Charlie Munger's Final Call on Alibaba Stock.

Charlie Munger, despite being 98 years old, is without doubt one of the smartest minds that lives today. From a young man who simply dreamed of financial independence, he's now worked alongside Warren Buffett to not only become a multi-billionaire but also one of the best value investors the world has ever seen. And that's why, when it was revealed he was buying into the Chinese tech giant Alibaba in Q1 of 2021, the investing world stopped to listen.

He started buying shares in the low 200s, and as Alibaba continued to fall, he continued to buy. In Q3 2021, he nearly doubled his position, and then in Q4, he doubled it again. Charlie was quite literally doubling down on this one. But then something that no one expected occurred. In Q1 of 2022, we got the shock of the century when Charlie's 13F showed he had, in fact, cut half of his Alibaba position. He sold 302,060 shares, 50.17% of his position, and that really triggered speculation: was he simply tax loss harvesting, or did he just admit that he'd made a very big mistake?

Well, just last week, Charlie Munger released his updated 13F for Q2 of 2022. I think we finally might have the conclusive answer.

Now, one thing to note about Charlie Munger: he is the master of doing nothing, and I mean that in the best possible way. 99% of his investing is simply waiting. One of his most famous quotes is, "You don't make money when you buy, and you don't make money when you sell; you make money when you wait." Charlie is the master of patience, and he can go very long periods without actually doing anything. For example, before he bought Alibaba in 2021, his next most recent portfolio activity was buying Posco shares back in 2014.

So when you see Charlie doing nothing, it really means all is well. If we take a look at his Q2 13F filing, have a look: he did absolutely nothing. And by the way, for those wondering if the Daily Journal Corporation's portfolio is even managed by Charlie anymore, I do believe it is. Yes, Charlie did step down as the chairman of the Daily Journal Corporation this year; however, in that filing, the Daily Journal noted that Mr. Munger intends to remain on the board and to continue to pay particular attention to matters with which he has been involved in the past, including the company's securities portfolio.

So, I think, long story short, the 13F filings still do give us insight into what Charlie is thinking. And as I was saying, if we turn to the Q2 2022 13F filing, nothing whatsoever—no buying, no selling. And despite this lack of activity, I do actually think this gives us all the clarity we need on Charlie's thoughts surrounding Alibaba. In short, he thinks it's a wonderful business, and he wants to hold it for the long term.

I can absolutely guarantee you if Charlie thought he had made a genuine mistake on this one, there's no way he would have stopped selling at 50%. He's not that kind of investor. If he wanted out, we would have seen this filing say Alibaba reduced 100%. To be honest, this information lines up perfectly with what Charlie has previously said about investing in China and in Alibaba specifically.

As a refresher, I want to play everything Charlie said on China and Alibaba on the 17th of February this year. Take a listen to what he was saying back then.

"In January, Jeff Gundlach was quoted, 'China is uninvestable in my opinion at this point. Why is that? I don't trust the data. I don't trust the relationship between the United States and China anymore. I think that investments in China could be confiscated. I think there's a risk of that.'"

"Obviously, with a significant percentage of the Daily Journal's marketable securities invested in BYD and Alibaba, you feel differently. Please explain why you are right."

"Well, of course, only the future knows who's going to be right. But China is a big modern nation; it's got this huge population and this huge modernity that's come in the last 30 years. We invested some money in China because we could get more value in terms of the strength of the enterprise and the price of the security than we could get in the United States. When you buy Alibaba, you do get a sort of a derivative, but assuming there's a reasonable honor among civilized nations, that risk doesn't seem all that big to me."

"Why would anyone as smart as Munger or Buffett consider investing in China or any of the Chinese companies?"

"Well, we did for a very, very simple reason: we got more strengths per dollar invested in China. The companies we invest in are stronger relative to their competition and priced lower. That's why we're in China."

"Why doesn't Buffett buy Alibaba?"

"Warren, like many other intelligent people, likes to invest where he's personally comfortable, and for some reason, I'm more comfortable with the Chinese than he is. That's a minor difference, but I have all kinds of places where I'm just like Warren, and I have all kinds of things where I'm not comfortable, and I just don't go near them. I think an old guy's entitled to invest where he wants to invest in what makes him uncomfortable. What do you know? It's okay to have some things that you just don't want to bother with."

"I don't think Alibaba is as entrenched as something like Apple and Alphabet. I think the internet is going to be a very competitive place even if you're a big internet retailer."

Now, as I said, this was on the 17th of February—that's right in the middle of the quarter that he reduced his Alibaba stake by 50. To me, those clips do not sound like someone who suddenly turned doom and gloom on their latest stock purchase, right? And I certainly don't think Charlie is a hypocrite either.

So this and the fact that he's stopped selling now in Q2 definitely proves that Charlie was just tax loss harvesting in Q1. So what does that mean? Well, if you don't know, in many countries around the world, you can lock in capital losses to offset the tax you pay on future capital gains. Hence, a lot of people that are making big profits will actually look to lock in losses on positions they're currently down on to reduce their tax bill.

The idea here is that then they can buy back into the company 31 days later to circumvent the wash sale rule and hopefully, it's still at a very depressed price. And what was really interesting in this case, if we look at the exact amount of shares Charlie sold in Q1 of this year, it wasn't 300,000 shares; it was very specific: 302,060 shares. That number happens to be the exact amount of shares he bought in Q1 and Q2 combined: 165,320 plus 130,740 equals 302,060 shares.

So what this tells us is that Charlie wants to hold about 300,000 shares. So he's accumulated 302,060 shares across Q1 and Q2 last year, realized he was down huge on paper, so he bought another packet of 300,000 shares in Q4 2021 at the heavily depressed prices around 110, 120.

Then in Q1, he locked in his loss by selling the original 302,060 shares. And because the accounting works on a first-in, first-out basis, he gets to keep the roughly 50% loss on the first packet of 300,000 shares for the tax benefit and then reset his position's entry point to the heavily depressed levels for the long term.

So that is, in my opinion, Charlie Munger's position on Alibaba. This one is going to be a long-term hold for the Daily Journal Corporation. To be perfectly honest, I think he's made this investment with a time horizon that's actually longer than he knows he's going to live.

I think that people understand with their sort of BYD investments and others that he may have the stomach kind of long term for 77. Yeah, I mean, yeah, long term, listen, you know, he thinks with a 30-year timer.

But with that said, I don't want this video to come across as some sort of hype video for Alibaba, and just because Charlie Munger looks to be holding this one for the long term doesn't necessarily mean that it's right for you as well. Of course, as we've seen, this stock has been extremely volatile in the short term. In just 12 months, the stock has both fallen 62% and risen 42%.

And that's because, as we know, there have been a few volatile issues with Chinese stocks at the present time. For example, China has said several times they're looking to push stronger regulations on their big tech giants. We're yet to see the extent of those new rules. Now, in fairness, they've recently announced that they intend to get that over and done with sooner rather than later. However, it is still a long, long-term risk with the way that their government likes to control their economy and their corporations.

There's also the risks surrounding the Holding Foreign Companies Accountable Act. Ever since it was found that US-listed Chinese company Luckin Coffee was found to be fudging their numbers, the US has said we need the Public Company Accounting Oversight Board to be able to audit the books of these Chinese companies in order for them to remain listed in the US. And the outcome of that has yet to be finalized.

Again, both China and the US state that they're working collaboratively to ensure that this does get done, but it's still a risk. So I'm definitely not trying to tell you that because Charlie Munger owns it, there is no risk. There are certainly risks, and in fact, even Charlie Munger himself isn't trying to convince you.

"Well, those are good questions, and there's no question about the fact that the government of China has worried the investors from the United States to invest in China more in recent months and years than he did in earlier periods. So there's been some tension, and it's affected the prices of some of the Chinese stocks, particularly internet stocks. Just in the last day or two, the Chinese leader has sort of reversed course on that and said he went too far and he's going to pull way back and so on and so forth. So we're having some hopeful signs. But yes, there are more difficulties investing, I mean, dealing with the regime in China than there are in the United States. And it's different; it's a long way away, and they have their own culture and their own loyalties and so on and so forth."

"The reason that I invested in China is I could get so much more, so much better companies at so much lower prices. I'm willing to take a little political risk to get into the better companies at the lower prices. Other people might reach the opposite conclusion, and everybody is more worried about China now than they were two or three years ago. So that's just the way it is; I have nothing to add."

So ultimately, it comes down to how you personally judge those risks. I think most people would actually agree that, you know, Alibaba is a pretty strong business, and it looks fairly cheap. I mean, if we just look over to Simply Wall Street, they get a six out of six for financial health. It has a healthy balance sheet, the debt to equity ratio is healthy and improving, and the debts are well covered by their operating cash flow. Quick FS shows the long-term growth of revenue, EPS, and free cash flow is all really solid.

The management's median 10-year return on investor capital is up around 15%, plus it currently trades at 13 times free cash flow. A few months ago, it traded at nine times free cash flow. I think most people would agree that it's pretty solid and it's pretty cheap. But whether it becomes a stock that you put on your personal watch list? Well, that's up to your own judgment on those political risks.

And here's the beautiful thing: if you decide that this one is outside your comfort zone, it's okay to stick it in the "too hard" pile. Because, luckily for us, we're actually entering into an economic period where a lot of quality businesses are shedding 10%, 20%, 30% of their market cap.

So if you may be one of those investors that was considering Alibaba last year because you just couldn't find anything else that was cheap right now, forget trying to stretch your circle of competence to cover Alibaba. You probably don't even need to. Just look at your own watch list, and you'll probably find something that's pretty awesome. Because at the end of the day, the absolute biggest rule of investing is, first and foremost, understand what you're buying, because that's the easiest way to ensure that you don't lose money.

So definitely don't stretch. If this one's in the "too hard" pile, that's all good. But anyway, guys, that is the Charlie Munger Alibaba story. I think this is honestly where the tale ends, because knowing how Charlie invests, you know, I don't think we're going to see any activity on this for a very long time.

But definitely let me know your thoughts. You know, do you feel comfortable investing in these Chinese stocks, or have you stayed well clear of them? Also, big thanks to Simply Wall Street for making this video possible. That will be linked down in the description if you wanted to get access to the analysis software that I've been using. There's also a 30% discount for you guys as well if you wanted to check that out.

Thank you very much for watching! Of course, leave a like on the video if you did enjoy it. But apart from that, I'll see you guys in the next video.