Shocking U-Turn by Buffett’s Right Hand Man
On April 11, a regulatory filing by Daily Journal revealed that the company had reduced its holdings in Chinese e-commerce giant Alibaba (NYSE:BABA) by approximately half. Primarily a newspaper publishing and software business, Daily Journal is strongly linked to Charlie Munger, better known as Warren Buffett’s longtime investment partner and, until recently, the vice-chairman of Berkshire Hathaway.
According to the filing, Daily Journal reduced its holdings from 602,060 shares at the end of 2021 to 300,000 shares at the end of Q1 2022. This change essentially reversed purchases that had been made to bolster the company’s Alibaba position in Q4.
Such a rapid change is extremely unusual for Munger, a famous buy-and-hold investor. Here’s what you need to know about this rapid reversal and what it could mean for Alibaba going forward.
Why Did Munger Buy Alibaba in the First Place?
To understand why an investor famous for his buy-and-hold strategy would take the unorthodox step of selling shares in Alibaba, we first need to look at why Munger bought the company in the first place.
To begin with, Charlier Munger is a long-time China bull. Believing the emerging market to hold massive untapped potential, the famous investor has spent multiple decades identifying opportunities in China. Needless to say, the e-commerce powerhouse that is Alibaba found a prominent place on Munger’s radar.
The company itself also once had much to recommend it from Munger’s perspective. Like Warren Buffett, Charlie Munger is a noted adherent of value investing. Examining the simple P/E ratio metric, Alibaba has gone through multiple periods where its pricing appeared favorable.
In 2015, for instance, the ratio dropped close to 15. For periods in 2016 and again in 2019, the ratio fell back below 20. By late 2021, the period in which the Daily Journal increased its stake, the ratio was once again hovering around 20.
Such periods often present buying opportunities for investors focused on finding mismatches between price and true value.
Why Charlier Munger Is Selling Alibaba
There are several possible explanations for Munger’s decision to pare back his company’s Alibaba holdings.
To begin with, Alibaba’s stock has lost 58.2% of its value over the last year. Although Charlie Munger tends not to buy and sell based on price movements alone, the scope of these losses points to much larger issues for the company that could persuade the famed value investor that it is no longer a suitable investment.
Munger is well-known for advocating patience punctuated with aggressive action as an investment strategy. This selling, it would appear, is aggressive action in response to aggressive and ongoing losses.
Munger’s concerns could also run deeper than Alibaba itself and extend to China’s current economic and political climate. He briefly commented on deteriorating relations between the U.S. and China during the Daily Journal annual meeting earlier this year.
Furthermore, Munger’s mastery of investing in China was formed during the reign of Deng Xiaoping, who preferred a far more economically open approach than current Chinese President Xi Jinping.
The sale of Alibaba may amount to a recognition of the new state of affairs in China as the Communist Party has pursued a crackdown on private business. Alibaba has been at the center of this effort, potentially explaining the move to sell before further damage is done.
It should be noted that Munger has made no public statement regarding the sale of Alibaba shares. As noted above, the information was revealed in a routine regulatory filing rather than in a public announcement from the company. As such, we can only speculate as to his motivations for this sudden reversal.
Will Alibaba Recover?
Despite the Daily Journal withdrawal from the stock, Alibaba appears to have decent prospects over the coming 12 months. Current analyst price targets suggest that the stock will rise 63.8% from $100.17 to $164.09.
It’s important to remember, however, that Alibaba has been subject to sudden shocks due to the intervention of the Chinese government. As such, there’s every possibility that external factors could prevent it from achieving such high growth.
With that said, it’s very unlikely that short-term price considerations influenced the Daily Journal decision. As a value investor, Charlie Munger takes a long-term view on investment decisions. The paring back of Alibaba holdings is likely less indicative of the company’s 12-month prospects than its ability to generate returns over the next 10 or more years.
Overall, Munger’s decision to withdraw from so much of his Alibaba position likely bodes ill for the company over the long run. Although Alibaba still appears to have steam left, high-profile investors losing confidence in the company could indicate its headwinds are much more than a temporary issue. If you’ve been considering adding Alibaba to your portfolio, it’s best to consider such factors before buying.
