Charlie Munger on Investing in China and Alibaba Stock

All right, we're back with more from Charlie Monga's recent Q&A session at the Daily Journal Corporation's annual shareholder meeting.

So, last time we spoke about Charlie's thoughts on inflation and interest rates. Um, I'll link to that video if you haven't seen it already. But this time, we're going to be diving into another very hot topic. We're going to watch through everything Charlie said on investing in China and also the comments he made on his position in Alibaba.

Now, before we get started, I did just want to warn you, you know, obviously Charlie holds investments in China. I hold investments in China. Charlie holds Alibaba stock. I hold Alibaba stock. And while I'll never try and influence your opinion on a stock, I'm not trying to suggest that you buy something or hold something or sell anything.

Um, just be aware of a video like this influencing your own confirmation bias because, of course, Charlie is probably going to talk about investing in China and Alibaba in a very positive light. But with that said, let's get straight into the first clip.

This one is Charlie talking broadly about investing in China in the current political climate, so let's take a listen.

"Although the financials seem strong, do the political pressures from the Chinese government worry you um at all?"

"Well, the Chinese government is worrying all the capitalists in the world way more than it used to. And of course, we don't like that, and we wish that China and the United States got along better. And if you stop to think about it, think of how massively stupid both China and the United States have been to allow the existing tensions to arise. What bad is ever going to happen to China or the United States if we two are close? If we make good friends out of the Chinese and vice versa, who in the hell is ever going to bother us? Of course, we should make friends with China, and of course, we should learn to get along with people who have a different system of government."

Charlie raises a really interesting point here. Is the rise in tension between the US and China actually the best political strategy? Probably not. I never really stopped to think about this, but imagine a world where the US and China were close allies.

I mean, you'd have nothing but prosperity for all the people in America and in China because the two largest economies would have each other's backs. You'd probably have less geopolitical tensions worldwide as everywhere else on Earth would know that you have to deal with China or America if you're being naughty.

So, I think that's a really interesting dynamic to think about, even if it's extremely unlikely. And if you've been listening to any content by Rayo lately, you'll know that the reason for that situation being very unlikely is that throughout history, when a rising power challenges an existing power, it basically always leads to conflict, not to partnership. And it certainly seems to be headed closer to that outcome currently.

So, with that said, next up, let's hear from Charlie on why he's gone ahead and invested his money in China despite the political tensions.

"In January, Jeff Gunlock was quoted, 'China is uninvestable in my opinion at this point. I've never invested in China long, long or short. 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 the 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. Other people, including Sequoia, the leading venture capital firm in the United States, have made the same decision we have. But I'm sympathetic to Gunlock. If he's nervous, he doesn't have to join us; different folks have different opinions."

Answered like a true value investor! We've invested money in China because we could get more value in terms of the strength of the enterprise and the price of the security, AKA he thinks the businesses are better and the prices are cheaper.

And this is a really interesting point because, so far, I've really just heard the super investors talk about how cheap China is. Everything's so cheap over there; let's buy, buy, buy! Here, Charlie goes on to say, "Well, actually, the businesses are better as well." And I think there are actually a few reasons for that.

There's the rising wealth of the average Chinese citizen, which is helping businesses grow rapidly just across the board. There's the fact that a lot of these big Chinese companies like Tencent or Alibaba are so big and important to the daily lives of citizens that it makes it very hard for other competitors to gain ground.

And then thirdly, there's also the fact that in China, they like to block big foreign companies from competing there. You know, the government just steps in and stops it. So there's no Facebook in China, there's no Google, Amazon's presence is very, very small—the list goes on.

And this obviously provides a wonderful environment of lower competition to the big Chinese players. So yes, a lot of these Chinese businesses are cheap, but in a lot of cases, they aren't the Benjamin Graham cigar butts; they're actually really strong companies. And Charlie goes on to reiterate this same point with further clarity just a minute or so later.

"I got a lot of questions just about the investing in China risks, and I'll ask this one from Ravi Meta. Um, he's interested in your take on China and Chinese stock exposure for the long term. He says 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 the 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 it for 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 China."

Short and sweet, but you can't argue with that, right? Stronger companies that are also cheaper sounds like a pretty good deal to me.

So, those were Charlie's thoughts on China more broadly, and a lot of that obviously relates to Alibaba already. But now, let's dive in a little bit deeper into the parts of the discussion where Alibaba was mentioned explicitly.

Um, someone named Vasal Patel from Toronto wrote in and said that as a Daily Journal owner, do we own local shares of Alibaba? Does that actually give us legal ownership of that business, or do we have a variable interest? And is that the same net-net? What do we own?"

"And I did get a series of questions related to that same sort of sort of thought. 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."

Another short and sweet answer from Charlie, and this one was short because you can really tell that he doesn't give much credibility, much substance to that argument. Um, because of course.

So when you buy shares in Alibaba, you're actually buying shares in a variable interest entity, which doesn't actually give you ownership of the business, but it does entitle you to the profits of that business. It's a weird system, but it's also been around for about 20 years, and a lot of China's education and media and telecommunications companies are listed offshore under VIE structures.

And there's been some chatter that the Chinese government is thinking about forcing all the big companies to delist from international markets, and they're going to actually go ahead and ban the VIE structure. But actually, fairly recently, the China Securities Regulatory Commission has actually come out and said that they do not want to do this. So I think at this point, that risk, as Charlie says, is fairly low. It's not zero, but I personally think it is a low risk, as Charlie explains.

All right, moving on to this last little clip. Let's have a listen.

"Another question came in on Alibaba, and I know that we've covered a lot of ground on this. I'll ask that because it's slightly different. This one comes from John Money in Marshfield, Massachusetts, and he says, ‘Charlie, Alibaba is a top three holding for you. It sells at a steep discount to its US peers. Best comparable is Amazon, which is triple Alibaba's PE. So what discount should U.S. investors seek when buying Chinese stocks considering the political, regulatory, and especially the ownership structure risk? Oh, and considering the fortune Berkshire made on your BYD suggestion, 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 is entitled to invest where he wants to invest. What makes you uncomfortable? What do you not—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 or Alphabet. I think the internet is going to be a very competitive place even if you're a big internet retailer."

Honestly, with this clip, I'm actually a little bit annoyed that the Warren Buffett tag at the end was included in the question because it turned out that that's the only part of the question that Charlie actually answered.

And I actually did want to hear his thoughts on what he thinks about the margin of safety that he would put on a company like Alibaba considering some of those risks that are attached, but what can you do? Um, nothing much to add with this clip. I thought it was interesting hearing Charlie describe that he is much more comfortable with investing in China than Warren Buffett is.

And this just goes back to the very important concept of Circle of Competence. Clearly, this is a slight difference between Charlie and Warren's respective circles—Charlie being more comfortable investing in China and Warren putting it on the "too hard" pile.

Um, and then finally, just touching on that last little part of the clip, I don't quite know what to take out of that last comment about Alibaba being less entrenched than Google or Apple. Maybe he thinks they're more flexible in what they could do in the future—more flexible in being able to pivot to a different business area if necessary, but I'm not really sure, especially because I think like a company like Google could pretty much pivot to a new business in just the snap of their fingers.

Maybe he meant that Alibaba is not as entrenched in the lives of citizens in the way that Google or Apple is, so maybe he was saying that their competitive advantage isn't as strong as some of those other companies. But ultimately, I just don't know with that one. So, if you have any ideas, just let me know down in the comments section below.

But guys, with that said, they were all the comments that Charlie made on investing in China and investing in Alibaba—the comments that he made at the Daily Journal 2022 shareholder meeting. So hope you enjoyed the video! Make sure you leave a like, leave a comment down below as well. Let me know what your take is on both investing in China and also Alibaba.

Uh, yeah, as I said, leave a like if you enjoyed. Please subscribe to the channel if you're new around here. I'd really appreciate it! If you want to learn how I go about my investing, you can check out Profit Full, links down in the description below. There's new money clips; if you want new money short-form content as well, you can check out that YouTube channel.

But guys, that'll do us for today. Thank you very much for watching, and I'll see you guys in the next video!