Charlie Munger's Alibaba Confession at the Daily Journal Annual Meeting (2023)

This video is sponsored by Morning Brew. Sign up to their free daily newsletter via the link in the description.

I regret Alibaba's one of the worst mistakes I ever made. I got over charmed by the people who were leading in the online retailing, and I didn't realize it's still retailing. Oh boy.

So, about a week and a half ago, Charlie Munger sat down with Becky Quick from CNBC to answer about two and a half hours worth of questions as a part of the Daily Journal annual shareholder meeting. As you might expect, the session was packed full of very interesting Charlie Munger hot takes and investing lessons.

So in this video, we're going to take a look at some of the best bits of the interview to see what Charlie thinks on topics such as China, on Buffett's stake in TSMC and Activision, the current macro environment, Costco, Disney, and a whole lot more. So let's get into it.

We start with what has to be the headline: Charlie Munger has called his investment in Alibaba the worst mistake he's ever made. Take a look.

"I regret Alibaba is one of the worst mistakes I ever made. Thinking about Alibaba, I got charmed with the idea of their position on the Chinese internet. You know it may be online retailing, but it's also still retailing. I just I got a little out of focus, and that made me overestimate the future returns from Alibaba."

I find this take really interesting because while he admits Alibaba was a big mistake for him, it was for one specific reason, and the reason was that he overestimated the future returns from the business. Thus, he overpaid for the stock. The one thing he didn't say was that he thought the business was poor. In fact, later on in the meeting, he goes on to confirm that he actually is still a big fan of investing in Chinese businesses.

The other thing that helps in terms of the China prospects is that you can buy better, stronger companies at a cheaper valuation in China than you can in the United States. The extra risk can be worth running given the extra value you get.

"That's why we're in China. It isn't like we prefer being in some foreign country. Of course, I'd rather be in Los Angeles right next to my house, you know, it'll be more convenient. But I can't find that many investments, you know, right next to my house."

So again, Charlie reiterates that he sees Chinese businesses not only cheaper but in many cases stronger than comparable U.S. businesses, and that's why he stays invested. That's been the thinking from a lot of value investors recently.

But of course, there have also been big risks surrounding potential delistings, and also who can forget geopolitical tensions? Now, we know that the risk of Chinese stocks being delisted from U.S. exchanges seems to have been resolved, at least for now. But of course, many investors are still worried about the geopolitical factors such as China-Taiwan. Well, never fear; Charlie chimes in on this as well.

"I would argue the chances of a big conversation from China have gone down, not up, because of what happened in Ukraine. I think that the Chinese leader is a very smart, practical person. I don't think Taiwan looks like such a cakewalk anymore. I think it's off the table and sat on for a long, long time. And I think that helps the prospects of investors who invest in China."

So my takeaway is certainly that Charlie likes Alibaba and Chinese stocks in the long run. I think he just admits that the price he paid was too high. But I'm also not expecting him to sell out or anything like that.

Next up, actually staying in the same area, Charlie also gave his thoughts on Taiwan Semiconductor, the world's largest chip maker. The reason that this is interesting is remember from our last video, this was Warren Buffett's really weird move where he bought a massive stake in the business, and then he sold practically all of it literally a quarter later.

So have a listen to what Charlie says about TSMC; it might just give us the answer as to why Buffett sold.

"The semiconductor industry, with each new generation of chips, you throw in all the money you previously made. So it's compulsory reinvestment of everything if you want to stay in the game. Naturally, I hate a business like that. At Berkshire, we like a whole lot of surplus money to come in; we can do something else with. Now if you're enough ahead of it, like Taiwan Semiconductor is, that may be a good buy at these prices. But I do think Taiwan Semiconductor is the strongest semiconductor company on Earth, so I'm a big admirer of what they've achieved."

Now, I obviously can't confirm this, but I would hazard a guess that Charlie's opinion is probably also what Warren thought, but just in reverse order. I would imagine Buffett saw the long-term potential for success in the world's largest semiconductor manufacturer TSMC and saw it at an attractive price, so he bought in. However, on further discussion, potentially with Charlie himself, they came to the conclusion that it was too hard of a business to be a long-term shareholder in due to the weaker moats and the characteristic of having to continually sink all your money back into the business just to stay ahead.

Interestingly, TSMC is also a company that occasionally pops up into Morning Brew's daily newsletter, which is a really handy resource for investors. Did you like that transition?

So, Morning Brew are once again the sponsor of today's video, and what they do is they make a really cool, quick, and easy to read daily newsletter in the business, finance, and technology space.

I personally read Morning Brew because a lot of people don't know this about me, but I actually really hate reading. I find it incredibly boring, so having a daily newsletter that doesn't waste my time, doesn't drown me in finance speak, and is actually fun to read is a very, very handy resource to have.

It's also completely free to sign up to, so I highly recommend at least trying it out. You can follow the link down in the description if you would like to do that, and in the process, you'll also be supporting the channel. So I'd really appreciate it. And as always, thank you very much to Morning Brew for their ongoing support of the channel.

With that said, back to Charlie Munger. The next clip I wanted to play again covers another controversial Berkshire Hathaway stock, and that is Activision Blizzard.

"Take a look, Berkshire has stock in Activision Blizzard, and you can argue whether that'll go through or not; I don't know. But the arbitrage play on Activision, well, yeah. Arbitrage are you? We sort of stopped doing it because it's such a crowded place. But here's here's little Berkshire doing it again in Activision Blizzard, and Munger using a little leverage as the Daily Journal Corporation."

I don't think there's too much to add with this clip, although it does potentially confirm Warren and Charlie's thinking on Activision. Remember again back to my last video; we saw that Berkshire actually reduced 12% of their Activision stock, and I wasn't really sure what Buffett was signaling with this move. Was he still confident in the deal? Was this the beginning of him, you know, leaving the position?

Now, I could be wrong, but it seems like the vibe from Charlie is that they are definitely going to keep holding this one through to the end and just hope that the FTC issues actually do get resolved in Microsoft's favor. Again, we will have to see, but Charlie certainly didn't give the impression that they'd made some mistake and they were now running for the hills.

So that's what he said on Activision, but then next up, what did he say on the current macroeconomic environment? What are the ramifications of moving away from a close to zero interest rate policy?

"Well, there's no question about the fact that as the interest rates have gone up, it's hostile to stock prices. But we couldn't have kept them forever at zero. But all politicians in a democracy tend to be in favor of printing the money and spending it, and that will cause some inflation over time. It may avoid a few recessions too; it may not be all bad, but it will do more harm than good, I think, from this point forward. That's one of the reasons The Daily Journal owns common stocks instead of government bonds. I think more inflation over the next hundred years is inevitable, given the nature of politics in a democracy. I just think this is one more damn thing to adapt to, and there are headwinds and there are tailwinds, and one of the headwinds is inflation."

I actually really like how Charlie explained what's happening right now. He's definitely the realist; he's not the idealist. You notice how he doesn't give an opinion on what he thinks the Fed should or shouldn't do. Instead, he conveys more of a "it is what it is" kind of attitude. Essentially, what he's saying here is yes, politicians will want to print and spend money, and over time that will cause inflation, but you can't stop that.

So as a value investor, you just have to see inflation and rising interest rates as occasional headwinds that you just have to cope with. There's no magic formula; this stuff just happens, and he's described this situation previously by saying, you know, sometimes the tide is with you, and sometimes against. But as a value investor, all you have to do is just keep swimming. Don't get caught up in the macro.

But beyond this clip, Charlie was also asked whether he believes we're going to start seeing recurring inflation spikes like what happened in the 1970s.

This is his thoughts on that topic:

"Al Pitman writes in from Chicago and wants to know if you think we might have on and off waves of inflation like we did prior to when Volcker stepped in at the Fed."

"Yes, I think we'll have some of that in the future. Do you think we'll have it immediately right now with what the Jay Powell is dealing with? I think I'm pretty good at long-run expectations, but I don't think I'm good at short-term wobbles. I don't know."

The famous idea is what's going to happen short-term. This is something that Michael Barry has been predicting over the last month or so: that what we'll see is the Fed succumb to political pressures and lower interest rates even when inflation hasn't stopped, and what we'll get is a repeat wave of inflation. Now, Michael Barry loves to make these kinds of predictions, but honestly, I gravitate more towards what Charlie says. You know, in the short term, nobody knows, and I think that's really true.

Remember Peter Lynch saying it's nice to know what the stock market is going to do or where interest rates are going to be a year from now; you never know it, though. So I'm definitely more on team Charlie and Peter here when it comes to short-term interest rate trends. You know, you just have to ignore the noise and instead accept that sometimes the tide is just against you.

Then from there, you can just accept that, and you can go back to researching your individual businesses. You know, if they're cheap, buy them; if they're expensive, leave them alone.

Alright, just two more quick clips. Charlie also took the time to speak about Costco, which was really interesting.

So here's a little bit of confirmation bias for all those Costco shareholders out there:

"As long as Costco keeps the faith, the strong culture, and their extreme low markup policy, I don't see any stopping it. The trouble with Costco is it's 40 times earnings; except for that, it's a perfect damn company, and it has a marvelous future and it has a wonderful culture, and it's been run by wonderful people, and I love everything about Costco. I'm a total addict, and I'm never going to sell a share."

I like this because it's a good reminder of just how crucial a moat is. With Costco, their moat is the scaled economies shared model, which means that, you know, as Costco grows, it becomes increasingly difficult for other businesses to compete. You know these days, Costco has grown to such a huge scale and a huge level of efficiency that they can use that power to always offer the lowest prices, which gives customers the best customer experience.

So no matter who tries to climb the ranks, they still can't beat Costco because at the end of the day, they can't charge the low prices that Costco does and have a better customer experience. Well, they can't do those two things and also stay in business, so there's been a really long-term stock for sale. And as time has gone on, he still just loves the stock.

But then on the flip side, Charlie also spoke about Disney and how he sees them slowly losing their moat. Take a listen.

"Definitely is an interesting case. Practically every business that Disney has has gotten tougher than it used to be. Again, welcome to human life. Think about Disney. Once owned the world; all of a sudden, in practically every front, it's more difficult. Imagine Kodak, which totally dominated photography in the world and invented this new technology. Kodak wiped out its common movies. Look to me like it's going to be a bloodbath too."

"You think Disney's headed down the same path, or you think that they'll be able to pivot? I mean, I know you followed the company."

"No, I think Disney has a lot of assets in it, but yeah, it's going to be way harder for them. I've never made an investment in a movie business in any way, shape, or form. It's very—it's always been very hard for the people who put up the money. It may be a very good place to make a living as an actor or a writer or something or a musician, but it's a hard place to make money if you're an investor."

So, Charlie definitely gives the impression that Disney is losing its moat, and this might be a case where a moat has almost been forcibly removed through external factors.

You might argue, well then was it even a moat? But it's interesting; one of Disney's moats was obviously barrier to entry in the movie business, and very few companies could even compete with Disney at the box office, which is just how the industry worked. But since COVID, the traditional box office movie business has obviously really been destroyed, and that's why the shift towards streaming has accelerated so much in the past three years.

So now, for Disney, they're actually on a similar playing field to companies like Netflix or Amazon. So with one moat taken away, they now have to rely on their brand moat to get them through. You know, who has the strongest brands? Obviously, Disney has Marvel, Star Wars, Pixar, the OG Disney properties. But now they're going head to head with other engaging properties that they don't own, like Lord of the Rings or Game of Thrones or Stranger Things or The Last of Us, etc.

Honestly, I think it's very interesting, even if, you know, Charlie maybe doesn't think so. And it'll be interesting to see who does actually come out on top in the long run.

But anyway, guys, I think that will just about do us for this video. There's also plenty—there are so many investing lessons in this meeting as well, so I definitely recommend you go and just check it out for yourself.

I might make a second video as well on that topic in the next few weeks sometimes, so definitely let me know if you'd like to see that. Please do make sure you're subscribed as well to make sure you do see it.

But with that said, guys, please leave a like on the video if you enjoyed, and with that said, I'll see you guys in the next one.