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Punishment time

INVESTORS TURNED their backs on some of the big guns over the past week. Among those suddenly to fall out of favour are Warren Buffett’s Berkshire Hathaway, giant Australian mining company BHP Billiton and my favourite, British American Tobacco (BAT). And the Americans have no inclination to pay heed to Goldman Sachs CEO Lloyd Blankfein’s “I didn’t know” – giving that share price a good beating at one stage. In brief, it looks as if the old investment advice “Sell in May and go away” will again be valid this year.
In chronological order, the punishment was more or less meted out as follows: Early last week BAT said its sales volumes – that is, the number of cigarettes sold – worldwide for the quarter to March had fallen by 1%. Investors immediately withdrew their support and on the JSE BAT lost almost R15/share. That’s slightly more than 6%, more than the dividend it’s just paid. It looks as if investors didn’t read further than the introductory remark about the 1% fall in sales: lower down (in the trading update) CEO Paul Adams says: “Our customers are clearly finding economic conditions difficult and volumes suffered as a result of market size declines. However, there was continued pricing momentum and good growth in market share, leading to solid revenue growth.”
In other words, he’s saying the increase in selling prices more than made up for the 1% fall in volumes and that profits are still rising. At BAT’s annual meeting last week chairman Richard Barrows again reminded shareholders the company’s turnover for the 12 months to year-end 2009 was up by 17% and profit by 20%.
That’s when Australia decided the smokers and the miners must pay for its government’s excessive spending over the past two years to ensure the country doesn’t fall into a recession.
Australia has now become the first country that’s going to weed out the smoking habit with ridiculously high excise duty. At the same time, that’s going to make much of Australia’s fiscal deficit go up in smoke, the government feels. But, of course, it’s not quite that easy. For a start, excise duty doesn’t create new income for the country. It’s not BAT that pays it, but Australia’s smokers. And remember: exorbitant excise duty on a packet of cigarettes opens up a wonderful playing field for all those inclined to a bit of fraud and smuggling without paying any excise.
But BAT wasn’t the only well-known South African company that suffered at the hands of Australia’s massive tax reforms last week. South African born BHP Billiton CEO Marius Kloppers said in a special statement the planned increase in mining tax in Australia was going to make the tax rate on BHP Billiton’s earnings in that country increase from 43% to 57%. There’s a lesson in that for Julius Malema. Why nationalise mines? That merely creates new concerns and worries for SA’s Government. Simply increase the mines’ tax rate from 43% to 57%.
Kloppers responded sharply. “The stability and competitiveness of the tax system have been central to the investment in resources in Australia. If implemented, those proposals seriously threaten Australia’s competitiveness, jeopardise future investment and will adversely impact on the future wealth and standard of living of all Australians.”
Who would have thought tax proposals could be just as poisonous for investors as the nationalisation calls by a hot-headed youth leader? Investors don’t like the “new” Australia in the least, and Billiton’s price is already down from R259 to R224/share. That’s even a bigger decline than resulted from investors’ pains with BAT.

There’s something rotten in the state of Omaha
Last week again saw the annual get-together of thousands of shareholders in the renowned Warren Buffett’s Berkshire Hathaway in Omaha, Nebraska. Some people even call it the “Woodstock of the investment world”. Nevertheless, even here in South Africa there was rather less publicity than usual. Perhaps that was because there’s no longer so much to boast about. Buffett’s unconditional support for Goldman Sachs CEO Lloyd Blankfein was a surprise for many of the 40 000 shareholders who gathered at Omaha.
Only a week before, Goldman Sachs itself was one of the shares investors had turned on. In his evidence before a Senate committee, Blankfein could find nothing to blame in the way the bank had acted. But others found a lot to blame, and Goldman Sachs’ share price suddenly dropped more than 10% – merely on the back of a negative mood, not because of poorer prospects.
But Buffett’s confidence in Blankfein isn’t the only reason for the sparkle of this 79-year-old’s investment skills to be fading. Thanks to wonderful little tools such as Google Finance we can now easily obtain the actual achievements over the past five or 10 years. It helps to eliminate that low reference figure of 40 years ago. After all, it’s no good insisting an investment over the past 40 years gave a return of 25% or whatever. We can’t buy now at the prices of 40 years ago.
Better to look at what happened over the past five years – or 10 years at the most. That’s the period in which Buffett was built up so much. Ten years ago, many people still made fun of him because he didn’t understand the dot.com surge.
The two graphs show how this guru of the investment world is getting older and older. In the first, we compare the performance of Berkshire Hathaway’s share price – that is, Buffett’s company – with that of BAT and BHP Billiton and, as a control, the S&P500, the index of the 500 largest listed shares in the United States. Readers will recall that Finweek has often pointed out that an equal exposure to BAT and BHP Billiton is the best international hedge and distribution for South African investors.
Berkshire’s share price – with a total increase of 36,7% over the five years against the S&P500 – shows Buffett is indeed a better investor or manager of an overall insurer (that is, Berkshire’s primary business) than the average investment manager in the US. The value of the S&P500 rose by only 2,58% over the five years. BAT’s share price over the same five years went up by 110% and BHP Billiton’s by a very attractive 187%.
“Yes, but it’s not right to look at only the past five years,” Buffett’s supporters will say. Well, fine. Let’s also look at one year and at 10 years and put the whole lot together in one table. And add SABMiller: it’s just as conveniently available on the JSE as BAT and Billiton.
The table tells its own story – but there’s also a little sting in the tail.
Remember, Berkshire doesn’t pay a dividend, while BAT is again offering its investors a healthy dividend of more than 5%/year. If the dividends BAT, SABMiller and BHP Billiton paid to their shareholders over the past 10 years are added to their performances in the table Berkshire’s doubling over the period looks even less impressive. But there’s no gainsaying the fact Berkshire’s share price has increased by 94% over the 10 years. The S&P500 fell by 18,3%.
That’s true. However, local investors and journalists mustn’t now get carried away by Buffett simply because more people go to his annual meeting than the boring meetings of BAT and BHP Billiton. Look at the graph: it’s the performance – not the number of people – at Woodstock that determines the investment value.
Just one last remark: South African investors can easily buy directly into gold by way of Absa’s exchange-traded fund (ETF) which is listed on the JSE under the code GLD. It’s the cheapest and easiest way to obtain exposure to gold. There’s also a fund in the US with the code GLD. It’s the SPDRGold Trust, an ETF with the instruction to follow the gold price as closely as possible. It’s only one of many similar listed funds available to investors.
Once again, thanks to Google Finance, it was easy to compare the graph of Berkshire’s share price with that of ordinary, old-fashioned gold. It looks as if the asset manager – Mr Gold, with a 166% increase over the past five years – hasn’t fared at all badly compared with Buffett’s 40,5%.
Vic de Klerk holds shares in BAT and BHP Billiton.
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