Profits. Not hidden in the jungle.

“This commitment to customer service is what distinguishes from their competitors. I think that the company is fairly priced considering its huge growth rates which are likely to continue for years to come.”


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To market to market to buy a fat pig Ooof. That looked bad at face value, stocks as a collective were thumped yesterday. Why? Worries about global growth. Yes, I can hear the collective sigh. The cause, Chinese PMI numbers that were lower again, possibly lower than the expectations that I didn’t quite know. Yesterday there was still a lot of digesting of the weekend Berkshire AGM. Some snarky remarks, comparing the meeting to Hogwarts and the rest of the investment world being full of muggles. Michael tells me, and I struggled with this, that people spent good money on no doubt elevated air ticket prices, elevated hotel prices, elevated food prices, only to sit in an arena slightly across the road from the main event. Yes, you sat and watched a screen where you got to see Buffett and Munger, rather than see them in person.

Ummmmm … If I were these two guys I might move the meeting to a larger location, charge high ticket prices, give the proceeds to charitable causes, that sort of thing. Why not? If these guys are the business equivalents of modern day Beyonce (and Jay-Z), Taylor Swift, Pharrell Williams and Co., yesteryears Sinatra, Hendrix (that’s Jimi), or more likely for those two, Gene Austin, Harry Belafonte and perhaps the Fleetwood Mac, the Eagles crowd. Who knows what those guys like! There was more than a little made in the broader media (that includes Twitter) of a question about Coca-Cola and obesity posed by a journalist to Warren Buffett (I think it was NY Times and CNBC’s Andrew Ross Sorkin asking), which the Oracle of Omaha (sort of) dodged.

He had this to say: “I elect to get my 2,600 or 2,700 calories a day from things that make me feel good when I eat them. That’s my sole test.” And then he continued along the same lines: “I like fudge a lot. Peanut brittle. I am a very, very, very happy guy.” I wonder how the sugar is evil crowd would counter this argument, after all the fellow is 85 and he seems in pretty good health. His mental health is about as sharp as ever. I am pretty sure all of us want to be like that when we get to that age. For sure! Without a single doubt. Charlie Munger weighed in and suggested that perhaps the criticism was immature and one sided. I guess he has a point, there certainly seems to be momentum on the side of the quick shift to healthier lifestyles, notice the food changes in Woolies? All that “carb clever” food, from pizzas to granola that contains little old style processed food.

There were also questions raised about their ability to outperform now, as a result of size and scale. I am guessing for those of us who have watched their progress over the decades, that might have always been the case. Also, why did some say that the advice is always to find a low cost market tracker? Perhaps for the average retail investor who is not interested in owning single stocks, this is definitely the answer. Dollar cost averaging. If you are not going to own single stocks, then make sure that you find a cheaper alternative. I think Berkshire, as long as they maintain the legacy of Charlie and Warren, will be one of those American institutions. Yes. Smart people are drawn to attractive workplaces. Talent is retained at reputable and principled firms. Yes. Charlie and Warren may be gone in two decades time (perhaps not), the company is more likely to be a lot bigger that it is now.

Lastly, the two (Charlie and Warren) had choice words for Valeant Pharma., which was countered by Bill Ackman (obviously), he holds a big position in the stock. The two also sneered at hedge funds and their fee (fleecing) structures, I am not too sure that Bill Ackman came back from that one. That was intertwined with the index tracker thing. For the record, Buffett is smashing hedge funds on the bet that he took a while back. Hedge Fund fees and underperformance relative to the index makes you wonder if Hedge Funds shouldn’t change their classification to High performance, high fees leveraged Funds.

Markets scoreboard quickly. Comments from Tim Cook in an interview with Jim Cramer saw Apple stock higher and looking even better against the rest of the market in the red last evening in New York, New York. The whole market fell sharply, stocks were off their worst if that makes anyone feel better. By the end of the session, the Dow Jones was off over three-quarters of a percent, the broader market S&P 500 sold off 0.87 percent, whilst the nerds of NASDAQ fell 1.13 percent. Energy and basic materials fell hard, lower prices as a result of the concerns over Chinese growth. Same old, same old as “they” say in the classics.

Quickly, listen to and read about the interview with Tim Cook done by Jim Cramer, the chattering classes of Twitter suggested that he sounded desperate. For me, I am not so sure that he needs to respond to Carl Icahn or anyone else, he works for the shareholders and is the custodian of their funds, being the man in charge. And if he needs to remind everyone all of the time that the middle class projections in China is set to grow from 50 million in 2010 to 500 million by 2020. Cook is right, the most important thing at the end of the day is that their customers really love their products. It is a little long (nearly 12 minutes), it is worth a watch.

Cramer always holds no punches and remember the short term nature of the beast. Loyalty rates and satisfaction rates have never been higher. Smartphone market penetration rates globally are in the 40’s percent. Cook says that Apple will give products to people to enrich peoples lives, and Cramer talks about people going to have to pry that product (the iPhone) from his cold dead hands. Cook talks services, the App Store, Music and so on. China is the clincher though for me. Everything is going to be fine, OK? I believe Tim Cook, Howard Schultz (Starbucks CEO who was here recently, could still be here) and people like Jack Ma who make comments on the transition of the Chinese economy. Cook says that the long term thesis remains intact on China. Thanks.

Back to local here for a moment. It was pretty much a sell all emerging markets. China is finished and stuff. And we are impacted by that as much as every other emerging market. It was not very pretty. It is unfortunately again the nature of the beast. Deep and liquid markets are overtraded and supply us with the necessary liquidity in order to execute with ease. It comes with the territory, we just have to roll with it.


Company Corner

As we chatted about last week, released their 1Q 2016 numbers and they smashed expectations pushing the stock back to record highs. Here are the numbers, Revenue up 28% to $29.1 billion, operating income up 331% to $1.1 billion and Net Income is $513 million from a loss of $57 million. The net income number is not of huge importance, as Amazon is spending most of the cash that comes through their front door on infrastructure development.

What is important is the growth rates being achieved and the customer loyalty being built as they grow. Sales in North America grew 27%, International sales grew 24% and Amazon Web Services (AWS) grew 64%. AWS is the big reason for the Amazon share price being up 58% over the last year, that segment of the business makes a healthy 64% operating margin unlike the 3.5% operating margin on the e-tail part of the business. The result is that North American net sales amount to $17 billion and have a profit of $588 million compared to AWS who has net sales of $2.5 billion but profits of $604 million.

On a customer service front, Prime same-day delivery grew by 11 metros in the US to now include 27 metros. This commitment to customer service is what distinguishes from their competitors. I think that the company is fairly priced considering its huge growth rates which are likely to continue for years to come. As a comparison Alibaba (who is the other global online seller) trades on a price to sales of 12 times, Amazon “only” trades on a price to sales of 3 times. The company is run by one of our generations great visionaries and operates in a sector that will become of greater importance to society, Buy


Linkfest, lap it up

Many Africans stay in one country and send money to their family in another country, the cost of doing this is eye popping – It still costs more to send money to Africa than anywhere else. The people that are paying these high fees are the people in society who can least afford to pay the costs, solving this price problem will help put some cash back into peoples pockets.

It looks like battles between government’s and technology companies is starting to gain momentum – WhatsApp, Used by 100 Million Brazilians, Was Shut Down Nationwide by a Single Judge. This follows the FBI case with Apple earlier this year. You can understand why governments feel they have a right to the information. I don’t think this will be the last battle.

I suppose the best way for AI to develop is through trial and error. Here is one way that the systems can learn and be tested to see how the programming stacked up to different scenarios – Elon Musk’s $1 billion AI company launches a ‘gym’ where developers train their computers

An interesting stat out of ItalyWhy Italian merry widows perk up after husbands die.


Home again, home again, jiggety-jog. Cruz quits. And then unfortunately in the closing hug accidentally “punches” poor Mrs. Cruz in the face and then to add insult to injury, elbows her on the other cheek. Trump as the Republican nominee. The Teflon Man. Good luck America, it certainly seems that extremism of all kinds rose after a financial crisis, this is known through history. When economic hardships are experienced, you will just about believe anyone who says that they have the secrets to #winning. Wow. I would think that his debating skills are going to be called into question against an eloquent states person like Hillary Rodham Clinton. See poor Mrs. Cruz -> Failed Candidate Ted Cruz Elbows Wife in Face. Shem, when it doesn’t go for you, it certainly doesn’t.

BHP Billiton are in a whole heap of trouble. Nothing new, just the quantum of a fine that the Brazilians want to levy on the company. The stock was down nearly 10% in Australia. The stock is down around 5 % at the start here. 43.5 billion Dollars is, as Paul says, a large number. Stocks are mixed at the open here, some up and some down!

Sent to you by Sasha, Byron and Michael on behalf of team Vestact.

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