Mohnish Pabrai SELLS his Alibaba Stock!

All right team, in this video we are talking about Monash Proprietor's most recent 13F filings. So this gives us an update to what he was doing with his US listed stocks in the third quarter, of which he owns three: Micron's, Heritage, and Alibaba. And let's just cut to the chase, he sold 78% of his Alibaba holdings. This is a very big surprise as he's been buying Alibaba for the past two quarters.

What's even crazier is that he's spoken recently about how he thinks Alibaba is a fantastic business. I'll play you the clip: "What's your overall thesis with Baba?" Well, it's an incredible business. I mean, it's... I mean, if you look at Baba and Tencent and you know where they're at, and the ecosystem, and the moat, and what they control, and you know all of that... And you know, look at the tailwinds from China. I mean, there's a lot to me to like even more than the large US tech.

So it is very strange to see a great value investor such as Monash do a complete 180 in about three months and just sell something that he only just bought, really. So in this video, I'm going to talk through some of the main reasons he might have done this, and I'll give my opinion at the end as to what I think his motivation was. So with that said, let's get started.

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So I had a bit of a brainstorming session yesterday when this news broke. I also had a bit of a chat with Investing with Tom, and overall I think there are five potential reasons why Monash might have sold Alibaba. Some are more likely than others, so I'm going to run through all five, and then I'll give you my opinion on what I believe is most likely at the end.

So reason number one: he sold Baba for 9988. So, as many of you guys know, when you buy shares of Alibaba, you're buying shares in a variable interest entity in the Cayman Islands. You can buy shares of that VIE in America, you can buy in Hong Kong, and you can also buy in Frankfurt. Now, the US is imposing new rules around foreign stocks being able to stay listed in the US. It's called the Holding Foreign Companies Accountable Act, and one of the rules is that the companies need to be audited by a US auditor.

However, currently, the CCP prohibits Chinese companies from being audited from outside auditors. So because of this, there is a slight risk that the American listed Alibaba, with the ticker symbol BABA, will be delisted and will trade over the counter. So a lot of investors are instead buying the Hong Kong listed stock with the ticker symbol 9988. If Monash did that, it would look exactly as we're seeing: you know, the 13F would show a big reduction in BABA, but we wouldn't see the Hong Kong version pop up in the portfolio because he wouldn't need to report that.

Personally, though, I don't think this is what would have happened because, regardless of what version of Alibaba you hold, at the end of the day, you still hold shares in the VIE in the Cayman Islands. And if the shares get delisted in the US and it trades over the counter, you will not be able to sidestep the share price declines by holding the Hong Kong version. But you know, it's still a possibility that Monash has done that; however, unlikely.

So that's reason one. Then reason number two: tax. I'm personally no expert on the US tax system, but similar to what we have in Australia, it seems you can use your capital losses to offset the tax that you pay on your capital gains in that year. So because we're almost at the end of the US tax year and because Monash was down quite substantially on his BABA position, there is a possibility he's sold to lock in a loss to offset other gains to minimize his tax bill.

Then he'll just buy back in at some point late this year or early next year. Now, in some parts of the world, this tax strategy is legal and in others, it's illegal, but I did a bit of research and it seems as though this wash sale rule is actually legal within the US as long as there's a 30-day period between the sale and the new buy. But again, I'm not an expert on the US tax system, so you know, maybe if you're a US accountant watching this, please let me know the specifics in the comments section below. I would really appreciate that.

All I know is that generally these wash sale events are typically frowned upon because it's essentially deliberately manipulating tax laws to end up paying less tax. But you know, it still definitely happens and is one of those things where it's very difficult to police if you do have laws around it. So maybe that's what Monash has done in this instance: taking advantage of being down on your position to simply reduce your tax bill, and then he'll just buy in later on. So that is potential reason number two.

Now, moving on to reason number three, and shout out for Tom for raising this point: maybe he had a very large withdrawal from the fund and he had to sell something. I mean, funds have investors, and investors can take money out of the fund if they want to. If Monash Babri has all of that cash invested, he'd potentially have to sell down to be able to fund the withdrawal.

There may very well be some quite large investors in that fund that have, you know, for one reason or another, decided to withdraw their money. If that was the case, he would likely sell the position that he was least bullish on to be able to just fund that withdrawal, and maybe that was Alibaba. You know, it's possible, but I still consider this one to be less likely, and that is mainly because of the next few points that I'm going to talk through.

So reason four could be that he's had a change of heart around the risks of Alibaba. Now, make no mistake, Alibaba is an exceptional business that's been a fantastic performer over a long period of time, but there are also some risks that come along with it. The main risk is the CCP changing the playing field and Alibaba suffering because of it.

As Monash said in that previous clip, he believes Alibaba is, you know, one of China's crown jewels and doesn't believe the CCP will crush them in the long run. But let's be honest, they haven't really felt bad about inflicting pain on Alibaba so far. And because the bulk of Alibaba's business is within China itself, changes the CCP makes to how the Chinese people live and work and play will have direct impacts on Alibaba's business.

So there is a potential that Monash has decided he doesn't like that sort of risk with Alibaba being so entrenched in Chinese society now, and I think this could be part of the story, but it's only a small part. I think the much larger reason why I believe Monash probably has sold his Alibaba stake is because he's had a better opportunity elsewhere.

I mean, it's tough to do, but you know, if you think you've found a great business that will double your money in five years, and you sink all of your money into it, then say the stock drops by 30%, but at the same time that stock dropping 30%, you find another stock that could 10x your money in the next five years, what should you do?

Well, let's have a look. You know, one thousand dollars, we'll say, could be two thousand dollars in five years. But then let's say we actually suffer a thirty percent decline, so our investment is now worth seven hundred. Then we find a potential ten bagger across the next five years.

So we lock in the thirty percent loss and put our seven hundred dollars now into our potential ten bagger. Well, if that situation plays out, seven hundred dollars turns into seven thousand dollars. So it's painful, but in some instances, it could be worth it. And I think that's exactly what Monash has done recently because have a look at this: Monash hasn't just sold BABA recently; he sold a lot of other businesses in his portfolio too.

Look at some of these cuts. You know, there's 48% cut, a 71% cut, 15%, 7%, 18%. Monash is typically not a seller of stocks. He buys great businesses, and then he wants to hold them for a really long time. So I have a feeling he's trying to free up some cash to deploy into a new position.

Now, what is that stock? Well, I don't know; however, I'm guessing it's Tencent. Why? Because about a week ago, Monash put out this lecture on his YouTube channel talking about, you know, moats, monopolies, capital allocation, etc. In it, he spoke at length about how he loves Tencent's business and how he prefers their model to basically every other business, including Alibaba.

He explained that Tencent is essentially two businesses: there's epic software engineers that do stuff, and then there's digital Warren Buffetts that make investments. You know, the epic software engineer business is getting 65% annual returns, and the investment business gets about 35% per year. But the power in having the moat be the software engineers is that that talent can be redeployed as needed.

You know, it would definitely suck if the CCP cracked down on one of their branches of their business, but if that happened, they could redeploy that talent if they needed to. Monash basically says the success of Tencent's business is in the talent pool as opposed to specifically the businesses that they run.

It was a very interesting talk, actually. I'll leave it linked in the description if you're interested. But, you know, long story short, he ends up saying this: "But I would bet that, given the superiority of the Tencent model, it would not surprise me that if we look ten years or fifteen years from now, that it's the most valuable business on the planet. To a large extent, I feel that they may even be able to transcend a bunch of stuff that the CCP is throwing at them and continues to throw at them."

So I think what they would like, if the Chinese Communist Party would listen, is: "Listen, guys, just tell me all the rules right now. Don't dribble it out every few weeks. Just tell me all the rules that you want me to play with, and if you tell me those rules, I will reprogram my two engines to still do well based on those rules." Those two businesses being the software engineers and also the digital Warren Buffetts.

And so, in the absence of clarity from the CCP telling them these are the rules, I think what Pony Ma has done, he just said, "Okay, let's fire both bazookas as much as possible outside China." So there you go. Fair to say Monash is liking Tencent as a business more so than anything else right now, and he said he's been doing this digging fairly recently too.

So I have a feeling now that he's been enlightened to, you know, this potential opportunity that could create higher returns for him over time than what he was seeing in Alibaba. So he's decided to free up some cash and chase that other investment opportunity instead. I don't know that for certain, but I think that's the direction that the clues tend to point.

I think it's a case of, you know, Alibaba is a great business, but he thinks that Tencent is better. But nonetheless, a very, very strange move from Monash Prabhu at face value, one that definitely caught me completely out of the blue.

And you know, if you guys have any other ideas as to why he might have done this, feel free to leave a comment, let me know about it, and let's talk about this down in the comment section below. Because, you know, I don't know; I'm just guessing, really. I'm just trying to think through these different moves and which ones make more sense than others.

So let me know what you think down in the comment section below. But overall, I think that's the reason why Monash probably is selling down Alibaba. I don't think it's because he thinks the business sucks. I don't think he's actually done a 180 on what he thinks about the business. I think he's probably just found something better elsewhere and he's just chasing that.

But anyway guys, hope you enjoyed the video. Leave a like on the video if you did find it useful or if you enjoyed it. I really appreciate it and it helps get this video out to more people, so I really do appreciate that. Subscribe to the channel if you haven't done so already. If you're interested in learning about the Warren Buffett style approach to investing, the value investing approach, then you can check out Profit For. I've made a full eight-hour course on that strategy, a step-by-step course, so you can check that out if you are interested.

Links down in the description below. Check out New Money Clips if you want more short-form new money content. But that's it for today, guys. Thank you very much for watching, and I'll see you all in the next video.

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