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Should Investors Follow Charlie Munger Into Alibaba?

- By Rupert Hargreaves

In the first quarter of 2021, the Daily Journal (NASDAQ:DJCO) made the first significant change to its stock portfolio since the fourth quarter of 2014.

At the end of March, the holding company reportedly owned 165,320 shares in Chinese e-commerce and tech giant Alibaba Group (NYSE:BABA), giving it a 19% weight in the equity portfolio. The position was worth around $37.5 million.


The Daily Journal's stock portfolio is managed by none other than Charlie Munger (Trades, Portfolio). As a result, it has become somewhat of a proxy for the value investor's views on different businesses, as it's the only entity managed by the billionaire that has to report holdings.

The Journal and Alibaba

Commenting on the new position at the beginning of April, I speculated that the value investor decided to buy shares in the company following advice from his friend and fellow value investor Li Lu (Trades, Portfolio).

Li is one of China's most successful investors. He manages the $30 billion Himalaya Capital, which primarily focuses on long-term investment opportunities in Asia, and is a close friend of Munger.

Munger has also repeatedly praised China for its economic revolution over the past few years. When he was asked about the Journal's new holding at Berkshire Hathaway's (NYSE:BRK.A)(NYSE:BRK.B) 2021 annual meeting, Munger stated:


"I think that the Chinese government will allow businesses to flourish. It was one of the most remarkable things that ever happened in the history of the world when a bunch of committed Communists just looked at the prosperity of places like Singapore and said, "The hell with this. We're not going to stay here in poverty. We're going to copy what works." They changed communism. They just accepted Adam Smith and added it to their communism. Now we have Communism with Chinese characteristics, which is China with a free market with a bunch of millionaires and so forth. They made that shift. They deserve a lot of credit. Warren and I are not quite as good at that, at changing our minds, in many cases."



A way to invest in China

I am inclined to agree with Munger that Alibaba would be one of the best ways to invest in China.

One of the best ways to invest in a country's economic growth is to buy small and mid-cap companies. Indeed, this is how Warren Buffett (Trades, Portfolio) and Munger made the majority of their fortune in the early years.

However, if one lacks detailed insight into a country's economy, buying a proxy for economic growth, such as Alibaba, is the better option.

Since the Daily Journal's position was revealed, the company has only released a short statement on the new investment. It told reporters that holding common stocks was an excellent alternative to low-yield Treasuries over a long-term time horizon. While this statement does not confirm or deny anything about the position, it suggests that Munger bought Alibaba to invest in long-term economic growth.

So, should investors follow Munger and build exposure to Alibaba? Unfortunately, there's no clear answer to this question. It all comes down to one's personal risk preference.

If we assume China can repeat the economic growth it has achieved over the past two decades, Chinese equities could achieve impressive returns over the next two decades. But the country's growth could slow now that it has become the world's largest economy. The law of large numbers may start working against it. What's more, China's financial markets are still relatively underdeveloped.

On the other hand, there will certainly be many opportunities for profit in China if the country's growth continues. Trying to find these opportunities could be difficult or impossible for foreign investors, and Alibaba offers a way to invest in the country's development as a whole.

Disclosure: The author owns no share mentioned.

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This article first appeared on GuruFocus.

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