The 99-year-old billionaire investor Charlie Munger has made headlines again. Munger, better known as Warren Buffett’s “partner-in-crime”, is known for being blunt and unapologetic about his opinions. In the recent 2.5-hour-long Daily Journal’s annual shareholders meeting, he shared his perspective on a myriad of issues from cryptocurrency, to artificial intelligence (AI), to the rising tension between the US and China. But perhaps what raised the most eyebrows was his self-admitted MISTAKE with his Alibaba investment!
“I regard Alibaba as one of the biggest mistakes I ever made. In thinking about Alibaba, I got charmed by their position in the Chinese Internet and didn’t stop to realize they’re still a gawd-damned retailer!”
So what exactly did Charlie Munger get wrong about Alibaba?
TABLE OF CONTENTS:
Charlie Munger’s Purchase into Alibaba
Charlie Munger’s Alibaba Mistake
1. Proper Portfolio Allocation
2. Estimating The Fair Value of a Business
What We Can Learn from Charlie Munger’s Alibaba Mistake
Does Charlie Munger still own Alibaba?
Munger first entered his BABA position back in Q1 of 2021, when Alibaba was trading between the $220 to $270 range. He then doubled down in Q3 of 2021 and then tripled down in Q4 of 2021. Subsequently, he trimmed the position by half in Q1 of 2022.
Speak about conviction and swinging hard when the opportunity arises, even at the ripe old age of 97 years in 2021, Munger wasn’t shy to show the world what his balls were made of! (We reckon they constitute some elements of steel and iron 😜). Unlike near-centenarians who are typically risk-averse, Munger appears to be thoroughly enjoying the game he is playing.
It was also made known to the public through Daily Journal’s 13F filling that Munger used leverage while building up this Alibaba position, which sounds counter-intuitive at first… because he once said that the most destructive 3Ls in the world are: Ladies, Liquor, and Leverage.
He was quizzed during the meeting on why the BABA stock was bought using leverage. He asked himself this mental question: “What is the appropriate % of your net worth you put into a stock if you think it’s an absolute hit? The answer is 100%, or maybe even 150%.”
Essentially, he viewed the opportunity to invest in Alibaba to be so ridiculously good.
It is still unclear whether Munger was margin-called out of his Alibaba position (because he did not admit to that in the meeting), but it was evident that he was visibly annoyed by the execution of the Alibaba position. In hindsight, Munger had bought in too much, too early.
Although Munger’s entry and exit price for Alibaba is not made known to the public, we can roughly estimate the range of outcomes, and how much damage he had potentially incurred.
|Time-Period||No. of Shares||Highest Price||Lowest Price||Direction|
*Calculations are based on the FIFO (First-in-first-out) method
In the Worst-case scenario, if Munger bought at the highest price in each quarter and sold at the lowest point – he would have potentially lost more than $54.8M dollars!
Even in the Best-case scenario, where he bought in at the lowest price and sold at the highest point, he would have still lost at least $14.3M dollars!
There were 2 critical areas that Charlie Munger got wrong in his Alibaba investment: portfolio allocation and estimating the fair value of a business.
We can see from Munger’s example, due to the concentrated nature of his portfolio, when he made a mistake with his capital allocation – it had dire consequences on his portfolio performance. Even after trimming half of his Alibaba position, Alibaba still makes up 15.15% of Daily Journal’s portfolio.
At Piranha Profits®, we advocate for proper position sizing and allocation. It is good for investors to look towards diversifying their portfolio into a basket of stocks from different industries and ensure that they size each position carefully, in accordance with their risk profile. Limiting individual company exposure to not more than 5-10% will enable investors to reap immense diversification benefits in the long-term
Munger admitted that one of the worst mistakes he made was that he got a little out of focus and overestimated the future returns from Alibaba as they were still in the retailing business, which is an extremely competitive environment. Specifically, Munger might be under the impression that Alibaba was in a superior position to fend off competition easily due to its ecosystem of apps, but was dead wrong when estimating the durability of their economic moat.
This comment came against the backdrop of Alibaba reporting one of the slowest growth in its history back in 2022. The competitive pressures were further intensified by new players (like Byte Dance) joining the e-commerce ring, coupled with consumption patterns evolving in real-time (a shift from online-commerce to social-commerce), which has largely impacted Alibaba’s top and bottom-line growth for multiple quarters now.
Despite Munger’s extensive experience in the markets for the past few decades, no investor is infallible. Throughout the course of the last two years, there were many value investors that “followed” Munger into his Alibaba investment, under the impression that given his track record, Munger has probably done the necessary due diligence and valuation work to justify a huge position in the stock.
This idea of “copy investing” is particularly dangerous, especially when you follow other investors blindly, even if the person is Charlie Munger or Warren Buffett for that matter.
As we always tell fellow investors, you can gain inspiration or stock ideas from other investors, but you can never replicate their understanding and conviction of the investment.
One of the keys to investing is independent thinking. You must first understand the economics of the business you are investing in, then arrive at a reasonable valuation. If you are not putting in the groundwork, then the stock market will feel like it’s always rigged against you.
Although from Munger’s commentary, he has made the assessment that he “over-estimated” the durability and quality of Alibaba’s economic moat, he still retains his position in Alibaba in the Daily Journal portfolio (based on the latest 13F filings).
Fundamentally, we still believe that Alibaba represents a good risk-reward opportunity for investors comfortable with the risk.
While Alibaba was unfairly sold down over the last few quarters, valuations continue to look attractive for the behemoth of a business Alibaba operates. Investors sometimes get too caught up with the price action of the stock and forget that they are buying into an underlying business.
Alibaba continues to post strong user growth across its ecosystem of apps, while still trying to expand into new business segments, at the same time, optimizing its cost structure to hold its operating margins in an arguably weak macroeconomic environment.
Despite the recent developments around the company that are beyond our control (such as the worsening US-China relationship), we believe in managing risk appropriately and capturing opportunities when they present themselves in front of us. The critical success factor in investing is to be able to buy at a good-enough margin of safety.
If you want to learn how to understand and study businesses, calculate the intrinsic value of stocks you’d like to own, and more importantly learn how to invest for long-term growth, check out our best-selling Stock Investing Course, the Value Momentum Investing™ Course taught by Adam Khoo.
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Piranha Profits® is one of the world’s leading online schools for investors and traders. In 2017, we started this online school to make our brand of online lessons and services available to people around the world. Headquartered in Singapore, we have since empowered the financial lives of over 20,000 students across 124 countries. The Piranha Profits® education team is led by award-winning financial mentor Adam Khoo, alongside 7-figure trading mentors Bang Pham Van and Alson Chew.
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