo, cast all those as racist who have exposed this distinctly questionable transaction – some would use stronger words to describe it, but I won’t – involving R880 million, and counting, of pensioners’ monies. To ignore this story would be tantamount to treason. Read Aunty Iqbal’s version of events.

Read also: James Myburgh: How independent is Surve’s Independent with R900m PIC debt?

Finally three years later (in May this year), it was Business Day which exposed the truth, or at least some of it, about the transaction. Forced to disclose its unlisted assets – following questions by DA finance spokesman David Maynier – PIC CEO Dan Matjila admitted reluctantly at parliament there was a political motive in spending nearly a billion rand on Independent – to create a black media giant. He said it himself: “It is only fair we should give blacks a chance to create a Naspers. That strategy is under way. We are less than two years into it and maybe we will create a black Naspers.”  It is a distinctly dubious motive for the spending of pension money. Aunty Iqbal says Maynier was motivated by racism. Maynier “uses… a group of white journalists of a particular generation, presumably because they are not apologetic or embarrassed about being the drivers of a virulently racist agenda to keep the South African media in white hands at all costs.”

Iqbal says that “our detractors”, who he also calls “media stooges” – which include Terry Bell, Ann Crotty, Pressly, Alec Hogg, Ed Herbst “and the other adherents of a white-controlled media” – were not above telling lies in their attempts to undermine Independent and the PIC “saying that government pension money was used to ‘bankroll’ Sekunjalo’s takeover of Independent. Well that is what has happened, has it not?

Pensioners helping to pay Surve’s R500 000 a month salary

Who is it exactly that benefits from this money going to Independent? Is this slush fund helping to pay Surve’s R500 000 a month (yes a month) salary as executive chairman of Independent? According to the PIC itself no money has to be paid back for five years, until 2018. Surve says R150 million has been paid back already “with a portion also accounting for the 20 percent equity taken by the PIC in Independent”, whatever that means.

Read also: Iqbal Survé: SA media’s Walter Mitty who got R900m from State pensioners

As usual there are more attacks on journalists than answers in Aunty Iqbal’s diatribe. The media needs to continue to chip away at getting more answers about what has happened to pensioners’ money. Aunty Iqbal is right about one thing, we need to question PIC money that is going to other media groups too, whether they are white or black owned or somewhere in between. In an environment where the media, especially newspapers, are contracting internationally, why is it that the PIC wants to invest pensioners’ money in bottomless pits? PIC senior fund principal for private equity Koketso Mabe was reported as saying that 70% of the PIC funding sat on the Independent Newspapers balance sheet while 30% was a direct loan to Sekunjalo. Neither of these amounts needed to be serviced in the first five years. However, the Independent Newspapers stake could be converted to equity or sold after five years. Only the Sekunjalo stake would ultimately have to be repaid.

We should all be screaming from the hilltops – journalists and citizenry alike –  about why about R1 billion (with interest on the initial sum) is being effectively “gifted” to Independent? One is certain that Aunty Iqbal will say that is a racist question, as he has turned muddying the waters into a fine art.

• Donwald Pressly, editor of Cape Messenger.

The post Pressly: Surve’s anti-white rhetoric – a R500k monthly distraction appeared first on BizNews.com.

The month post Brexit was always going to be interesting, firstly the result was unexpected, and secondly, no one was certain of how it would all play out. But as Alec Hogg summed up, normal service resumed as the Biznews.com Global Share Portfolio regained the losses. The portfolio is built on Warren Buffett foundations, and over the long term the market noise doesn’t take away from the fact that all the stocks held, are well run companies. Alec takes us through the performance and current position of the portfolio, providing a comprehensive breakdown of how the shares are doing and how the companies, split between the likes of Apple, Amazon, Barclays, Berkshire Hathaway, Alphabet, IBM and Novo Nordisk are performing. – Stuart Lowman

Hi there, Alec Hogg coming to you with the BizNews Global Share Portfolio for July 2016. It is now 19 months since we started. Our annualised return on the portfolio is 25 percent. A lot of that has been due to the fact that the Rand has weakened over the past 19 months, we’ll get into the detail in just a while, but the good news is that every, single constituent of our portfolio rose in the past month. If you recall a month ago we seemed to picket really poorly. Stuart Lowman is with me, the BizNews managing editor.

Stuart Lowman: Thanks Alec, it’s good to have you back in Johannesburg.

Yes, and I see I brought some good weather. The weather over in England has been literally, it’s been in the 30’s (33 – 34) a complete heat wave there, so I guess global warming is making the muddy island a little less muddy.

I was going to say that you brought a little tornado with you to Johannesburg yesterday, so a lot of unexpected events this year.

Indeed, yes well that’s the least of our worries at the moment but when we get back to the portfolio itself. Every, single member of the portfolio in the last month was up and there was a huge bounce for Alphabet (Google) – that was up $70 a share. The Rand improved from R15.20 to R14.25, so when you put it altogether the portfolio, in US Dollar terms was stronger and the Rand was stronger as well, one offsetting the other, remember because we convert everything back into Rands and as a consequence of that our portfolio in fact did very, much better. It was interesting Stuart because last month we couldn’t have picked a worse day. We like picked the worst of the worse days to do our podcasting, which was not a bad idea because it does bring you down to earth a little bit.

Was that the day after Brexit, Alec?

I think it was the day after Brexit and we were sitting at an annualised return of about 21 percent. That’s now picked up to 25, which shows you how markets can move. Remember, this is not a portfolio that has been built so that you can trade it day-to-day. It does give you some really good opportunities and in fact, Apple came up with their results yesterday and that share price bounced strongly. A result of the numbers, which again we’re going to get into in just a moment that was up by 5.5 percent in the after hours trading in the United States, another one that’s bounced very strongly is IBM also with their quarterly results. We’ve got Amazon coming out also Alphabet. Hopefully Berkshire will be able to do better as well, so all around our portfolio is well positioned and we’re looking forward to a continuation of the trend. I guess that’s why, when I sent out a Tweet this morning, it was to say “Normal business resumed. We hope that the portfolio, although it is a long term bet, will continue with its normal business resumed, in other words, moving in the right direction.”

Okay, let’s get through the individual constituents and that’s what you can see where we are at the moment. Interestingly enough the S&P 500 Index and I like to always repeat the overall strategy of this portfolio. When we began it in December 2014 it was on the basis that we felt that the Rand was going to be a fundamentally weak currency. The reason for that is the developmental state ideas, by the politicians in South Africa, will not do the economy any good, so that’s really where we started off. The basis was you can take all your money and put it into US Dollars if you like but we can do better than putting your money just straight into US Dollars by investing in the equity market.

If you have a look at Vanguard, which is the top of them there that is an index tracker, so what that does is it replicates the S&P 500 Index, about as close as you can get it, and in the 19 months, (since we’ve been running this portfolio) that is up by five percent. If you’d taken all your money and you put it into US Dollars you would have clearly improved by that amount. Had you taken all your money and put it into Vanguard, over the period, you would have improved by five percent. As you can see, when you go down the portfolio (right to the bottom) where it says ‘total’. Our total portfolio is up 16 percent, so we have outperformed the market, with these stock picks, by 11 percentage points, since starting. That is a very satisfying return any way you want to look at it. Of course we’ve been very lucky.

We have Amazon in there. You can see up 124 percent (this is in US Dollar terms), also a good move by Alphabet – up 38 percent, and the other one that beat the market was Novo Nordisk, which was up by 22 percent. That’s the overall portfolio, as you can see we’re up by 16 percent. What has been good though is during this period a lot of the stocks have underperformed for a period of time and then come into their own. Indeed, we were sitting on Amazon, which went backwards for a couple of months, after we bought it or brought it into the portfolio, and then of course it just took off. IBM has done something similar. You can look there now, IBM is actually up by nine percent, on where we acquired it, and Berkshire Hathaway virtually breaks even after being down quite a lot. It just shows you once again that what you need to do is to make sure that you do your active analysis, and then you put the stocks in the portfolio and for the most part, just let it run.

Here’s in the Rand terms, and this is the one that we need to consider as we are investing in South African Rand. The portfolio overall is up by 40 percent since inception – that’s 25 percent annualised (a very good return). Had you gone for just the Rand you would have had a return annualised of 17 percent, so we’re eight percentage points better than the South African Rand or had you just put your money into a currency account. As you can see again, the figures there are very impressive for Amazon, which has pulled us higher. The laggards, Barclays, which we only bought unfortunately just before Brexit, when we talk about bad timing. It looked brilliant for about two weeks and then Brexit came along and the price collapsed. Well it has improved a little. In fact, it’s improved considerably in the past month, and we do think that it will be moving in the right direction but just to bring all of those into context for you.

In the past month Alphabet (Google) that’s up $70 a share in the past month, it’s had a fantastic run. Amazon is up $40 a share, also very good. Apple Computer is, in fact up $10 a share, after last night’s disclosure of its quarterly results. In our portfolio though we’ve only taken into account four Dollars, which is where it closed last night. We’ve got a nice, little improvement there on Apple as well, which will take the loss to Apple, in Rand terms, down to about five or six percent, which is now starting to look a lot better than where we were at one point.

Barclays, in the last month, it went up 12 Pence, but of course the Pound fell against the Rand, as it did against every other currency, and the Pound, which cost you R20 for a Pound a month ago, it now costs you only R18.84, a whole lot better than three months ago, when it was costing you £24.00 (ask me). Berkshire Hathaway is up six Dollars a share in the past month. IBM, on the strength of its financial results, $20 a share higher, Novo Nordisk also four Dollars a share, and just to add to the party the index fund, Vanguard, up $15 a share, so it shows you that the portfolio, overall has returned 80 percent better than the Rand return, so our strategy so far is working on both points. The one point being that we think the Rand is going to be a weak currency, so we’re benefitting from Rand weakness. On the other point being the stock-picking that we’re doing in the United States market and improving on that way. Stuart, just tell us how the questions work.

Yes, Alec…to all the listeners, it’s just on the right hand side bar there. There’s a little question and answer section. If they just plot their questions in there, we’ll do them verbally online, so that’s all good.

All right, so it’s easy enough to see?

Yes, we’ve had a few technical questions but it looks like all the sound is sorted.

Great, super. Sorry about that with the sound. Maybe that was what our little interference was a minute ago. Let’s move on. We’ll take questions as they come in, so if you do have a question that you’d like to discuss please jump in.

There we go – the Rand prices at opening versus the prices today. Remember we did start the portfolio, in fact we started in September 2014, and then we decided to change the base, so after having quite a nice run for a couple of months we stopped again and resuscitated from December 2014, which gave a lot more people an opportunity to come for the ride. As you can see since then, the Rand from R11.27 to the Dollar, R14.35, so although it’s improved in the last while the Rand has still declined on average or annualised by 17 percent since we started the portfolio. There it gives you a very good indication of how the individual constituents worked. Apple virtually wiped out now that loss after the financial results beat the market’s expectations. Barclays being the single laggard, but we think we can live with that. We do think that there’s a longer term reason why Barclays will do better. It’s offering excellent value and there’s the graphical illustration.

As you can see Amazon, (but you can’t so well because the graph is a little bit squashed – I apologise for that) but it shows you that three constituents of the portfolio have done far better than the Rand. A fourth has done okay. In line with it, these two, Berkshire Hathaway just a little bit lower, and then our two losers there, being Apple and Barclays.

This is the dividend receipts. No dividends were received in the past month, so no update on that side. Let’s get into the individual constituents.

This is the S&P 500 Index, which is reflected in the Vanguard Exchange Traded Fund, if you like, it’s the American equivalent of the Satrix 40, excepting that there’s 500 shares, American market being a whole lot bigger than the South African market. They literally overlay each other and that’s the way it should be when you are investing in an index fund. Vanguard has improved in the last 12 months by the number that you see there, just over three percent.

Moving onto the next one and here’s one of our three bankers, Berkshire Hathaway. It hasn’t been the best performer on the American Stock Market in the past year. In fact, it’s been rather disappointing for us since inception but I’m not at all worried. I do believe that Berkshire Hathaway (the green by the way is the market as a whole) that’s about 3.5 percent, as you can see in the last 12 months. Berkshire has level pegging in the last 12 months but it’s come a long way from where it was in the beginning of this year. Berkshire is like an index fund itself but over time it’s proven to outperform the S&P 500, so although things haven’t been going that great in the last 12 months. As a long term bet, I’m still very happy to be with Warren Buffett.

From Robert de Vos, he asks if there’s any comment on the Deutsche Bank DBX USA fund, as an overall USA fund and just any ideas on the overall US economy?

Starting off with the DBX Fund – we are, in South Africa, they’re restricted if you’re going to put Rands. If you’re going to use Rands then the DBX USA Fund is a very good option. If however, you’re going to invest that one million Rand that you’re allowed to, in the offshore markets then Vanguard is a far better option. When you invest in an index tracker you should be going for the lowest possible cost and Vanguard is five basis points, in other words 0.05 percent, 1/20^th of one percent is the fee that you get charged by the Vanguard Fund, which makes it so much cheaper than anything that is available. If you’ve put your one million Rand into Webtrader and you can do that without asking for any permission from anybody, even if you don’t have your tax up to date. Every South African is allowed that one million Rand, so you can switch that across. It’s when you go over a million Rand and you start asking for special permission that you have to go through the Exchange Control hoops but, up to that point, you should be investing through Webtrader straight into the Vanguard index tracker. If, however you’ve already used that million and you’ve got Rands to spare, in South Africa that you can’t take overseas for one reason or another, it’s not a bad option – it’s not a bad bet.

As far as the US economy is concerned we have to remember that although we do have a slice of our portfolio in the S&P 500, so in other words really focussing on the US economy. A lot of that is already international, so many of those companies will be offshore but our portfolio, if you look at it, each of those stocks that we have in the portfolio have been carefully selected, so they are in many ways, apart from Berkshire Hathaway, not vulnerable to any shocks in the US economy or their profits or sustainability of the business is not that vulnerable. In fact, Berkshire is quite a defensive stock, if you’re worried about the US economy. We are going to have an update on how things are going there tonight, I think Stuart, with Janet Yellen?

Oh yes Alec, she’s talking tonight…

So we’ll know tonight what is happening on that one, but the world is not in a great state at the moment but that doesn’t mean that you can’t find stocks or individual companies that are benefitting. We are riding the disruption wave, and as a consequence we’re in stocks that we think are just going to be shooting the lights out into the future and the first of these you can see on screen now is Alphabet. (I hope that answers the question properly).

Alphabet is the old Google and, as you can see in the past year, it has outperformed by 17 percent, the NASDAQ, which is the index that it is benchmarked against. In the past month Alphabet, well let’s talk about Google it’s just easier to understand because Google is over 90 percent of what the Alphabet business is at the moment. They’ve got a brand new competitor, who could be quite a scare. A business called Verizon, which is a US telecoms business, has been moving quite aggressively into the space that Google and Facebook currently dominate. If you have a look at the digital advertising expenditure for this year, it’s estimated that Google will pick up about $26.5bn, this is for the US. Facebook about $10bn. Microsoft – $3.5bn and Verizon, after its acquisition of Yahoo, for $4.8bn that’s just gone through, is now pushing up its share to about $3.5bn. Just to keep that in context. Google – $26bn, Facebook – $10bn, Microsoft and Verizon – $3.5bn and there really aren’t any other players in that market but Verizon is a potential threat. The acquisition of Yahoo, for $4.8bn is, it looks a snip, if you consider that when Marissa Meyer, the chocolate-box blonde left Google to go over to work for Yahoo, she was heralded as the inspirational leader who was going to transform the business. She did a bit of a Koos Bekker deal there. She threw mud at the wall and hoped some of it would stick. That’s what Koos did in the late 90’s, early 2000’s, and in that process he found Tencent, which he bought when there were only 30 people. Now it’s by far the biggest part of Naspers’ portfolio, and one of two biggest internet companies in China but Marissa has bought 60 start-ups in the last year or so, costing her company $3.3bn. Now imagine this, Verizon is going in there, it’s buying Yahoo, it’s got all the base that Yahoo has, all the users, the advertising that comes through, although the advertising is on the slide there but it’s got all of that content, plus bets on 60 start-ups that Marissa Mayer has done all the hard work for, and it’s only paid a premium for the non-start-up costs, if you like, of R1.5bn, (a very good deal for Verizon). They are merging that together with AOL, which you would probably know best for Huffington Post, for those of you with long memories, would know during the internet boom. AOL was merged with Time Warner and it became AOL Time Warner and famously that was the merge data when it was a disaster.

AOL is still around. Huffington Post is a strong part of AOL. They’ve got other businesses as well and they bought that last year for $4.4bn. Verizon has spent $10bn to get a significant slug of a market that Google and Facebook have been dominating and are looking to increasingly make further acquisitions and to give another option to advertisers who, at the moment are kind of, having to go to those two – an interesting story.

Just on Koos Bekker there, Alec. Gerard asks Alphabet versus Naspers?

That’s a very good question. You really are then taking a bet of Tencent versus Alphabet, and I’m inclined, at the moment, to stick with Alphabet. Tencent has had a fantastic run and remember just to put that into context. Naspers, if you take its market capitalisation, in other words what you’re getting when you buy the shares, you’re actually paying for its stake in Tencent and you’re getting everything else for free. So you get MultiChoice for free, you get the newspapers for free, the Mail.ru, which is a big company in Russia. Some of the other interests in South America – all of that just comes along for free but this is not unusual, when you buy into a company that has a stake in another company. There’s always or generally there’s a discount, excepting if you happen to be PSG here, in South Africa where they put a premium on Jannie Mouton’s deal making abilities but for most companies there is a discount between the value of your investment and what you would pay on the market.

Naspers has got its appeal but right now Tencent is still playing in the Chinese market. There are some very serious questions about what’s going on in China and if you are a believer in the market process, if you believe that the market system is more efficient than a centralised command and control system and it’s not to say that China is what would be typified in textbooks about communist’s management. Certainly the economy in China is very free, relative to where it’s come from but it still has that dead hand of the state there whereas, in the United States, the whole country has been built on unlocking human potential. Just to put one small, little thing into context here. If you are doing a business like ours, like BizNews, in the United States of America you can start-up tomorrow. There’s nothing to prevent you from doing that. The market system, if you’re good enough you’ll get attraction. In China you need a license, and then once you’ve got a license before you can publish anything, it has to go through a sensor. If you consider the difficulties that one has to expand your business or certainly to promote free speech, which is what Tencent has always had an issue with. Then you do know that you’d rather be with the horse that’s running freely.

Andrew asks, it was back on the DBX discussion. Would it be a good hedge against any recession that may happen in the next few months (I’m assuming South Africa)?

The South African recession – my feeling is that you have to look at the big picture when you’re taking a bet on the DBX tracker or on Vanguard, or indeed on the BizNews Global Portfolio. The big picture is when you have a look at the way the South African economy is being managed and you have to either believe it’s been well managed or poorly managed because the Rand will eventually reflect that. The South African economy, sadly from my perspective, is being managed as a developmental state. Clearly those who are making the rules have not learnt from Venezuela. They’ve not learnt from the lessons of South America. They still think that human beings are smarter and that the state is smarter than the free enterprise system. As a consequence of that they will learn the hard way, as has happened through history, so when you’re an economic historian you just have to know that this is a really bad approach that’s been taken but it’s been driven by politics. Politics trumps economics in a developing country, and South Africa is a developing country, so as a consequence of that if your economy does not grow, if you’re not able to deliver the returns that you need you have to make it appealing for people to bring money in.

Remember, a developing country – another definition is you are developing because you need capital from other parts of the world. Developed countries export capital. Developing countries import capital, so if you’re importing capital how are you going to import capital to South Africa? You have to make it more appealing and you do that by depreciating your currency. That’s just if you want a real, simple, basic economic 101, so yes, anything that is hard currency based is a hedge against economic downturns in this country.

From LH – on Deutsche Bank the company, not the DBX, says it’s fallen tenfold in the past ten years in US Dollars. Given the Euro crisis what are the chance of them going bust?

Going bust, oh my goodness? Deutsche Bank is probably too big to fail. It being the size that it is and the Germans being as meticulous and disciplined as they are, it probably is priced to go bust but remember one thing about banks and this is why we haven’t been terribly enthusiastic about banks. Barclays was a special situation that’s why we invested there but banks, generally, the rules have changed dramatically (after the global financial crisis). Up until the global financial crisis banks could leverage themselves to a point where they could make superior returns. Post global financial crisis and the outcry after the bailouts the regulators have caught up with banks and now banks are really like utilities. You’re looking at a bank in the same way as you would be looking at an electricity provider or a gas supplier. They are heavily regulated and because they’re so heavily regulated by Government and the compliance levels are so high they’re never, well not never (never is a long time) but it’s unlikely that they’re going to outperform in the short term.

You have to look, if you’re investing in banks, at special situations, like Barclays – it was trading at 2/3rds of it’s… In fact, it’s now round about half of its underlying assets and its business is High Street where, in the UK primarily but of course it’s got international corporate finance businesses as well but the High Street – that’s where the value of that brand lays and there, the Brits don’t change bank accounts. One percent a year change their bank accounts – not a terribly competitive banking system at a retail level in the UK, so Barclays is extremely well positioned. They’re in the process of selling Barclays Africa, and they’ve done that in a very smart way, so there’s a big capital injection there. They’re coming from a low-base. We like that as a special situation.

As a banking sector overall, Warren Buffet – if you go onto BizNews and you can read the transcripts of the entire Berkshire Hathaway AGM this year. He said ‘of the top 100 banks, maybe five he would invest in’, and he’s already got two in his portfolio. The one is Wells Fargo and the other one is Bank of America. I don’t think Deutsche Bank is going to make one of the other three, so perhaps that answers the question.

Here’s our superstar and it continues to be a superstar. It did come very close to the market, as you can see. The blue line is Amazon – earlier this year the share price, however has been on a rip thereafter, up 40 percent or outperformed the market by 40 percent, this is NASDAQ (its benchmark) and Amazon, when you are based, as I am at the moment in the UK, you realise why people are finally clicking to this incredible business. The world is being ‘Amazoned’ and the news that came through in the last month for this company, has been very positive.

The first one is they have gone into a partnership on financial services with Wells Fargo, Warren Buffett’s favourite bank – he owns ten percent of it. What they’re doing there, it’s a little step in the right direction but if you consider how big Amazon is already and the way that it’s retail footprint – in most countries in the world, most Western developed countries. If you order something from the post it actually arrives. We, in South Africa, don’t understand this because it’s very rare that you would send something of value through the post. In the UK credit cards arrive, similar in the United States, and when you buy from Amazon it is, in fact delivered to your doorstep, either through the post or through a delivery service. That gives this company an enormous footprint and an enormous reach. Now it’s moving into financial services, very slowly as it’s done with new products, with this partnership with Wells Fargo, they are offering student loans to start-off with at 50 basis points cheaper than the overall student loan market is available, so that’s what they’re starting with.

The other thing, which is a huge breakthrough, is that Amazon has desperately been trying to reduce the cost of its distribution. You can imagine it’s very expensive to put… We bought, last month, some khoki pens to write on a white board and they cost £2.50 and literally, somebody came to our door and popped it through the post box. It must have cost Amazon much more than £2.50 to get it to us, you would have thought. They’ve been working on this to try and offset the cost of delivery and this morning, indeed, the news has come through that Amazon has struck a partnership with the UK Government, where it is going to be allowed to deliver its products through drones in UK suburbs. This is the first time its won permission to do so anywhere in the world. It’s been fighting with the American Government and got caught up in a whole lot of treacle on that side but it seems like, with the Conservatives in power and Brexit now behind them, they will be becoming even more friendly towards business and it’s going to make a huge difference to Amazon’s margins. If it can literally have guys sitting in the head office playing – what a ‘lekker’ job. Wouldn’t that be a great job to have, where you play with the drones and send them off to go and deliver at peoples’ houses? What happens there is, because you’d think if you leave it on the doorstep isn’t someone going to come past and steal it?

It’s not their culture. The culture is no, no one will steal it. The company or the part of Amazon that’s been putting this together is called Prime Air. They’ve been working at it since 2013, and they’re looking forward, of course to get into the market, at last, with Amazon pilots now being able to fly multiple drones at one time. The other bit of news from Amazon in the past month is that it’s prime day, it has a day – they call it ‘Christmas in July’. This year the sales were up 60 percent, so that initiative, which has been going for a little while now, is gathering more and more momentum. As Buffett said, “The world is getting Amazoned.” Believe it – we will never be selling this share.

Moving onto Big Blue and at last Big Blue is starting to come into its own. I’m afraid I’ve got the wrong graph here for you. I’ve got Amazon’s graph instead of IBM’s graph. Anyway, that doesn’t stop the story and the story for IBM is that the quarterly results were released in the past month and those quarterly results were very pleasing indeed. Although revenues are down again and I don’t know why the media obsesses about this. IBM has told us, in no uncertain terms that they are moving away from their legacy systems into new areas, what it calls strategic imperatives. Analytics in the cloud – analytics by the way, would include very deep analysis. They have a product called Watson, which analyses big data more efficiently than any other option in the world and it is there where they are making great strides. Remember, IBM has got relationships with the top 100 global companies already because of the hardware that it has installed. Anyway, analytics, cloud, mobile, and security, social – those are all areas where it is focussing. Revenues in those areas are now 38 percent of the business. They were up 12 percent.

The other parts of the business, who needs an old ‘main frame’ computer, if you can put all your information in the cloud, those parts of the business are coming under pressure. They knew they were going to come under pressure that’s why they’ve been moving away and finally the penny is starting to drop. They’ve also been increasingly buying companies, which would slot well into their strategic imperative areas. They spent $5bn on deals there in the first six months of this year. I like still, very much what’s going on at IBM and my goodness, you could have got the shares at about $130 just a few months ago, and they’re now at $160, still offering great value. Still $10 cheaper than Warren Buffett bought in at, so IBM – I’m very happy to have that in our portfolio.

Novo Nordisk as well, this is a good dividend player. It’s underperformed slightly the market, generally but it’s not a worry. Remember this is an enormous slug of the insulin market. People are still getting sick. They’re still eating too much sugar. Until we see a reverse in that trend we don’t have to worry about Novo Nordisk. No news or no big news coming out of the company this month excepting that some analysts are starting to see Novo Nordisk as a good opportunity again.

Apple Inc. – okay, financial results out last night. Up to this point Apple has been the disappointment or one of the disappointments of the portfolio. As you can see it underperformed the market by 21 percent that is up until the results. You can cut that now to about 15 percent. The shares are bouncing strongly in afterhours trading. The reason for this is that Apple beat the market, as did IBM by the way, on its numbers. Apple beat the market quite comfortably. I’ll give you some of the numbers because they’re quite relevant. On profits or earnings per share – the market expected 139 it came at 142. On the number of iPhones sold the market expected (these are for the second quarter of 2016 – the three months to the end of June). Market expected 39.9 million iPhones – 40.4 million iPhones were sold. It expected 9.1 million iPads – the new iPad is taking off, 9.95 million iPads were sold, and so on. It is sitting on cash of $231bn, which is an extraordinary amount of money for a company that’s market cap is almost half of its value. It is sitting, in cash in the bank and you’ve got the Apple brand and you’ve got great products. This new SE model, by the way, has been selling far better than analysts anticipated and what Apple was shouting about was that its services revenue was up $19bn in this period, and it’s now got to $6bn in the quarter. That $6bn out of $42bn, so it’s not by any means a huge slug of the business just yet but the returns that Apple is getting there, the profit margins it’s making there are far higher. Like IBM, Apple is moving into the services business and being pretty successful at it.

An interesting development at Apple is that a gentleman by the name of Bob Mansfield has been switched. He’s a veteran at the company. He’s been there for 17 years and led some of the biggest and most challenging projects at Apple during Steve Jobs’ time and subsequent to that. He has been switched to run the very secret electric car project they’re busy with. I’ve been asked before by some of the participants in our monthly webinar – would we be investing in Tesla? I love what Elon Musk is doing, who can’t or who doesn’t love it, but with Apple and Google looking to try and eat Tesla’s lunch – you’ve just got to worry a little bit if those giants start coming after you. Particularly Apple, they are looking for a new line. It’s likely that they’re moving into electric cars at some stage. Google we know are definitely moving into that area. They are already the global leaders in driverless cars, an area where Elon Musk has had his difficulties in the past month, with the first fatality in a driverless car, by Tesla. It’s a fascinating area when you look at these big giants and they’re taking each other on.

We are however, very happy with Apple. It’s one of those things… One day we’re going to wake up and there’ll be an announcement from Apple and the share price will rocket because they’ve done something spectacular. They’re a very secretive business. They’ve got huge amounts of cash. They’re buying back their own shares at a significant rate. Warren Buffett’s portfolio has bought Apple shares and he hasn’t touched technology for a while. He did admittedly say it wasn’t him but it was his two portfolio managers, Ted Weschler and Todd Combs – the two of them had actually gone in and bought Apple shares because they were just too irresistible. After the latest set of quarterlies, you can understand why.

That’s just to bring everything back into perspective. Barclays have only been in the portfolio for a couple of months. Unfortunately, our timing there wasn’t that great. As you can see the Rand cost price of Barclays was R36.33 per share – it is down at R28.07, so that’s been the worst, down 23 percent. Apart from that there’s really not a lot to complain about. Apple is now down after the bounce in the share price last night, six percent since inception, and everything else, in Rands, has been doing extremely well of course, with the flag bearer being Amazon.com.

Just a quick final question. Are dividends received in your Webtrader account taxed as interest or foreign dividend?

Wow, that’s a little too complicated for me. I would imagine, because they’re dividends, that they would be taxed as foreign dividends and there would be a dividend withholding tax but I suggest the best way to find out that is to drop Stuart a line at Webtrader or in fact, just give them a call and I’m sure somebody in the team will be able to help you out.

Well, that’s it. That’s our webinar for today. Thanks for the attendance.

Standard Bank is like a bank, most banks – there they are. Please look at that disclaimer. I’ll leave it up there, while I jibber-jabber. We are giving you a model portfolio. We are trying to help you to start looking at investing offshore. Something that you might consider, if you haven’t invested offshore yet, is to read my book, my Invest like Warren Buffett book. It really is written in a language that anyone can understand and it will also give you a little bit of a leg-up to get into the market.

A quick one before we go Alec, Bruce wants to know out of all the shares in the portfolio, if you could, which one would you add investment to?

Apple, definitely, I think Apple is so cheap. The problem why it’s so cheap is because it’s so big and it’s hard for investors to get the Apple story because when they look at it and they look at $500bn to $600bn market cap, the biggest in the world, well depending between them and Google which day it is but the most valuable company on earth – it is just hard for them to get their head around it but if you knock off a few zeros and look at these things in perspective. It is to me the next Amazon for our portfolio. Amazon was a sleeper for a while and it took off. I believe that Apple will be the same.

The SE, the new cheaper iPhone has been a roaring success and watch this space when they move into the motor vehicle market. Apple, as they did… Can you remember, when Steve Jobs launched the first iPhone, up to that point there was no such things as ‘Smartphone’s’ they didn’t exist, and yet there’s a whole industry now on ‘Smartphone’s’. There is already an electric car but Elon Musk is, as great an entrepreneur as he is, he’s still looking at 50 thousand vehicles a year that he’s trying to produce. He’s now really working hard at ramping it up.

When Apple go into that market you can be sure that with $230bn in cash sitting in their balance sheet. They won’t be looking at 50 thousand cars. They’ll be looking at an altogether different approach but it’s in the DNA of the company to keep things silent, to keep it quiet, as they did with the iPhone. At some point in time they’re going to be launching their next hurricane on the global business world. That’s why I would be, of all the stocks in this portfolio – the one I like most is Apple.

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By Ed Herbst*

“(Mandela) said to me, just before he got ill, ‘Iqbal, are you still the same?’ I said to him, ‘Tata, I am still the same.’ He said, ‘Now I can go.”

Dr Iqbal Survé, quoted in the Daily Maverick of 30/6/2016

“It is apposite to remind the respondents of the sentiments expressed by the late State President, Nelson Rolihlahla Mandela on 20 April 1964 in his opening address in the dock:

…I have fought against white domination, and I have fought against black domination. I have cherished the ideal of a democratic and free society in which all persons will live together in harmony with equal opportunities …”

Judge Roshini Allie in the Cape High Court on 12/5/2016 in granting an interdict sought by the University of Cape Town against RMF leader Chumani Maxwele and 15 other respondents who had attempted to burn down the UCT campus.

Shortly after he was released from prison, Nelson Mandela accepted an invitation from the Jewish community in Cape Town to speak at the Marais Road Shul in Sea Point. I was sent to cover the event as an SABC television news reporter.

During his speech he referred to an incident which occurred during his incarceration on Robben Island. The prisoners had asked for the opportunity to worship and a minister from the Dutch Reformed Church was sent to conduct Sunday services.

After one of these services the cleric had asked the prison warders to give Mandela the only gift he could offer, a guava. This was duly confiscated. “How cruel were my jailers”, Mandela said.

His deeply-moved audience was humbled by his capacity for forgiveness and his extraordinary generosity of spirit.

Resignation with immediate effect

Dr Iqbal Survé and the newspapers now under his control, the Cape Times in particular, constantly evoke the name of Nelson Mandela and I was reminded of what Mandela said in the Sea Point synagogue when the following Twitter post appeared under the name of Karima Brown, one of his senior news executives who, last week, showed her faith in him and in the long term future of newspapers like the Cape Times by resigning with what amounted to immediate effect.

Long gone are the days where we explain ourselves to White politicians. Especially ones (sic) that try (sic) to undermine and underplay the disastrous impact of racism, whiteness and its attendant entitlement. You stand on the shoulders of giants and you inspire so many young and old to live authentically and with purpose. Helen Zille is a bully who has an overdeveloped Madam complex. She has yet to answer to the substantive issues raised by the widest range of people on her crude attempt to use political power to determine the reading choices of the Western Cape government. As you said elsewhere whiteness and its hegemony stops right here and right now. We ain’t taking this shit no more!

This was a response to a series of Twitter attacks on Helen Zille and David Bullard by Eusebius McKaiser.

At first I was disbelieving. Given that junior reporters look to senior news executives for ethical guidance on what constitutes neutral and objective reporting, I felt that the post could not have come from her and had surely been posted by someone else with malicious intent. Her attitude towards white people is however highly regarded by Eusebius Mckaiser who, with approval, proved its veracity by including the above-mentioned words at the end of this article. It goes without saying that if any white journalist were to generalise about black people in that way there would be a firestorm of criticism.

In a recent article posted on Politicsweb, Ernst Roets of Afriforum quotes a South African Institute of Race Relations (SAIRR) survey which found that only 4.7% of all South Africans perceive racism and xenophobia as the country’s greatest unresolved issue and that 79.4% of the black South Africans polled in the study had indicated that they did not experience ethnic animosity.

‘White madam’

Roets defines those who work frenetically to create the opposite impression as “Race Merchants” and I wonder what he made of another Twitter post by Brown on 20 July:

Brown’s statement related to a dispute about an apology which the Press Ombudsman ordered the Cape Times to make. Her Twitter statement like the previous one, was devoid of dignity, courtesy and restraint. In my subjective perception, it echoed the sort of statement about Zille previously made by Julius Malema in his fiery, polemical youth, something for which he subsequently apologised.

Do such tweets, infused with racial hatred and ethnic condescension, not accurately reflect the Sekunjalo ethos?

This ethnic nationalism and pervasive sense of racially-tinged victimhood seems to be an essential component in what Brown calls “media transformation”. In an interview with Michael Bratt of Media Online she says:

“The normative dominant narrative in South Africa is captured in neo-liberal, white privilege and that is perceived as normal. I’ve always argued that my job as a journalist is to challenge that dominant narrative.”

In this regard the Cape Times has certainly been “transformed”. It relentlessly accuses white South Africans of racism and constantly seeks to ratchet up animosity against them, an approach that is the antithesis of the Nelson Mandela dream – nation building through reconciliation. I am told that the last white news reporter, one of the country’s best environmental reporters, Melanie Gosling left the Cape Times at the end of last year having endured extraordinary unpleasantness from the editor Aneez Salie – who delights in telling the white readers of his newspaper to “Piss Off”.

Sordid first

Gosling and reporters like her were targeted virtually from the moment that Brown and Mde were appointed after they wrote a favourable article about President Jacob Zuma in which they attacked one of his critics, Prince Mashele. Gosling was among those threatened by Survé’s lawyers – a sordid first in South African media history.

Salie’s predecessor as Cape Times editor, Gasant Abarder, played a singular and successful role in driving one of Cape Town’s leading Struggle journalists, Tony Weaver out of Newspaper House and getting rid of one of his predecessors, the beloved, long-term columnist John Scott – in a two line email!

For a further understanding of Brown’s “transformation” mindset, read her colleague Vukani Mde’s article about the “white internet”:

‘Like I said, I don’t think the white internet (or the white media establishment in its entirety) will ever forgive that picture, ever.’

I never knew that the internet was ethnically Balkanised and neither, it seems did Ferial Haffajee.

Her response was succinct.

WTF

Cosmic coincidence

By cosmic coincidence Brown and Mde authored an article “Media freedom cannot be divorced from transformation” which appeared in the Cape Times on the same day that their boss, Dr Iqbal Survé chose to settle, literally on the steps of the Labour Court, with the dismissed Cape Times editor, Alide Dasnois. This conveniently obviated the need to for him to testify under oath about his definition of media transformation and the strong element of Ubuntu in the way in which he treats his staff.

We are thus fortunate to have access to the words of the great man, expounding with his usual gravitas and grace, on how he saw the transformation of the University of Cape Town.

At a meeting of the UCT Association of Black Alumni (UCTABA) hosted in the Kramer Building at the university on 7 April last year, Dr Survé made the following statements as reflected in this YouTube clip:

At 50 minutes and 11 seconds he says that UCT ‘… does not respect me as a black man.’

At 52:37 he says: ‘Frankly speaking it is a racist institution.’

At 56:40 he says: ‘If you want real change, I suggest you change the leadership of this institution, change it in its entirety.’

Swinging retrenchments?

Thus encouraged Chumani Maxwele and the RMF started a relentless war of attrition which culminated on the assault on its vice chancellor Dr Max Price and arson attacks which then spread to other campuses (half a billion rand and counting) – all this after Dr Survé was given a PIC “loan” of a billion rand under conditions that your bank would never dream of offering you and with the alleged goal of “creating a black Naspers”.

Essentially Survé seems to see the “transformation” of UCT as a more profound enunciation of what has been achieved in the Cape Times newsroom – get rid of every white news reporter and editor regardless of merit or years of dedication and loyalty to the institution in much the same way that more than a hundred senior white managers were driven out of the Cape Town municipality when the ANC took political control in 2003. The consequences of the “transformation” of the Cape Town municipality have been as disastrous as the RMF “transformation” of UCT.

A recent Intellidex research study indicates that the four biggest South African media companies have more than 50% black ownership but I gather that Survé, Brown, Mde and Gasant Abarder see it more in terms of the National Democratic Revolution i.e. that every private and government institution must rigidly reflect the demographic breakdown of the country.

‘Verwoerdian quotas’

This was best articulated by Enoch “Canyon Springs” Godongwana an honest and honourable man, who said that South Africa must apply “Verwoerdian quotas” – and the ANC has not disavowed this interpretation despite a recent Constitutional Court judgment and the subsequent agreement between Solidarity and the SAPS.

James Myburgh, in a Politicsweb article, calls this a ‘…morally abhorrent principle, which drags behind it an odious history.’

We thus need clarity in practical terms on what Dr Survé means by “media transformation” because, according to futurist Clem Suntner:

‘We can thus estimate that by 2030 – based on current growth – for the age group 0-24 there will be 91 Blacks, 7 Coloureds, 1 Asian and 1 White in every group of 100 youngsters.’

Does this mean, Dr Survé, that in 14 years’ time a cum laude, white journalism honours graduate and aspirant news reporter will have a 1 in a 100 chance of being employed by you or, as things currently stand in the Cape Times newsroom under Aneez Salie, no chance at all?

How can this be reconciled with the extraordinary generosity of spirit of Nelson Mandela whose memory you so often evoke and, above all, with his memorable statement from the dock during the Rivonia trial in 1964?

“… I have fought against white domination, and I have fought against black domination. I have cherished the ideal of a democratic and free society in which all persons will live together in harmony with equal opportunities …”

Retrenchment process

In the meantime, “Dr Dan” Matjila’s dream of creating a “Black Naspers” while deliberately not generating the maximum safe return for civil service pensioners is turning into a nightmare for editorial staff at Independent News Media (Pty) Ltd – they have been served with Section 189 notices, the opening salvo in a retrenchment process.

They have been told that they might lose their jobs and that those who remain will have to agree to work for a lower wage and they are wondering what Karima Brown – who literally disappeared overnight – knows that they don’t.

The Cape Times has been ordered to apologise to Alide Dasnois for once again misleading its readers and the questions keep piling up.

In May “Dr Dan” told parliament that: “The strategy is working now and the numbers look good.”

Actually, they don’t.

Also in May, Herman Manson of Mark Lives revealed the Audit Bureau of Circulation newspaper sales figures for the first three months of 2016 compared to the figures for the equivalent period last year. These figures showed that the Cape Times daily sales have dropped from 32 371 to 31 767.

Perhaps “Dr Dan” can update parliament on the extent to which his project is succeeding and whether the claim that Dr Iqbal Survé is drawing a monthly salary of half a million rand for this brilliant business plan is true.

• Ed Herbst is a pensioner and former reporter who writes in his own capacity.

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By Ed Herbst*

“The torch of crusading journalism carried by so many from Thomas Pringle to Percy Qoboza, Donald Woods, Max du Preez and Martin Welz, among others, has been dropped, with a few honourable exceptions, by the English press and picked up by Afrikaans newspapers.”

Rhoda Kadalie, Business Day 14/10/2004

We are indebted to the tenacity of Democratic Alliance MP David Maynier and the honesty and integrity of our Deputy Minister of Finance, Mcebisi Jonas. They forced the CEO of the Public Investment Corporation, Dr Daniel Matjila, to concede in May that there had been a political rather than an investment motive in the PIC’s decision to provide most of the funding which allowed Dr Iqbal Survé to acquire Independent News Media Pty Ltd, the largest group of English newspapers in the country.

Matjila said the goal had been to give black people a chance to create a second Naspers.

Investigative journalism

A singular criterion in determining the success of such a venture is investigative journalism – in short, how have the Indy titles compared with the Naspers newspapers in this regard since the Sekunjalo takeover three years ago?

In my subjective assessment the two outstanding examples of investigative journalism in the past year or so have been the role of Beeld’s Erika Gibson in breaking the story about the way in which the African National Congress corruptly and illegally facilitated the escape of Sudanese president Omar al- Bashir and how our courts were lied to in this regard and Rapport and Beeld’s exposure of pervasive corruption in the Passenger Rail Agency of South Africa (Prasa).

After Janet Heard, head of the News 24’s parliamentary bureau, wrote about Gibson’s exclusive, I asked Gibson to give her own account of what happened in the al-Bashir escape saga and her response was subsequently posted on the Media Online website. This was investigative journalism at its best.

It would not be fair to say that on the Prasa story Pieter-Louis Myburgh (Rapport and, subsequently News 24) and Leanne George (Beeld) blew the Indy papers out of the water because the Independent titles were never in the water anyhow.

Eviscerated of its finest talents by a vengeful purge, Dr Survé’s newspapers were at best listless hangers-on in covering this saga of corruption and mismanagement, doing damage control by occasionally publishing retrospective follow-up articles.

Pieter-Louis Myburgh

Here is how Anton Harber described Myburgh’s entry for the 10th Taco Kuiper Award for Investigative Journalism for 2015 – which Myburgh won:

• After an anonymous tip-off, Myburgh spent four months verifying the claim that the Passenger Rail Agency of SA (Prasa) had spent R600m on rolling stock which was too tall for our railway network. When the story, “SA R600-m train blunder”, ran, Prasa said it was “devoid of truth”. But Peter-Louis followed up with documentation that proved the case. Prasa later admitted the massive blunder and, as a result of this and other reports, the CEO Lucky Montana and the Chief Engineer, were fired. It was classic investigative work: careful, patient probing to find supporting evidence for an abuse of public moneys, backed up with solid documentation, and powerfully presented to ensure it had impact. And it certainly did.

I have prepared the following timeline to showcase not only the talents of these fine reporters and their newspapers but the extent to which pervasive corruption has been allowed to flourish on the watch of the ANC.

• Pieter-Louis’s coverage of Prasa started with a report in Rapport on March 2015 detailing how a host of politically connected individuals positioned themselves to become beneficiaries of Prasa’s massive R51 billion tender for new passenger carriages awarded to Gibela, the local subsidiary of French manufacturing giant Alstom.
• In May 2015 Myburgh reported on a dodgy property transaction that linked former Prasa CEO Lucky Montana to a company that had won contracts worth billions of rand to provide Prasa with security products and services.
• Myburgh’s next article in Rapport, in June 2015, focused on yet another upmarket property, this time in Cape Town, which linked Montana to a businesswoman whose company had secured lucrative contracts to refurbish and service Prasa trains.
• On 5 July 2015, Rapport/Pieter-Louis Myburgh broke the story of how Prasa had purchased locomotives, the Afro 4000’s, that were too tall for South Africa’s rail infrastructure. While the previous articles had revealed the murky background deals involved in the Prasa contracts, this article disclosed for the first time that there were fundamental engineering shortcomings in the hugely expensive trains that had been purchased.
• The 5 July 2015 exposé by Myburgh on the Afro 4000 locomotives was met with fierce denials from Prasa – which was still being led by Montana at that stage. Rapport, however followed up with a second Myburgh article a week later on the locomotives, this time with documented evidence. This evidence included reports from Prasa’s own engineers, which clearly indicated that the Afro 4000’s were not compliant with South African rail specifications. The week thereafter the Prasa board told Montana that he no longer needed to see out the remainder of his tenure as CEO.
• On 4 October 2015 Rapport readers learned that a lawyer representing Montana had paid R25 million in cash for two upmarket properties.
• In January 2016 the newspaper revealed that an Angolan businesswoman, Maria da Cruz Gomes, who’d been visited by President Jacob Zuma at her home, as well as a lawyer with ties to Zuma’s family, had received payments totalling R80 million from Swifambo Rail Leasing, the local company who’d supplied the Spanish-built Afro 4000 locomotives to Prasa. No clear reasons have been provided as to why Swifambo had received invoices from these individuals or why they had been paid out in this regard.
• On 14 August 2016 Myburgh broke another angle on the increasingly murky PRASA saga in an article headlined ‘Zuma friend’s R550m bonanza’.
• On 21 August 2016 Myburgh revealed another seemingly dodgy PRASA-linked property transaction, this time a luxury Durban apartment bought as a “gratification” for a senior Prasa employee, Luvuyo Gantsho, who oversaw a multi-billion-rand security contract.

Leanne George

Here is how Anton Harber summed up the submission by Beeld’s Leanne George:

This is a story of hubris. Following from the previous Prasa story, Leanne George heard CEO Lucky Montana describe his head of engineering Daniel Mtimkulu as a “genius”. With admirable journalistic scepticism, she checked out his genius, only to find that he was not registered as an engineer and his claimed double-doctorate – including the one he claimed to have got when he was 15 – was a figment of his imagination. And this is not the quality one wants from someone who has to oversee a R600-m train carriage purchase. He lost his job, as did another fake doctor in Prasa and, eventually, the CEO himself.

• On 8 July 2015, three days after her colleague broke the story about the newly-purchased Prasa locomotives not being suitable for our rail system, a front page lead in Beeld by Leanne George gave the first indication that the professional credentials of the company’s chief engineer, “Dr” Daniel Mtimkulu were suspect. Two days later another Beeld front page lead revealed that Mtimkulu’s claim in an SAFM radio interview that he had studied in Germany for his doctorate during the fall of the Berlin Wall could not be true. George had ascertained that Mtimkulu had been born in 1974 which meant that he was, if his claim was true, 15 years old when he commenced studying for his doctorate in Germany and that meant he must have matriculated at the age of eight years!
• On 17 July 2015 George broke the story about Lucky Montana’s dismissal
• On 24 July 2015, in another Beeld front page article, Leanne George broke the news that “Dr” Mtimkulu had no engineering qualifications whatsoever!

Responding to her enquiry, the Vaal University of Technology revealed that although Mtimkulu had registered there for a diploma in mechanical engineering, he had never completed the course!

• On 31 July 2015, George and Myburgh filed an article revealing that Prasa could not account for a “missing” R17 million.
• On 15 September 2015 George and Myburgh filed the most disturbing story of them all – not only are the Afro­4000 locomotives too tall for South African rail lines, their brakes could also pose a danger.
• On 9 December 2015George and Myburgh broke the news that Swifambo Rail Leasing, the company that won the multi-billion rand contract to deliver the controversial Afro 4000 locomotives to Prasa, had pocketed an extra R335m.
• On 14 December 2015 George and Myburgh reveal that the managing director of the company that won the contract to supply Prasa with its controversial Afro 4000 locomotives, spent R27 million in cash on a game farm and lodge in Limpopo five days after Prasa made its first payment to his company.

In fact, two years after Dr Iqbal Survé took over the Independent titles – which include the Cape Times, the Cape Argus, the Mercury, Pretoria News, the Daily News, The Star, the Sunday Tribune, the Sunday Independent, the Diamond Fields Advertiser and Isolezwe – and started his purge of some of the country’s best editors, journalists and subeditors, not one of his newspapers made the 2015 finalist list for the Taco Kuiper award.

In 2014 the Taco Kuiper award for investigative journalism also did not go to a newspaper owned by Dr Survé. It went to Sam Sole, Stefaans Brümmer, and Vinayak Bhardwaj of the Mail & Guardian’s amaBhungane team for ‘The Nkandla Files’ and an Indy newspaper did not even make the shortlist of six entries.

This indicates that Dr Dan Matjila’s goal of establishing a black Naspers was nothing but an ill-considered pipe dream which holds little comfort for the country’s civil servants whose pension fund financed this project.

The recent resignation of Karima Brown and the impending retrenchments – staff will learn whether they are still employed when they get their payslips on Thursday – must make fear the pervasive emotion in the Indy newsrooms and that is hardly the incentive needed for producing world-class investigative journalism.

Given the PIC investment of hundreds of millions of rands to create a “black Naspers” it is interesting to reflect on the latest sales figures for daily newspapers published on Herman Manson’s Mark Lives website.

In the table for daily newspaper sales which Manson provides only one newspaper is highlighted in green which signifies an increase in sales and that is the Pretoria News, a newspaper owned by Dr Survé, which saw a radical improvement in the numbers of newspapers sold each day – 23 copies. If you subtract the 3606 which are effectively given away to schools and left at airports, then the number of people who actually buy the newspaper with their own money drops to little more than ten thousand.

Does that figure justify, after three years, an investment of more than a billion rand on behalf of the civil servants who expect a reasonable but safe return on their pensions by the people who are charged with that responsibility?

Does it justify the dearth of investigative reporting in the Indy newspapers if you use the Taco Kuiper awards as a determinant?

This was not a first. Snuki Zikala helped bankrupt the SABC with his equally ill-considered fantasy of establishing the “African Al Jazeera”. Hundreds of millions of rands were spent setting up 13 news bureaux in cities all over the world to produce news programmes which could be accessed by 0.5 % of South African households because the necessary decoder was not available locally – a brilliant business plan!

Thank goodness for the Afrikaans press.

• Ed Herbst is a pensioner and former reporter who writes in his own capacity.

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Tencent Holdings, of which South Africa’s Naspers holds a sizeable stake, has soared in value, joining the ranks of the world’s 10 largest public companies, reports Bloomberg. Don’t expect growth to slow. Tencent has developed plans to drive revenue generation through expanding its entertainment empire. Chinese entrepreneurs like to talk about having a king dish, or house special, as a necessity for business success; Tencent is talking about serving up its king dish in many different ways – multichannel delivery. Meanwhile, Tencent has benefited from China’s economic restructuring, which has encouraged the growth of the private sector in order to wean the nation off its dependence on state enterprises. The Chinese government has signalled its intent to continue doing more of the same for the foreseeable future, slashing red tape and trying to make it easier for private enterprises to thrive. That must be good news for shareholders pinning their hopes on Tencent’s continued success. Naspers was an early investor in Tencent, with its success catapulting Naspers chairman Koos Bekker into the league of global billionaires. Forbes estimates Bekker’s wealth at about US$1.8bn. In June, Naspers – a former print media company that has reinvented itself as a digital player – reported headline earnings up 21% in dollar terms. With 77% of Naspers revenues generated outside South Africa, not only in China, but in Russia and elsewhere, the company is a classic rand hedge. The Naspers share price has ticked up in value since 2012, as Tencent has grown and the rand has declined compared to major currencies. – Jackie Cameron

By Lulu Yilun Chen

(Bloomberg) — Tencent Holdings Ltd. has surpassed China Mobile Ltd. to become the country’s most valuable corporation, underscoring the growing importance of a vibrant private economy over lumbering state-owned enterprise.

Tencent rose 4.2 percent to HK$210.20 in Hong Kong on Monday, reaching a market value of HK$1.99 trillion ($256.6 billion), edging past China Mobile’s HK$1.97 trillion and putting the tech company in the ranks of the world’s 10 largest public companies, including Apple Inc. and Alphabet Inc. Tencent’s shares have jumped four-fold in as many years by building a lead in mobile gaming and online advertising, surpassing a roughly 20 percent advance in the Hang Seng Index.

The company’s rise exemplifies the new realities of the world’s second largest economy, where smokestack industries prepare to lay off workers while younger companies such as e-commerce giant Alibaba Group Holding Ltd. make inroads into everything from finance to media. Private businesses, marginalized for decades by a state sector that enjoyed easy funding from government-owned banks, now play a pivotal role in hiring and innovation, and the best performers are spearheading China’s shift toward a consumption-led economy.

“China’s economic restructuring is happening faster than many have expected,” said Shen Jianguang, chief Asia economist for Mizuho Securities Asia Ltd. 

Read also: Naspers and Tencent attack Facebook in Africa – added pain for MTN , Vodacom

Services accounted for more than half of output last year for the first time, while consumption made up more than 70 percent of the expansion in the first half of this year. The rise of companies such as Tencent shows China can unlock still more of its growth potential by giving more market access to private companies and rolling back state monopolies, he said.

Since 2006, the title of China’s most valuable company has been held mainly by government-controlled industrial heavyweights such as  China Mobile, Industrial & Commercial Bank of China Ltd. or  PetroChina Ltd., according to data compiled by Bloomberg. Tencent arch-foe Alibaba also briefly held the title just after its 2014 debut.

Chinese internet sector stocks have been buoyed by the strategic importance the country now places on the sector. State-backed funds and enterprises are championing some of the biggest private investment rounds in companies such as Ant Financial and Didi Chuxing. President Xi Jinping, recognizing the sector’s importance to both political and economic control, has designated its top entrepreneurs key targets for party outreach.

It wasn’t always like this. For years, China’s private companies operated in the long shadow of the gargantuan state sector, deprived of capital and support. Early entrepreneurs founded nationwide brands from Wahaha mineral water to Haier appliances, paving the way for today’s captains of industry like Alibaba’s Jack Ma and Tencent’s own Ma Huateng. Hungry to expand, they sought out overseas money: Alibaba gained investment from SoftBank Group Corp. and Yahoo! Inc.; Tencent won the backing of Naspers Ltd., a South African media company; Baidu Inc.’s early investors included IDG Capital Partners, according to Crunchbase.

Along with Alibaba, Tencent has now advanced to the vanguard of the private sector. Its strategy of driving revenue growth via advertising and gaming through messaging applications WeChat and QQ have brought more than 1 billion users into the fold. The company has beaten revenue and earnings estimates in all but one of the past six quarters.

The company has designs to build a Disney-like entertainment empire. It’s splurging on content from anime to Hollywood movies to generate ad sales, which rose 60 percent in the June quarter. Popular titles including Cross Fire and Naruto Mobile helped Tencent more than double smartphone gaming revenue to 9.6 billion yuan in the period.

“When it comes to intellectual property, you have to serve the chicken many ways,” Tencent’s Ma, China’s third-richest man, said of his aspirations during a rare press conference earlier this year. “It should be viewed as cross-platform entertainment and be developed from multiple dimensions.”

The post How Tencent plans to turbocharge its already dizzying growth appeared first on BizNews.com.

It’s difficult to argue against Naspers as an investment. The share price has sky-rocketed, with the pessimist investors calling the top at intervals starting around around R500 a share. The stock currently sits over R2000, and doesn’t seem to be slowing down. But when one investigates the fundamentals of the company, can one make sense of the rise? Ted Black is a cash ROAM specialist, he uses it as his lens to understand a companies value. Why? Because he says management’s purpose should be to make the firm more valuable. He takes a stab at Naspers, and asks if Koos Bekker and his team are still producing the goods. An interesting analysis. – Stuart Lowman

By Ted Black*

Naspers has had some bad press recently. Its credit rating may be heading for junk status and the firm has been accused of secrecy about the management share scheme. Meanwhile the share price and market value of the firm (VOF) keep climbing.

Instead of tracking the share price, let’s look at the business through a Cash ROAM (Return on Assets Managed) lens because management has only one purpose. It is to make the firm more valuable.

The VOF derives fundamentally from the cash productivity of the asset base. Managers who blindly accept the “common sense” of cost control and profit planning and watch the day to day share price, miss this point completely. The ROAM-focused manager does not make this elementary mistake. He/she fully understands that the true measure of management’s competence is asset productivity.

If management’s purpose is to make the firm more valuable, then as Peter Drucker put it, the purpose of the firm itself is to create and keep customers. That’s how you make it more valuable. The only results come from outside – from customers when you bank their cash. Inside, there are only costs. This means that the three most important measures for operating management are:

1. ATO – this is Sales ÷ Assets. It is called “Asset Turnover” and measures the sales productivity of the asset base.
2. Cash ROS% – this is Cash EBIT (Cash Profit generated by operating activity before interest and tax) ÷ Sales as a percent. It measures the profitability of sales. Multiply the two and you get,
3. Cash ROAM% – the overall measure.

ROAM is more than financial. It measures marketing strategy. It asks in this order:

• For every $ of assets, how many $s of sales do we generate? (ATO)
• For every $ of sales, how many cents profit do we make? (Cash ROS%)

So how does Naspers stack up? Always judge a trend – not a number. Take ATO first.

As you can see, the sales productivity of the asset base has plunged since 2006.

Today, for every $ of assets, management generates a mere 36 cents of sales revenue.

As to cents profit per US$, it has fallen from 26.8 to 7.7 since 2008.

Management has steadily spent more in costs and expenses as a % of sales for the past nine years. Next is the combined effect of ATO and ROS on Cash ROAM.

It has fallen from 24% to less than 3%. The Cash Profit after Tax ROAM is only 0.5% and yet the VOF rockets up.

Today, market cap is 174 times the Cash Operating Profit and a 1000 times the cash profit after tax. Why?

Simple, Naspers is now an investment company. More than 100% of its profit before tax comes from its share of equity profit. Probably more than 90% of that is from Tencent.

Looking at Naspers annual report reminds me of the dotcom days … lots of gobbledygook, and very little information given on segments. You are left with a feeling that the only really profitable business is done where they dominate their markets. That’ll be South Africa and Tencent in China.

It is definitely a Rand hedge. Tencent’s Cash ROAM, although in decline from a heady 50%, coupled to massive growth, is still a very healthy 16%.

As the owner of a very successful chicken producer in the USA, Perdue, once said, “Put all your eggs in one basket and then watch that basket!”

Is that what Koos Bekker and team are getting to after his brilliant investment? They don’t seem to be managing the other eggs very well do they?

What do you think?

• Ted Black runs workshops, and coaches and mentors using the ROAM model to pinpoint opportunities for measurable, bottom-line, team-driven projects. He is also a freelance writer with several books published. Contact him at tblack@astrovoice.co.za.

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