Charlie Munger SELLS 50% of Alibaba Stock!

Well, big news, guys! I just got back from Melbourne. I'm extremely tired, but Charlie Munger just halved his position in Alibaba. He's always very quick to release the 13F filings right after the quarter ends, and he has done so once again.

So, it showed that the Daily Journal Corporation halved their stake in Alibaba during Q1. They halved it! I mean, 12 months ago he bought 165,000 shares. In Q3, he bought 136,000; then Q4, he loaded up the truck, buying 300,000 shares. Now, in Q1, he's basically just turned around and sold 300,000 shares.

So, this is obviously pretty big news in the value investing community. You know, Charlie Munger is one of the most successful value investors out there, and Alibaba is one of the most talked about stocks in the value investing community. So, in this video, you know, let's talk about it! What are some of the highest probability reasons that the Daily Journal Corp has just done this?

If we start with the most obvious, I think the first potential explanation for this move is that Charlie has just seen some sort of fundamental change to the business, right? I mean, that's one of the two big reasons why a value investor might sell. A stock gets either hideously expensive, or, you know, fundamentally the story changes.

Now, personally, I think this is less likely. It's not impossible, but I think it's less likely. The reason I think that is that, generally speaking, the risks of an Alibaba investment, to me anyway, seemed to have been slowly dissipating over time. You know, there was a delisting risk because of the Holding Foreign Companies Accountable Act, where China was not allowing the PCAOB to inspect the Chinese company's auditing firms. Recently, we've seen that China is actually telling the accounting firms to prepare for joint inspections.

Then, of course, there were the risks associated with the VIE structures and whether China was going to ask the foreign listed companies to delist or maybe just abolish the VIE structure. Again, the CSRC came out and said quite clearly that that's not what they're trying to accomplish. There was also the risk of a prolonged tech crackdown and increased regulation.

Now, China has announced that they want to get this done sooner rather than later. They want to finalize that as soon as they can. So, a lot of these risks have been dissipating over time. However, you know, I don't want to downplay the fact that there are still risks, and maybe Charlie has said, you know, “What? I feel like the story has now changed.”

I mean, there are still questions around the economic slowdown in China, there's questions around slowing growth within the company, and there's even risks of potential economic consequences for China generally if they end up siding with Russia regarding the conflict in Ukraine. So, maybe Charlie just sees some of these issues and, you know, he feels like the story's changed. He just doesn't want to be a part of it anymore. That could be a possibility.

But if that's truly the case, you also have to ask, why would he only sell half? You know, maybe he was only able to sell 50% of the stake before the end of the quarter, and he'll sell the rest in Q2. But, I don't know. I wouldn't imagine the Daily Journal owns enough stock that they need to move particularly slowly.

But anyway, that is potential reason number one. And then the next one I want to talk about is tax loss harvesting. Of course, we know that capital losses can offset capital gains and can, of course, reduce your tax bill. Thus, a lot of investors like to take advantage of locking in a loss for the old tax bill, only to buy back in later at a lower cost basis. It gives them that immediate tax benefit, I suppose.

So maybe Charlie is doing exactly what Monash Pabrai did when he sold Alibaba. He's harvesting a big capital loss while it's sitting there right in front of him. Because remember, Charlie was originally buying back when the stock was somewhere around like $230 per share, whereas today it sits at about $100 per share. So for him, there would be a significant paper loss that he could materialize. He could lock that in, so that very well could be a potential reason if he knows he's got big realized capital gains in whatever their current tax year is.

So that's definitely a potential hypothesis. But then from there, the next hypothesis for, you know, this sell by Charlie is that maybe he's converted 50% of the position into, you know, the Hong Kong listed shares. As we've seen, a lot of investors have been converting the ADRs across to Hong Kong shares, just to cover the risk of a potential USD listing, I suppose.

And this is interesting because if he were to do this, then on the 13F filing, which is what we just got, it would look exactly like what we're seeing. You know, it would look like a 50% reduction in the position because, of course, the 13F just reports U.S. listed positions. It doesn't tell you what they've bought in London, or in Australia, or in Hong Kong.

So it could be the case that Charlie has decided to switch a fair amount of the holding over to Hong Kong, and that would also give him another benefit. It would give him flexibility to alter the position during both Hong Kong trading hours and also American trading hours, which is, that's another little perk.

However, again, this hypothesis does raise the question, you know, if you're concerned about the USD listing risk, why would you only transition half of your position over? It doesn't quite add up. The only potential there is that maybe he wanted to transfer the entire position, but as we were talking about before, he only got 50% of it done by the close of the quarter.

So we'll have to wait and see what he does, you know, in the next quarter for this potential explanation. But, anyway, moving on, then the next big reason—the next potential reason behind this Alibaba sell—is that maybe Charlie just saw another opportunity elsewhere that he wanted to take advantage of.

And this could be the case if he's found a new stock that's outside the U.S. because that wouldn't show up in a 13-F filing. It also makes sense that he'd probably have to sell a position to buy something else, because it wasn't that long ago that Charlie himself was saying that he's used up all of the Daily Journal's excess cash. “My whole adult life, I've never heard cash waiting for better conditions. I've just invested in the best thing I guess I could find, and I don't think I'm going to change now.”

And the Daily Journal's used up its cash. Now, Berkshire has excess cash. Now, of course, yes, they still do have cash sitting on their balance sheet, but it's kind of like the DJ Koh's emergency fund. So it's interesting to hear Charlie say that they've, you know, spent all of their excess cash. Thus, to finance a different bet, they probably have to shrink a pre-existing bet.

So maybe that's what's happened here. And remember, interestingly, that is exactly what Monash Pabrai did when he sold his Alibaba position. He sold out of Alibaba to then go over and put that money into Tencent. Yes, he did, you know, do a little bit of tax loss harvesting along the way, but the primary reason he sold Alibaba was to go over and buy Tencent because he thought that it was a better business that was also very, very cheap.

So this could very well be the case with Charlie as well. But, you know, what would he have bought? I mean, honestly, I have no idea. However, you know, based on the 13F filing, clearly it's nothing that is within the United States.

But then with that said, that leads us to the last two potential reasons why he might have sold 50% of his Alibaba stake. I think these are very, very interesting reasons and honestly something I didn't even think about until I saw them float up online.

So the next thing I wanted to discuss is, was it actually Charlie that sold these shares? Because, as we know, recently Charlie actually stepped down as the chairman of the Daily Journal Corp, meaning that his place is now taken by Stephen Michael Jones. So it's not out of the realm of possibility that Stephen, who's also the interim CEO after Jerry Salzman stepped down, could have seen the exposure that the Daily Journal's equity portfolio has to China and maybe didn't like that.

So maybe reduced their exposure to Alibaba by 50%. So, this to me is very interesting because, you know, what's changed? We see the Daily Journal buying, buying, buying Alibaba for a whole year as it drops further and further, and then the company turns around and sells 50% of the position the very same quarter that Charlie Munger steps down as chairman. Sounds like there could be something to that.

However, on the flip side, reports out of the company did say that Charlie Munger will continue serving as a director and, as such, will continue to pay particular attention to matters with which he has been involved in the past, including the company's securities portfolio. So this is a tricky one.

There's evidence to suggest that this hypothesis could be right, as evidenced to suggest that it also could be wrong. So I'd definitely be interested; let me know what you think down in the comments section below.

But with that said, that does lead me to the last potential reason that I can think of, anyway, as to why the Daily Journal cut their Alibaba position in half, and that is to potentially deleverage the portfolio. You know, without being an expert in the Daily Journal Corporation, I was very interested to hear Charlie Munger talking recently about how he actually uses margin in the Daily Journal portfolio, even though he's generally against margin in principle.

And have a look at this: from Q3 to Q4, the margin debt rose from $32 million to $69 million, and the only thing that happened in the portfolio was that he bought more Alibaba. So maybe he's now just realizing that maybe the margin loan really isn't worth it.

I mean, the Daily Journal wouldn't have anything to worry about if they did get a margin call, but it's still not something that most investors want to, you know, have to worry about, I suppose. So maybe he's just saying, “You know what? Owning more Alibaba on margin just probably isn't worth the risk, so I'm just going to deleverage.” That's also definitely a possibility.

But again, who knows for sure? Maybe it was also a call from the new CEO. Maybe he's not happy with the margin debt and he wants to reduce that risk, so we just can't be sure.

But overall, I guess they are my hypotheses. So definitely let me know which one you subscribe to more in the comment section below. And also let me know if I've missed any—if I've just, like, missed a potential hypothesis as to why he might have reduced 50%. But I think those six different reasons are probably the six, you know, possible outcomes.

But anyway, let me know down in the comment section below. If you like this video, guys, leave a like on it; I would definitely appreciate it. Subscribe to the channel, and that's it from me. I'm gonna go have a sleep because I'm so tired. I got back from Melbourne yesterday, but anyway, that's a whole nother story.

Thank you very much for watching, guys, and I'll talk to you in the next video!