At the 2022 Daily Journal Annual Meeting, Charlie Munger delivered a simple defense of why he invested DJCO’s cash into Alibaba (BABA). Enjoy these highlights straight from the GOAT’s mouth!
I also share some of my guesstimates as to how much I think the Daily Journal may have invested in Alibaba throughout 2021 in looking at DJCO’s latest shareholder documents. It may also be surprising how little Charlie Munger seems to own of DJCO too!
-Intro Charlie’s Wisdom At Daily Journal 2022
-Why Is Charlie Right On Alibaba?
-DJCO’s Margin Debt Investment In Alibaba
-Potential Risks Of Investing In China Question
-Is BABA Ownership Legit?
-Charlie: China Did What They Had To Do
-Charlie: “Massively Stupid” Roast
-Why Doesn’t Warren Buffett Buy BABA?
-Charlie’s Investment Advice Given Rising Inflation
-Charlie Is Fully Invested VS Buffett Holding Cash
-Overseas Securities That DJCO Owns On Margin?
-How Much DJCO Invested In Alibaba & Other Assets
-Investment Is Get More Value Than What You Pay For
Some of the questions and answers related to Charlie’s investment in Alibaba and his investing approach include:
Question: In January, Jeff Gundlach was quoted “China is uninvestable in my opinion at this point.” “Don’t trust the data, the relationship between US and China. Investments in China could be confiscated, a risk of that.” With a significant percentage of DJCO marketable securities in BYD and Alibaba, you feel differently, please explain why you are right.
Charlie: 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 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 US, have made the same decision we have. But I’m sympathetic to Gundlach. If he’s nervous he doesn’t have to join us. Different folks have different opinions. I feel about Russia the way he feels about China. I don’t invest in Russia, so I can’t criticize Gundlach’s point of view. It’s just I reach a different conclusion.
Question: You and warren concentrated investments, many have led to gains. More impressively, none of them has led to significant losses. DJCO has recently bet a large amount of its capital on Alibaba, a foreign traded stock. It’s also taken on an additional $40 million in margin debt to make these investments. What makes you so sure that these investments won’t lead to a substantial impairment of DJCO’s equity capital, which would impact the company’s ability to reinvest the resources needed to develop the company’s software operating business?
Charlie: Of course if you invest in marketable securities, you have the risk that they’ll go down, you lose money instead of make it. But yet, if you hold a depreciating currency, that’s losing purchasing power. On balance we prefer the risk we have to those we’re avoiding. We don’t mind a tiny little bit of margin debt.
Becky got a lot of questions just about the investing in China risks. Question: Interested in your take on China and Chinese stock exposure for the long term. 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 a number of the following reasons. 1) The security threat issues, 2) the potential conflict of over Taiwan, 3) inability to meet western accounting standards, 4) 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?
Charlie: 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.
Question: As a DJCO 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?
Charlie: When you buy Alibaba you do get a sort of derivative, but assuming there’s a reasonable honor among civilized nations, that risk doesn’t seem all that big to me.
Question: Although the financials seem strong, do the political pressures from the Chinese government worry you at all?
Charlie: 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. We wish that China and the US got along better. And if you stop to think about it. Think about how massively stupid both China and the US have been to allow the existing tensions to arise. What bad is ever going to happen to China or the US if we too are close, if we make good friends out of the Chinese and vice versa. Who in the hell is ever gonna bother us? Of course we should make friends with China. Of course we should learn to get along with people who have a different system of government. We like our government because we’re used to it. It has advantages of personal freedom. China could never have handled its life with a government like ours. They wouldn’t be in the position they’re in. They had to prevent 500-600 million people from being born in China. They just measured the women’s menstrual periods when they came to work, and aborted those who weren’t allowed to have children. You can’t do that in the US. And it really needed doing in China. And so they did what they had to do using their methods. I don’t think we should be criticizing China, which has terrible problems because they’re just not like the US. They do some things better than we do. They should like us and we should like them. I am totally… I think nothing is crazier than people who foment resentments on either side of that one.
Question: Does it concern you to see Russia partnering up with China and that relationship getting cozier?
Charlie: I can hardly think of anything that’s more stupid. And both sides are doing it. The political leaders on both sides are trying to make points with their own constituencies by showing how tough they are. That is massively stupid on both sides.
Question: Alibaba is a top 3 holding, it sells at a steep discount to its US peers, best comparable is Amazon, which is triple Alibaba’s PE. So what discount should US investors seek when buying Chinese stocks considering the political, regulatory, and especially the ownership structure risk? And considering the fortune Berkshire made on your BYD suggestion, why doesn’t Buffett buy Alibaba?
Charlie: Well, 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. I have all kinds of things where I’m not comfortable, and I just don’t go near them. I think an old guy’s entitled to invest where he wants to invest. It’s OK 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 and Alphabet. I think the internet is going to be a very competitive place even if you’re a big internet retailer.
Question: What’s the best advice you have for individual investors to optimally deal with the negative impact of inflation other than owning quality equities?
Charlie: Well, it may be that you may have to choose the least bad of a bunch of options. That frequently happens in human decision-making. And the Mungers have Berkshire, Costco, Chinese stocks through Li Lu, a little bit of DJCO, and a bunch of apartment houses. Do I think that’s perfect, no? Do I think it’s OK? Yes. The great lesson from the Mungers, you don’t need all this damned diversification. That’s plenty. You’re lucky if you’ve got four good assets.
I think the finance professors that sell the idea that perfect diversification is professional investment. If you’re trying to do better than average, you’re lucky if you have four things to buy. To ask for 20 is really to asking for egg in your beer. It’s very few people who have enough brains to get 20 good investments.
Question: If taxes were not an issue, what are your thoughts on going to cash today, and waiting for better opportunities to deploy that cash over the next 12 months. Is it a sensible idea in your mind?
Charlie: In my whole adult life, I’ve never hoarded cash waiting for better conditions. I’ve just invested in the best thing I could find and I don’t think I’m going to change now. And the Daily Journal has used up its cash. Now Berkshire has excess cash. Quite a bit of excess cash. But it’s not doing that because it knows how to time investments. He just can’t find anything he can stand buying. So we don’t have a solution to your problem. We’re just coping with it as I’ve described.
Question: I noticed that our company is using margin debts to purchase overseas securities. And the overseas security is not reported in the SEC filing. As a shareholder, am I entitled to know what overseas security we own on margin?
Charlie: Well the practice at Daily Journal and Berkshire is the same, we disclose what we have to under the rules because we don’t want people to know what we’re buying and selling. So we tell everybody what we have to under the rules and we keep it confidential until then. That’s our system.
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