Collection: Charlie Munger - #202 'Why Charlie Munger Invest in China & Alibaba 2022'
[Transcript]
BECKY QUICK 00:00
In January, Jeffrey Gundlach was quoted: “China is uninvestable, in my opinion, at this point. I’ve never invested in China long or short. Why is that? I don’t trust the data. I don’t trust the relationship between the United States and China anymore. I think that investments in China could be confiscated. I think there’s a risk of that.”
Obviously, with a significant percentage of the Daily Journal’s marketable securities invested in BYD and Alibaba, you feel differently. Please explain why you are right.
CHARLIE MUNGER 00:29
Well, of course, only the future knows who’s going to be right.
But China is a big modern nation. It’s got this huge population and this huge modernity that has come in the last 30 years. And we invested some money in China because we could get more value in terms of the strength of the enterprise on the price of the security than we could get in the United States. Other people, including Sequoia, the leading venture capital firm in the United States, have made the same decision we have.
But I’m sympathetic to Gundlach. If he’s nervous, he doesn’t have to join us. Different folks have different opinions. I feel about Russia the way he feels about China. I don’t invest in Russia so I can’t criticize Gundlach’s point of view. I just reached a different conclusion.
BECKY QUICK 01:29
This question comes in from Bill Roberts and he says, "Charlie, you and Warren have been making concentrated investments since the 1950s. Many of these investments have led to gains but, even more impressively, none of them have led to significant losses.
As far as I can tell, neither one of you has lost more than a few percentage points of equity on any single investment. Daily Journal has recently bet a large amount of its capital on Alibaba and foreign-traded stock. It’s also taken on an additional $40 million in margin debt to make these investments. What makes you so sure that these investments won’t lead to a substantial impairment of Daily Journal’s equity capital which would impact the company’s ability to reinvest the resources needed to develop the company’s software operating business?"
CHARLIE MUNGER 02:15
Well, of course, if you invest in marketable securities, you have the risk of them going down and you’ll lose money instead of making it. If you hold a depreciating currency, that’s losing purchasing power.
On balance, we prefer the risks we have to those we’re avoiding and we don’t mind a tiny little bit of margin debt.
BECKY QUICK 02:36
Someone named Vishal Patel from Toronto, wrote in and said that, "as a Daily Journal owner, do we own local shares of Alibaba? Does that actually give us legal ownership of that business or do we have a variable interest and is that the same? Net-net, what do we own?"
I did get a series of questions related to that same sort of thought.
CHARLIE MUNGER 02:56
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.
BECKY QUICK 03:12
From Ravi Mehta, he's interested in your take on China and Chinese stock exposure for the long term, he says, "it becoming quite evident that Chinese companies could be banned from doing business in the Western world, or maybe some of the Eastern countries too, because of the number of the following reasons:
1) the security threat issues,
2) the potential conflict over Taiwan,
3) inability to meet Western accounting standards,
and 4) human rights issues.
Considering all of the risks mentioned above, why would anyone as smart as Munger or Buffett consider investing in China or any of the Chinese companies?"
CHARLIE MUNGER 03:48
Well, we did it for a very, 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.
BECKY QUICK 04:10
This one came in from Waseem, he said, "although the financials seem strong, do the political pressures from the Chinese government worry you at all?"
CHARLIE MUNGER 04:19
Well, like Chinese government is worrying all the capitalists in the world way more than it used to. And of course, we don’t like that. And we wish that China and the United States got along better.
And if you stop to think about it, think about how massively stupid both China and the United States have been in allowing the existing tensions to arise. What bad is ever going to happen to China or the United States if we two are close? If we make good friends out of the Chinese and vice versa, who in the hell is ever going to bother us?
Of course, we should make friends with China. And of course, we should learn to get along with people who have a different system of government.
We like our government because we’re used to it and it has advantages of personal freedom. China could never have handled its life with a government like ours. They wouldn’t, it wouldn't be in the position they’re in.
They had to prevent 500 million or 600 million people from being born in China. They just measured the women’s menstrual periods when they came to work and aborted those who weren’t allowed to have children. You can’t do that in the United States. It really needed doing in China.
And so they did what they had to do using their methods. I don’t think we should be criticizing China which has terrible problems, because they’re not just like the United States. They do some things better than we do. They should like us and we should like them. So I'm totally – I think nothing is crazier than people who foment resentments on either side of that one.
BECKY QUICK 06:20
You said that we should partner up with China. Does it concern you to see Russia partnering up with China and that relationship getting a little cozier?
CHARLIE MUNGER 06:28
It’s hard to think of anything that’s more stupid. And both sides are doing it. The political leaders on each side are trying to make points with their own constituencies by showing how tough they are. That is massively stupid on both sides.
BECKY QUICK 06:44
Another question came in on Alibaba and I know that we've covered a lot of ground on this, I'll ask this because it's slightly different.
This one comes from John Mooney in Marshfield, Massachusetts and he says, "Charlie, Alibaba is a top three holding for you. It sells at a steep discount to its US peers, best comparable is Amazon which is triple Alibaba’s P/E. So what discounts should US investors seek when buying Chinese stocks considering the political, regulatory, and especially the ownership structure risk?
Oh and considering the fortune Berkshire made on your BYD suggestion, why doesn’t Buffett buy Alibaba?"
CHARLIE MUNGER 07:17
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, I have all kinds of things where I’m not comfortable and I just don’t go near them. I think an old guy is entitled to invest where he wants to invest.
BECKY QUICK 07:52
What makes you uncomfortable? What do you not –
CHARLIE MUNGER 07:54
It’s okay to have some things that you just don’t want to bother with.
BECKY QUICK 08:01
Like crypto, I got lots of questions on that.
CHARLIE MUNGER 08:05
I don’t think Alibaba is as – I don’t think Alibaba is as entrenched as something like Apple and Alphabet. I think the internet is going to be a very competitive place even if you’re a big internet retailer.
(Source: https://youtu.be/8RxLj9OVqLo)
[YAPSS Takeaway]
Invest where YOU personally feels comfortable. Different folks have different opinions.
