Charlie Munger Just DOUBLED His Alibaba Position!

Well guys, welcome to the new office. I was actually going to leave. I was going to have Sunday’s video be the first one where we’re actually in the office. But of course, right after I recorded that video, we have big breaking news from the one and only Charlie Munger regarding Alibaba.

And you know, at this point, we all know the story with Alibaba. It's a very strong company that's very important in the context of China's growing economy. In fact, there are 1.4 billion people living in China, of which 1.2 billion have access to the internet. And guess what? Alibaba has 953 million active annual customers in China. So fair to say it's one of China's most important companies.

However, as we've seen, a lot of question marks have loomed over the stock in the past year or so. You know, increased regulation, de-listing from the New York Stock Exchange. Of course, the Ant IPO was blocked, and this multitude of issues led the stock to tank around 50 percent. But it's also enticed a lot of big-name value investors to buy into Alibaba. Of course, we've seen Charlie Munger, Ray Dalio, Guy Spier, Monish Pabrai, although yes, he did sell out recently to harvest that capital loss and instead put that money into Tencent. But regardless, it's been a very popular stock amongst value investors, most notably our good friend Charlie Munger.

And with Q4 2021 now over, Charlie's been very quick on the buzzer and has actually already released his quarterly 13F filing, which shows, you guessed it, a lot more buying of Alibaba. So in this video, let's talk about exactly what he's done with his Alibaba position, and let's have a chat about why he's done it.

So for those that don't know, Charlie manages money as the chairman of the Daily Journal Corporation, and he is the master of doing absolutely nothing with his stock portfolio. One of Charlie's core investing philosophies is to act very infrequently, by only when you're looking at a smack bang home run. Apart from that, spend most of your time waiting, accumulating cash, and waiting for those golden opportunities. And he certainly practices what he preaches.

If you look at the 13F history for the Daily Journal Corporation from Q4 2013 to Q4 2020, that portfolio really had not changed. No new stocks were bought, no stocks were sold. The 13F showed four stocks: Posco, USBancorp, Bank of America, and Wells Fargo, and they more or less stayed in that order. But then in Q1 2021, Charlie bought a new stock, which was, of course, Alibaba. He bought somewhere between $220 and $270 per share, and this made big headlines at the time, particularly because the investing world was really starting to freak out about China’s crackdown on U.S. listed Chinese businesses. So this move by Charlie Munger kind of made us perk our ears up and pay more attention to Alibaba as a business.

But then strangely, in Q2, as the stock continued to slide, Charlie didn’t add to his position. Honestly, this is very strange behavior from Charlie. He's not one to stop buying a great company if it keeps getting cheaper. But those concerns were laid to rest in Q3 as Charlie added 81% to his position as the stock fell as low as $148 per share.

But then we get to Q4. The stock really tanked hard in Q4. It fell to a 52-week low of $108 per share. And as we've just found out a few days ago, Charlie, sticking true to his investment strategy, has continued to buy. He just doubled his Alibaba stake. In fact, he bought 300,000 shares, taking his tally up past 600,000 shares. This position now occupies 27% of his portfolio, almost the same amount as his Wells Fargo position.

So no hesitation this quarter from Charlie Munger. You know, when one of the stocks he likes continues to fall, he continues to buy. And this aligns perfectly with this strategy. He's definitely in the camp of averaging down if he can, because in his eyes, one of his stocks falling further just represents the opportunity getting better and better. So he's stepping up to the plate, and that's a very important trait to have as an investor: having the conviction to continue to buy when the price is falling, and quite dramatically.

But that confidence to act decisively only comes from having a thorough understanding of the business, and that's definitely what Charlie has in this instance. Charlie has studied not only Alibaba, but he's gone in depth on the whole economic and political system of China. And because he's done that, that knowledge gives him the confidence to buy even though the media continues to spit out lots of worrying articles about, you know, delisting risks, tech crackdowns, blocked IPOs, etc.

Just have a listen to Charlie's conviction when he's asked these questions about China and Alibaba. What are your current thoughts on China and whether the communist leaders will allow businesses with strong leadership to flourish in decades to come?

“Well, I think that the Chinese government will allow businesses to flourish. It was one of the most remarkable things that ever happened in the history of the world when a bunch of committed communists just looked at the prosperity of places like Singapore and said, ‘The hell with this. We’re not going to stay here in poverty. We’re going to copy what works.’ And they changed communism. They just accepted Adam Smith and added it to their communism. And now we have communism with Chinese characteristics, which is China with a free market, with a bunch of billionaires and so forth. And they made that shift. They deserve a lot of credit. Warren and I are not quite as good at that as changing our minds in many cases, and that was a remarkable change coming from such a place. And of course, it's worked like gangbusters. It has enormous growth in the average income of the average Chinese. They've lifted 800 million people out of poverty fast, and there’s never anything like it in the history of the world. So my hat is off to the Chinese, and I think they will continue to allow people to make money. They've learned it works. The Chinese, I love what the guy said in the first place: ‘I don’t care whether the cat is black and white as long as it catches mice.’ That's my kind of talk.”

Mr. Munger is a champion of Chinese stocks. How concerned is he about Chinese government interference as seen recently with Ant Financial, Alibaba, and Mr. Jack Ma? What, for example, is to stop the Chinese government from simply deciding one day to nationalize BYD?

“Well, I consider that very unlikely. And I think Jack Ma was very arrogant to be telling the Chinese government how dumb they were and how stupid their policies were and so forth, considering their system. That is not what he should have been doing. I think the Chinese have behaved very, very shrewdly in managing their economy, and they've gotten better results than we have in managing our economy. And I think that that will probably continue. And sure, we all love the kind of civilization we have. I'm not saying I want to live in China; I prefer the United States, but I do admire what the Chinese have done. How can you not? Nobody else has ever taken a big country out of poverty so fast and so long. And what I see in China now just staggers me. There are factories in China that are just absolutely full of robots and are working beautifully. They're no longer using peasant girls to beat the brains out of our little shoe companies in America.”

So Charlie has taken the time to study China's economic system. He understands the political system, and this enables him to quickly shoot down these media narratives and also gives him confidence to buy more shares. And now, fast forward a few months, now even the China Securities Regulatory Commission are starting to shoot down some of these false narratives being pushed by the media as well. They've recently confirmed they aren't looking to force U.S. listed Chinese stocks to de-list. They aren't looking to ban the VIE structure. They aren't looking to destroy China's biggest businesses, that is not what they're about. In fact, the more you look into it, the more you realize that the CCP is just doing the right thing.

They reigned in the for-profit education industry because it was getting corrupt. They imposed a big anti-trust fine on Alibaba because they were abusing their monopolistic power. They're actually acting incredibly predictably. Their actions aren't unpredictable in the slightest. But as I said, being able to cut through all this negative media noise just comes back to how well you understand the business.

But that's not the only reason that Charlie Munger continues to buy Alibaba. There are, of course, three more pillars to his value investing approach. There's, of course, the moat, there's the management, and there's the margin of safety. So let's also cover those three points as well.

So firstly, when it comes to a competitive advantage, of course, Alibaba has their iron triangle. This consists of Alipay, Cainiao, and then the e-commerce sites Taobao and Tmall in China. And it's this combination of a really solid payments platform as well as great logistics that's what's really helped shield the e-commerce businesses in China, the Taobao and Tmall, which has obviously helped them grow for the most part without serious competition. Their moat really just comes from thinking about the entire e-commerce experience and ensuring there are no fault points along the way, and they've done that really well, very similar to kind of Amazon's approach.

So then, in terms of management, yeah, you could actually argue that there was a bit of a lack of integrity there, as they have been found to be using their monopolistic position to try and gain further advantages. However, the Chinese government has cracked down on this. They slapped a big anti-trust fine on them after they implemented a rule where merchants could sell on Alibaba or on another e-commerce site but they couldn’t sell on both, so Alibaba got fined for that. And they also made a generous donation for common prosperity, which yes, was forced by the CCP, but I think they've definitely learned their lesson there and understand that the CCP is watching them very closely.

So that’s the integrity side of management. But obviously, in terms of the management's skill, you cannot argue that the management team isn’t doing a good job with this business. They've got a minimum of 10% return on invested capital over the past 10 years, with a median of 15.3%. They've got about $23 billion in debt total, but they've got about $50 billion in cash. They've also been able to grow the business really, really well over a long period of time and are still, to this day, posting great growth despite the company's size. So in terms of skill, I think the management team is doing a fantastic job.

So that's the third pillar. And then, of course, the fourth pillar of Charlie Munger's approach is valuation. And this is no doubt a big factor in the Alibaba story for Charlie Munger. And for those that don't know, Charlie is an investor who simply won't invest unless he's getting a big fat margin of safety, a big buffer between the share price and his calculated intrinsic value.

Have a listen to how he explains it: “No matter how wonderful it is, it's not worth an infinite price. So we have to have a price that makes sense and gives a margin of safety considering the natural vicissitudes of life.” So he always looks for a margin of safety to protect against the natural vicissitudes of life.

But now, think about this. He first started buying Alibaba probably in the low $200s, let’s say $240 as a guess. The share price today sits at $126 per share. That's 50% lower than when he first started buying, aka that's 50% lower than his first margin of safety price. So I'm not surprised at all that Charlie has doubled up this quarter because the stock now sits considerably lower than his original margin of safety price. Thus, the more he buys now, the more he de-risks the possibility of permanent loss of capital.

So in my opinion, that's overall why Charlie Munger continues to buy into Alibaba. It's a high conviction bet. The company has a great moat. The management team has done well, and now it's a hell of a lot cheaper than his original margin of safety price. Why wouldn’t he keep buying?

So that's my thoughts on the matter. But obviously, definitely let me know your opinion as well in the comments below. You know, do you think as Charlie does and Alibaba presents a golden opportunity, or do you think he's missing something major, and we really should be avoiding the U.S.-listed Chinese stocks? So definitely let me know down in the comments section below.

But that will do us for this video, guys. Thanks very much for watching. Leave a like on the video if you did enjoy it or if you found it useful. Subscribe to the channel if you haven't done so already. Join New Money for 2022. There's going to be a lot of content coming out on the channel, all things stock market investing in 2022, so make sure you're subscribed. If you're interested, check out Profit4 if you want to learn about how I go about my investing, either passive investing or active investing, following the same four principles or core investment philosophies that Charlie Munger uses in his investing approach that we spoke about today.

You can check out Introduction to Stock Analysis if that's something that interests you, and you want a full in-depth, step-by-step course. But apart from that, guys, that will just about do us for today. Thank you very much for watching, and I'll see you guys in the next video.