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Charlie Munger on Why He Used Leverage to Buy ALIBABA | Collection: Charlie Munger #277



[Transcript]

BECKY QUICK

Charlie, this question comes from Michael Gallagher. He says,“According to company filings, it appeared that Alibaba shares were purchased with leverage. And when the stock price fell last year, he was seemingly forced to sell," he being you.


“Can you ask Charlie to confirm that it was bought with leverage? And if so, why would he do that as it seems to go against his philosophy?" I got several questions that were similar to that.


CHARLIE MUNGER

Yes, it’s true. I operated with no leverage for long stretches of my old age and Warren is the same way. And recently, I did use a little bit of leverage here in another place because the opportunities were so ridiculously good. I thought it was desirable to do that. So you’re right, it’s unusual for us, but we did find a few things.



And by the way, if you go back early in my career, I used some leverage. I sometimes ask myself a mental question, I say, “What is the appropriate percentage of your net worth you should put it in the stock if you think it’s an absolute cinch?"


Well, if you’re kind of fellow who’s right when you think something is the cinch the answer is 100% or maybe 150%. But nobody teaches people to think that way in finance. But if the opportunity is great enough, the logical answer is 100% or maybe 200%.


BECKY QUICK

Somebody else wrote in, where you said the 3 things that ruin people are ladies, liquor and leverage. So why would you use leverage when you know that’s 1 of the 3 things that can destroy somebody?


CHARLIE MUNGER

Well, I used a little on my way up and so did Warren, by the way. The Buffett partnership used leverage regularly every year of its life. What Warren would do is, he would buy a bunch of stocks and then he'd borrow against those stocks and he'd buy into these — they used to call the event arbitrage, liquidations, mergers and so forth.


And that was not — didn’t go up and down with the market. That was an independent banking business. And Ben Graham’s name for that type of investment, he called them Jewish Treasury Bills. And it always amused me that’s what he would call them.


But Warren used leverage to buy Jewish Treasury Bills when on the way up and it worked fine for him. Berkshire has stock in Activision Blizzard. And you can argue that’s — whether that will go through or not, I don’t know, but that’s the Jewish Treasury Bill.


BECKY QUICK

Arbitrage, the arbitrage play on Activision?


CHARLIE MUNGER

Well, yes, event arbitrage — but we sort of stopped doing it because it such a crowded place. But here’s little Berkshire doing it again in Activision Blizzard and Munger using a little leverage at the Daily Journal Corporation.


BECKY QUICK

So is leverage…


CHARLIE MUNGER

You can argue that I used that leverage to buy BYD, you can argue it’s the best thing I’ve ever done for the Daily Journal.


BECKY QUICK

So is leverage the least evil of the 3 Ls?


CHARLIE MUNGER

I think most people should avoid it, but maybe not everybody need to play by those rules. I have a friend who says, the young man knows the rules, and the old man knows the exceptions.


 

[YAPSS Takeaway]

“What is the appropriate percentage of your net worth you should put it in the stock if you think it’s an absolute cinch?"


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