First of all, personally, I feel that investing is really a deeply personal endeavour. There is really no right and wrong, and it is dependent on your own personal character and situations.
In my previous post, I discussed the predictions by Michael Burry.
In this post, let’s think about Charlie Munger. Charlie Munger together with Warren Buffet, are probably the best know investors around. Charlie is 98 years old and has a net worth of around USD 2.2 billion.
Charlie Munger and Michael Burry are in my opinion, great investors. They have very different styles of investing, and both are extremely difficult for small retail investors (like me) to emulate (in that sense they are similar).
Michael is able to make profits in good and bad times and has a good track record of beating the S&P 500. In good times, he is long quality stocks and in down markets, he shorts over-valued stocks (options trading).
Charlie on the other hand is the ‘king’ of doing nothing for an extended period of time. I meant that in a good way. In contrast to Michael, for Charlie, 99% of his investing is basically doing nothing and waiting. For instance, before he bought Alibaba shares in Q1 2021, his previous most recent portfolio activity was a reduction in his Posco (PKX) stakes in Q4 2014.
His inactivity is astounding.
Oh yes, he hates ‘over-paying’ for any stock. In addition, in view of his long time horizon when it comes to investing, market crashes are a given.
“The big money is not in the buying and selling, but in the waiting.” Charlie Munger
Hence, it is no wonder that when it was known that Charlie bought Alibaba shares in Q1 of 2021, the investing world was abuzz with this news. Charlie is the chairman of Daily Journal, the Daily Journal has positions in only five stocks. Through the 13F filings of the Daily Journal, the public can track the holdings’ size (and earlier trading moves made).
He started buying Alibaba shares (BABA) in the low $200s, and while the shares continued to fall, he continued to buy. In Q3 2021, he nearly doubled his position and in Q4 2021 he doubled his position again. He was quite literally doubling (or averaging) down on this stock.
However, then he did something which most people did not expect. In Q1 2022, Charlie slashed his company’s holding in Alibaba Group Holding Ltd. (BABA, Financial) by 50.17% during the quarter, selling 302,060 shares. The transaction had an impact of -13.87% on the equity portfolio. The stock traded for an average price of $115.52 per share during the quarter.
Subsequently, it holds 300,000 shares in total, accounting for 15.35% of the equity portfolio. It is estimated that Daily Journal has lost 40.25% on the investment since establishing it in the first quarter of 2021.
Charlie Munger’s Daily Journal Halves Alibaba Position (read here)
Charlie Munger Dumped Alibaba, but Analysts Are Still Bullish (read here)
So that triggered the question: Was he just tax-loss harvesting or did he indeed make a mistake?
Recently, the Q2 2022 13F filing was released (July 2022), and I reckon we finally have the conclusive answer. True to Charlie’s nature, there was no activity, no buying and no selling.
If Charlie really thinks that he has indeed made a mistake, he would continue selling and not stop at 50.17% (and probably reduce it by 100%).
Well everyone makes mistakes, even the great Charlie Munger.
Nevertheless, Charlie himself has acknowledged that there are risks in investing in Alibaba.
There was a large and incalculable risk from the tortuous structure in which BABA and other Chinese companies are packaged for foreign ownership. It was also clear that China no longer needed foreign investors as it had two decades ago and would no longer welcome investments that pulled huge profits out of Chinese enterprises. Charlie Munger could not have been uninformed of these factors. He simply saw the problem differently.
Alibaba is a growth company, not a cigar butt company with a few more puffs in it. Its growth looks uncertain, however, as the government feels free to lay demands on it as a contribution to “Common Prosperity,” the cover slogan that Xi Jinping has applied to buy submission to his authority.
Here’s what Charlie saw in Alibaba, the same stuff that everybody interested in the subject already knows:
Alibaba is a rapid growth company.
However, the last couple of years shows how it has been bloodied by the Chinese government. As fast as revenues grow, the cost of revenue numbers has outpaced them. Both gross profit and net income growth trail revenue growth since 2016.
Many would have graded Alibaba for an A+ on Profitability and a C on valuation. However, as many (critics) would have said, it is cheap for a very big reason. It’s too cheap, and that’s not necessarily a good thing. The best comparison is to Meta (FB). It has been cheaper than its tech/media peers for a few years, and now everybody knows why. It was cheap in a bad way. That tells us that the market’s view is that it is no longer a growth company but a troubled company. It sells at a discount to the market.
Let’s refresh back on what Charlie said about Alibaba in the past (and more importantly as recent as in Feb 2022). Alibaba is a stock with some wonderful operating businesses and a single big problem (regulatory risk).
At the May 2018 Berkshire Annual Meeting, Charlie said that “Most American investors are missing China.” I’m not so sure about that. At another point, and for the life of me I can’t dig it up, he said a few good words about the model of “socialism with Chinese characteristics,” in effect the Chinese model of capitalism.
During the 16 Feb 2022 Daily Journal Meeting, Charlie said:
Why invest in China? And why Alibaba?
“China is a big modern nation. It’s got this huge population, and this huge modernity that’s come in the last 30 years. And we invested some money in China because we can 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.
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.”
Why Warren doesn’t invest in Alibaba?
“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. And — 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’s entitled to invest where he wants to invest in.”
Does the VIE structure bother him?
“When you buy Alibaba, you do get sort of a derivative, but assuming there’s a reasonable honor among civilized nations, that risk doesn’t seem all that big to me.”
The above was on 17 Feb 2022, it was right in the middle of the quarter when Charlie reduced his stake in Alibaba by 50.17%. The above quotes do not sound like coming from someone who turned negative on his latest stock pick. Moreover, I do not think Charlie is a hypocrite either (he has no need to anyway).
So with the above quotes and thoughts and the fact that he stopped selling in Q2 2022 proved that he is indeed tax-loss harvesting by selling Alibaba stocks.
Charlie sold exactly 302,060 shares (not 300,000 shares). That number is exactly the total no. of shares he bought in Q1 & Q2 2021.
It tells us he basically wants to hold around 300,000 shares. So he bought around 602,060 shares in Q4 2021 at the heavily depressed price of $110-$120 dollars, then in Q1 2022, he locked in his loss by selling 302,060 shares. And then he reset his position at his entry point in Q4 2021 for the long term.
So what is tax-loss harvesting?
During that time when he sold, the majority of Munger’s trade in the stock is still down by between 58% and 30%. Mohnish Pabrai, a value investor who reportedly plays bridge with Munger and also owned a substantial stake in Alibaba before selling out, has stated in an interview that he sold his Alibaba stake for tax loss harvesting.
Tax loss harvesting is when you sell a stock at a loss to offset any capital gains tax you may have had to pay on another asset. In most countries (including the US), this is perfectly legal as long as you don’t buy back the stock straight away. Usually, you must wait at least 30 days before buying back the stock; this is called the “Wash Sale Rule.”
Of course, the billion-dollar question is why would a 98-year-old billionaire still wants to invest for the long term (for the Daily Journal Corporation). Mind you, when we talk about the long term in Charlie’s definition, it is not months or a few years, but decades. He thinks with a 30 years’ time horizon.
Let’s just say that the time horizon for his hypothesis would likely outlive him.
As highlighted above, to quote him again: “I think an old guy’s entitled to invest where he wants to invest in.”
Well, with that being said.. full disclosure, I currently do not own any Alibaba stocks. I used to own Alibaba stocks (9988.hk). I first invested in Alibaba near the end of 2020 after reading up more on it. Subsequently in May 2022, I capitalised on the depressed price to switch the funds invested in Alibaba to Tencent (700.hk). I also have a small holding in Pinduoduo (PDD).
I felt that Tencent is a better company than Alibaba (but I may be wrong).
Stock price of Alibaba Group Holding Limited (9988.HK) continues to drop… What should I do? (read here)
I still believe that Alibaba is a great company, and believe that the regulatory risks would sort themselves out. I also have a significant portion of my dividend portfolio in HK-listed dividend counters (around 30%).
Nevertheless, to add to the negative news, on 29 July 2022, the U.S. Securities and Exchange Commission added Alibaba to its provisional list of companies that would be delisted from U.S. exchanges under the 2020 Holding Foreign Companies Accountable Act (HFCAA), meant to force U.S.-listed Chinese firms to open their books to U.S. inspectors.
The SEC’s threat to delist Alibaba is a new chapter in a years-long dispute between U.S. and Chinese regulators over how to audit Chinese companies listed in the U.S. The fight over auditing requirements puts all 261 U.S.-listed Chinese companies, with a combined $1.3 trillion in market capitalization, at risk of being forced to leave U.S. markets.
Alibaba raised $25 billion in 2014 in what’s still the U.S.’s largest IPO. Now a U.S.-China fight could kick the Chinese tech giant off Wall Street (read here)
I am sure Chinese tech stocks are not for everyone. It is difficult enough to track and review the financials and business narratives of any listed company, having another set of regulatory issues does add to the stress.
Well, I guess, to each his own.
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