x Abu Dhabi, UAEThursday 20 July 2017

Patience is vital when monitoring your investments

The View from Here Investing in star-powered stocks certainly has its risks. Analysts point out that they rarely pay dividends and are often more volatile than lesser-known options.

'Too big to fail" has come to mean vast egos making stupid decisions for which the taxpayer has to pay. But it could also mean an opportunity too good for small investors to pass up.

Nobody understands this better than Warren Buffett, the world's richest investor. While fund managers in the 1970s were ignoring the plodding dinosaur stocks like Coca-Cola and General Electric, Mr Buffet was buying. Today, his investment company, Berkshire Hathaway, is worth about US$370 billion (Dh1.3 trillion).

We now have a whole new crop of companies so wildly successful they are likely to be around for a generation, if not more. Companies like Amazon, Apple and BHP Billiton represent the kind of corporation that has grown so large that it will take an unexpected disaster to bring them down.

The latest to join the ranks of the super company is the yet to be named Glencore/Xtrata entity, now in merger talks. Both companies are based in Switzerland.

Xtrata is mostly into coal mining and Glencore, commodities broking with a dash of mineral extraction, too. Together, they should have a market capitalisation - their combined worth - of about $82bn, with annual sales of $209bn

Last year, Aabar, the Abu Dhabi investment company, bought a $850 million stake in Glencore. This was shortly before Glencore listed on the London Stock Exchange - an event that marked the largest listing in history.

The Glencore/Xtrata hookup will create a company that dominates the trade in commodities. Ivan Glasenberg, the chief executive of Glencore, told The Sydney Morning Herald recently that the company's traders talk to about 8,000 commodities producers every week. The zinc, copper and iron it purchases are sold on to consumers, at a hefty profit.

It's likely that in the future, everything from the light bulbs above your head to the car you drive will bear the hidden footprint of the new entity.

Aabar's investment tells you something: it expects Glencore to be a long-term holding rather than a quick cash generating play. Aabar probably expects the new company to deliver dividends and capital growth for years to come.

Of course, big companies can and do fail - Enron is a spectacular example. But, like the sinking of the Titanic, Enron was a man-made disaster. Thieving directors hid behind crooked accounting, creating the illusion of a successful company. As much as Enron serves as a warning of companies becoming to big to be doubted, it was also something of an exception.

A far more salutary indication of how large companies can go wrong is Kodak, which closed its doors last month. It failed dismally in adapting to the digital revolution, which swept away a company we once trusted to preserve our memories. Now, Kodak itself is a memory.

The darling stocks of our age are those companies whose footprint expands across the globe. Apple is an American company, but its products are known from Jakarta to Johannesburg. It's seen off rivals like HP and Samsung and continues to find new products the market will adore.

Amazon, too, is now an international company that happens to be based in the US. It's the world's largest online retailer and although it is facing competition from Apple, among others, it does not appear seriously threatened.

Facebook has also has joined the league of big companies with the announcement of its IPO last week. Investors will be hoping for a repeat of Google's performance, which has seen the internet search engine's stock climb 500 per cent since it was listed eight years ago.

But investing in the stars also has its risks. Analysts point out that they rarely pay dividends and are frequently more volatile than lesser-known stocks. During the market fall in 2007, Google stock lost twice as much as Johnson & Johnson, a regular dividend payer.

In some respects, these new giants are too young to have really proved their staying power. They need to begin showing profit instead of only producing skyrocketing growth. As they mature, however, they should settle down and start returning value to shareholders through dividends.

Microsoft is a good example of this. Regarded by many as long past its prime, the plodding software manufacturer hiked its dividend 25 per cent last year. It continues to deliver solid shareholder value. Despite the all-out assault on its business model, from free software like Linux to rampant piracy, it remains the undisputed leader in software provision.

The key with the new giants is, therefore, patience. They may well in time prove they earn the title "too big to fail".

Gavin du Venage is a business writer and entrepreneur based in South Africa.

pf@thenational.ae