China is Uninvestable.

Stocks based in the world's second largest economy are uninvestable again. Bernstein sales trading desk's Mark Schilsky said in a note on Monday, “This idea of Chinese stocks being uninvestable has been a recurring theme in the media over the past few weeks following the 20th National Congress of the CCP.” The meeting, which was supposed to give investors clarity and optimism moving forward, seems to have done the exact opposite, with the Golden Dragon Index—an index featuring 65 U.S.-listed Chinese businesses—plunging 14.5% after the event.

And by the way, if you're interested in analyzing some of these big U.S.-listed Chinese stocks, then definitely check out my Discovery collection I recently published over on Simply Wall Street. Link down in the description below. If you want, you can actually click through on each stock and see things like valuation, past performance, and financial health, etc. And if you did want to sign up for Simply Wall Street and get full access, at the moment, you can get 40% off an annual subscription.

But anyway, it's certainly no secret that following the National Congress, some of these big name Chinese stocks were absolutely crunched. In fact, names such as Alibaba, Tencent, JD.com, and Pinduoduo fell between 10% and 25% in a single day after it was revealed that there would be a major leadership reshuffle set to further consolidate Xi Jinping's power. It also didn't help that the event was shrouded in controversy as video emerged of former supreme leader Hu Jintao being escorted from the Great Hall of the People, supposedly due to medical reasons.

With six Xi loyalists announced as the new Politburo Standing Committee shortly thereafter, it's fair to say that foreign investors were very spooked, with their main concern being that Chinese economic policy could take a sharp turn back towards Maoism and will be less tolerant of the capitalistic advances originally implemented by Deng Xiaoping. In fact, in his address at the National Congress, Xi Jinping made a point to highlight some of those factors. He reaffirmed his desire for common prosperity, promising to improve income distribution and regulate the means of accumulating wealth.

He provided no update as to the possible easing of China's zero-COVID policy, instead claiming it is a great achievement at the party. On the Taiwan front, he reaffirmed the desire to bring Taiwan back under Chinese control and refused to rule out the use of force if necessary. Furthermore, Xi is also set to serve an unprecedented third term in office after he abolished term limits in 2018. He is now considered the most powerful man to ever lead China.

Now that's a lot to take in, but do these events make China as uninvestable as the media makes out? Well, I certainly wouldn't jump to that conclusion straight off the bat because here we do have to remember that the media's fundamental goal is not to inform but is to generate clicks. So naturally, the news around China will always trend towards fear and doom. After all, it's much easier to generate interest by saying, you know, "China is uninvestable," as opposed to saying something like, "Chinese businesses are strong and undervalued," but they just operate in a vastly different political and economic environment to our own.

Beyond that factor, we also have to remember that the media is also notoriously short-term focused. Because remember, in the world of financial markets, most players—not us, but most players—are trapped into short-term activity and literally can't take advantage of short-term carnage for long profits. Remember, Wall Street has to impress their clients every three months or the clients will just jump ship.

Or the analysts that are brought onto these TV programs, they're only ever looking at like the next three to six months. You know, if they make an investment that they're certain will do well in the next 10 years, but first it loses 50% in six months, it doesn't matter. Too bad, they've already been axed.

I actually want to give a huge shout-out to a friend of the channel, Sven Carly, who took the time in a recent video to look back on all the previous times the media was printing headlines that a particular investing scenario was supposedly uninvestable. He noted that two years ago, oil was uninvestable. I remember that one. In 2011, European stocks were uninvestable. And in 2009, all bank stocks weren't investable, too. What's interesting in each of these examples is that, in the short term, these particular stocks or commodities were very volatile, but over time, all of them proved to be wonderful short-term opportunities to make long-term profits.

Here, I think it's also worth remembering how the media presents information to support their narrative. For example, a lot of media attention was drawn to how the Politburo Standing Committee is now full of Xi loyalists so that Xi Jinping can run the perfect communist regime he's always dreamed of. You know, business in China is now dead—too bad, so sad. But it's worth noting that China’s new premier, Li Qiang—literally the second in command—doesn't fit that picture at all.

The Asia Times notes that Li is a tech-savvy supporter of high-tech entrepreneurship who believes that China's future lies in the digital economy. They note that “Li's appointment should be a wake-up call; the ubiquitous ideological blinders and preconceptions in the foreign policy establishment are the cause of a chronic misreading of China, leading to concomitant political reactions with dangerous implications and consequences.”

Li studied business administration and holds an MBA degree from Hong Kong Polytechnic University, a top-tier Asian business and technology school founded by Hong Kong tycoon Li Ka-Shing. He has supported technological entrepreneurship at the leading edge of China's development. Li was one of Jack Ma's most visible supporters in the China Communist Party leadership. He brought Elon Musk's Tesla to Shanghai. His appointment affirms the leadership's support for the private-led high-tech industry.

I mean, that certainly paints a different picture to what was being said in the Western media, right? It's a good demonstration of why we shouldn't always believe the media narratives that are pushed in front of us every day. But with that said, and to be balanced, I definitely do want to mention that investing in Chinese businesses certainly isn't without risk. There are definitely risks in investing in Chinese businesses right now.

I guess my point so far has really just been that we should avoid being swept up in media narratives that are often embellished, but there are certainly some risks—don't get me wrong. For example, there's still some risk of potential de-listings of Chinese businesses from American markets. There are risks that the Chinese government will regulate their big businesses and maybe meddle with exactly how profitable these businesses can be. There are even geopolitical risks surrounding Russia and Ukraine, and of course, Taiwan.

The point is it certainly isn't zero risk. But I think my mate Tom explained it best in his recent Q&A video. There are really two things that will matter when you make an investment. There tend to be elements of the investment case that are knowable and important, and there's also things that are unknowable but still important. The things that you're getting at here with the CCP and so on, those are things that are important, but they're not knowable.

So, um, I would say if you are interested in investing in some of those businesses, you know, you have to keep some of the potential risks in mind. I think you've got to just allocate a portion of your portfolio, you know, appropriately for your risk tolerance based on the unknowable risks that are out there. Once you're over that hurdle, I think you just focus on the business like any other stock. I think that's the way you really need to look at this.

Don't pretend the risks don't exist; they do. But Tom also made a great point in that video, and Sven made a good point in his video, that right now a lot of these Chinese stocks are so cheap that provided you don't YOLO 100% of your portfolio into these stocks, in a lot of cases, you're being offered more than a healthy discount in order to take on that added risk.

So then if you are comfortable with taking on that risk, as Tom says, then it's all about what you're actually buying, which is a business. With that in mind, for the last part of this video, I want to break through what's being focused on in the media and instead listen to some of my favorite investors talking about China, and importantly, talking about the actual businesses rather than just the politics.

So stick around through these clips because I think they're quite eye-opening. Let's start with Howard Marks talking about how he views investing in China. “So in the last six months or so, we've seen people say China is not investable. That's the word: uninvestable. Now my ears perk up when I hear that because if nothing else, it introduces the possibility that China is cheap. It's not overpriced; maybe it's underpriced. Maybe it's something one should do.

Europe and Japan are economic senior citizens—not much vitality. The U.S. is a mature economic adult doing fine, but I would argue that the best decades are behind us. China is an economic adolescent, and if you've ever had a national adolescent in your house, as I have, then you know it can be tempestuous and there are ups and downs, but you also know that the adolescent's best decades lie ahead.

I happen to believe that China wants to be a member of the world community, and Shanghai, for example, wants to be one of the world's centers of finance.” Interesting perspective about China wanting to be part of the capitalistic worlds that we all live in. There's been a lot of evidence in that direction, too, despite what the media are trying to push—you know, communism with Chinese characteristics, right? The Chinese characteristics, of course, being an add-on to describe the elements of capitalism that they've now adopted.

So that's Howard Marks' opinion. Now next up, let's hear from Monish Pabrai on how he views this space. “In the case of the large players in Chinese tech, they're pretty high-quality players, but in many cases, the rules were not defined. And so, you know, in a wild west scenario, you're not really breaking any laws; you're just reading with what's acceptable in the wild west.

And I think the Chinese government coming down and saying, ‘Hey, wait a minute, I think some of these things, if we tweak it somewhat, at the end of the day, we end up with a better ecosystem.’ What's your overall thesis with Alibaba? Well, it's an incredible business. I mean, if you look at Alibaba and Tencent and kind of where they're at and the ecosystem and the mode and what they control, and look at the tailwinds from China, I mean, there’s a lot to me to like, even more than the large U.S. tech.

I think Alibaba is a crown jewel for China, just like Tencent is the crown jewel for them. I don't think they will want to do things—these are the plays that can have the possibility of global footprints that they can get there. So I don't think the government is going to take an approach which is going to, you know, kill the golden goose, if you will.

Well, my take is they've extracted their pound of flesh, and they've sent a pretty clear message: Who's in charge? I don't really expect much more than what we've seen already.” Again, interesting views. Very much of the opinion that these big Chinese companies are very high-quality businesses. That's certainly different to what you hear in the media, isn't it?

And I really like his point too about how the CCP would be foolish to crack down further on their biggest businesses. It makes sense, right? But again, the media don't really want to write about that. Anyway, that was Monish Pabrai's viewpoint. What about Monish's close friend, Guy Spier?

“Now we go to Alibaba. I think that the company, as best I can understand, has reached a degree of centrality in the Chinese economy and in the global economy that, as China grows, in spite of everything, all the other noise that is going on, it is extremely likely to be lifted. In spite of not having Jack Ma at the helm anymore, it seems to me that that's the kind of analysis that Charlie Munger has done.

It's in this unusual place of being part of the retail infrastructure of China and of the world while, at the same time, having some really, really good economics going on around it. The other sort of blockbuster company in China, Tencent—going back to my earlier point about analyzing stakeholders and doing real sustainability analysis—I have a huge problem with gaming companies because I think that many of those games are rotting the minds of our young people.

It's interesting to me that the Chinese Communist Party decided to ban children from playing more than one hour a week. So for me, gaming companies may be the new tobacco, and I think that's part of the reason why he was not interested in Tencent. Last piece of the analysis: I happen to know—this is a kind of inference—he's got a huge investment with Li Lu. Li Lu has an extraordinarily good understanding of China. Li Lu is this Chinese and very, very genius investor, and so that leads me to believe that Charlie Munger has a deep understanding of the place of Alibaba, not just in Chinese business but the way the Communist Party sees Alibaba.

I also bought some Alibaba. What I did was I sized the position right for—I sized it well below what would have been right for me. I think often the answer when you're investing in public markets is position sizing. You're very lucky; you can go, especially if you're on a small fund, in many, many of the businesses that are out there. You can go as large or as small as you like.”

I find that last bit very interesting as this circles back to what Tom was saying before. There are risks, no doubt, but if you're comfortable with taking on some risk, then the great thing is you can just size your positions according to your risk tolerance. It's also interesting hearing how much faith Guy has in Charlie Munger as well in those clips. He definitely backs him in, doesn't he?

With that said, lastly, let's hear from the man himself. “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. Other people, including Sequoia, the leading Venture Capital firm in the United States, have made the same decision.

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. It's becoming quite evident that Chinese companies could be banned from doing business in the Western world or maybe some of the Eastern countries too because of a number of the following reasons: one, the security threat issues; two, the potential conflict over Taiwan; three, inability to meet Western accounting standards; and number four, human rights issues.

Considering all of the risks mentioned above, why would anyone as smart as Munger or Buffett consider investing in China or any of the Chinese companies? Well, we did a very simple reason: we got more strength 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 charge.”

There you go. For Charlie, he's almost totally focusing on the underlying businesses and actually giving very little attention to the macro and to the political factors of investing in China. But again, that's the difference between a super investor and a media outlet. Imagine a media outlet writing a story about China along the lines of what Charlie just said; there's just no way.

But guys, with that said, those are my thoughts on whether China is currently uninvestable, and they are the super investors' thoughts on investing in China as well. Now, once again, I don't want this video to swing you one way or another on potentially buying any of these Chinese stocks. People call me an influencer, but in truth, that's the exact opposite of what I'm trying to do.

I am not trying to influence you in any way, so please do your own due diligence, you know, as always. But overall, what I hope that you take away from this video is really just that oftentimes what you see in the media is really just a lot of noise and you really shouldn't believe everything that you read. But with that said, guys, thanks very much for tuning in and, you know, listening all the way through this video. Make sure you leave a like if you did enjoy it and subscribe if you'd like to see similar videos in the future.

But apart from that, guys, thanks very much for watching, and I'll see you all in the next video.