In this article, we discuss Charlie Munger’s thoughts on China and his 5 favorite stock picks. If you want to read about some more stocks in the Charlie Munger portfolio, go directly to Charlie Munger’s 2 Favorite Stock Picks.
Charlie Munger, the founder and chief of Daily Journal Corporation, is one of the most famous value investors in the United States. Amid rising inflation, volatility, and a massive slump in the prices of growth equities, there has been a huge investor exodus from growth towards value plays. As a result, the investing strategies of Munger, a long-term partner of Warren Buffett, are once again in the spotlight. Munger manages a hugely successful but incredibly small portfolio at Daily Journal Corporation that comprises just five stocks. The collective worth of his stakes in these firms was over $258 million at the end of December 2021.
One of the more controversial positions in his portfolio is Alibaba Group Holding Limited (NYSE:BABA), the Chinese tech giant with a market capitalization of close to $300 billion. Over the past few months, the shares of the tech firm have slumped, dropping by more than half in value since April 2021, due to a regulatory crackdown in China and an inflationary market in the US. Munger has used the opportunity to double down on his bet on the Chinese company, increasing his stake by 99% and 82% in the last two quarters of 2021.
Munger Says Chinese Firms Provide Better Strength Per Dollar
At the annual meeting of Daily Journal Corporation shareholders in mid-March, the veteran investor outlined his broader economic outlook and thoughts on China in particular. When asked about his interest in Alibaba Group Holding Limited (NYSE:BABA), Munger was of the opinion that he thought he could get “more value” in terms of the strength of the enterprise and the price of the securities in China than he could get in the US. He also highlighted that leading venture capitalists in the US were on the same boat that he was in with regards to China.
After the Russia attack on Ukraine and the Western sanctions on Moscow, financial experts in the US are questioning the foresight behind investing in China due to the Chinese position on Taiwan. Munger was asked about this and the possibility of Chinese firms being delisted in the US for failing to meet international accounting standards. The investor noted that his position in Chinese stocks was simply because he got “better strength per dollar invested” and the firms he invested in were priced lower but stronger than the competition.
The relations between the US and China, especially with regards to trade and related business activity, have not been smooth in the past few months. Investors fear owning stakes in Chinese firms that trade on US exchanges as American Depositary Receipt (ADR) shares due to this ongoing tussle. Munger has admitted that owning Chinese stocks like Alibaba Group Holding Limited (NYSE:BABA) are akin to “owning a sort of a derivative” but dismissed concerns around this by invoking “honor among civilized nations”.
During the course of the annual meeting, the famed value investor stressed that “on balance” he preferred the risks that he had with ownership in Chinese stocks to those that he was avoiding. Munger’s bullish position in Chinese firms are surprising given that his previous track record mostly comprises US-based firms. Some of the top stocks in the Munger portfolio over the years have included Berkshire Hathaway Inc. (NYSE:BRK-B), Costco Wholesale Corporation (NASDAQ:COST), and American Express Company (NYSE:AXP), among others discussed in detail below.
Our Methodology
The stocks were picked from the fourth quarter regulatory filings of Daily Journal Corporation.
Charlie Munger
Charlie Munger’s Thoughts on China and His Favorite Stock Picks
5. Bank of America Corporation (NYSE:BAC)
Number of Hedge Fund Holders: 84
Bank of America Corporation (NYSE:BAC) provides banking and financial products. Latest filings show that Daily Journal Corporation owned 2.3 million shares in the company at the end of the fourth quarter of 2021 worth $102 million, representing 39.56% of the portfolio. The fund did not sell or buy shares of the firm between October and December 2021.
On March 28, Morgan Stanley analyst Betsy Graseck upgraded Bank of America Corporation (NYSE:BAC) stock to Equal Weight from Underweight with a price target of $49, citing “higher quality loan portfolio and above average sensitivity to higher rates” as some of the main reasons behind the ratings upgrade.
At the end of the fourth quarter of 2021, 84 hedge funds in the database of Insider Monkey held stakes worth $47 billion in Bank of America Corporation (NYSE:BAC), compared to 72 in the previous quarter worth $46 billion.
Among the hedge funds being tracked by Insider Monkey, Nebraska-based investment firm Berkshire Hathaway is a leading shareholder in Bank of America Corporation (NYSE:BAC) with 1 billion shares worth more than $44 billion.
Just like Berkshire Hathaway Inc. (NYSE:BRK-B), Costco Wholesale Corporation (NASDAQ:COST), and American Express Company (NYSE:AXP), Bank of America Corporation (NYSE:BAC) is one of the stocks that elite investors are flocking to.
In its Q3 2021 investor letter, Oakmark Funds, an asset management firm, highlighted a few stocks and Bank of America Corporation (NYSE:BAC) was one of them. Here is what the fund said:
“Earlier this year, one of our holdings, Bank of America Corporation (NYSE:BAC), announced that it was raising its minimum hourly wage from $15 to $20 and would increase it to $25 by 2025. The company received great press for placing the well-being of its employees above profits. But was it really either/or? Bank of America’s chief human resources officer spoke to the bigger picture: “A core tenet of responsible growth is our commitment to being a great place to work…that includes providing strong pay and competitive benefits to help them and their families, so that we continue to attract and retain the best talent.” Bank of America Corporation (NYSE:BAC) understood that engaged, high-caliber employees are more productive, less prone to turnover and, therefore, less expensive in the long run. Increasing the pay for employees wasn’t elevating employees above shareholders; it was the right thing to do for employees and for shareholders.
If an increase to $20 was good, why stop there? Why not $50 per hour? Because the benefits the business receives at $50 don’t justify the expense. The bank would no longer be able to price its products competitively and would lose business. The employees would “win” in the short term, but eventually the lost business would lead to job cuts, meaning both employees and shareholders would lose. The negative effects of stakeholder overreach are no different than when CEOs overreach to inflate short-term profits. Both hurt shareholders and stakeholders.”
4. Wells Fargo & Company (NYSE:WFC)
Number of Hedge Fund Holders: 94
Wells Fargo & Company (NYSE:WFC) is a diversified financial services firm. Regulatory filings show that the investment firm of Munger owned over 1.5 million shares in the company at the end of December 2021 worth $76.3 million, representing 29.52% of the portfolio. The fund did not add to or decrease the stake it had in the firm between October and December compared to third quarter filings.
On March 31, investment advisory Piper Sandler kept an Overweight rating on Wells Fargo & Company (NYSE:WFC) stock with a price target of $63. Analyst R. Scott Siefers issued the ratings update.
At the end of the fourth quarter of 2021, 94 hedge funds in the database of Insider Monkey held stakes worth $6.11 billion in Wells Fargo & Company (NYSE:WFC), up from 88 in the previous quarter worth $6.18 billion.
Among the hedge funds being tracked by Insider Monkey, New York-based investment firm Eagle Capital Management is a leading shareholder in Wells Fargo & Company (NYSE:WFC) with 20 million shares worth more than $961 million.
In its Q4 2021 investor letter, Davis Funds, an asset management firm, highlighted a few stocks and Wells Fargo & Company (NYSE:WFC) was one of them. Here is what the fund said:
“The absolute level of revenues and profits generated by such companies is in fact so large that most of the major financial holdings in the portfolio produce enough annual operating income individually that a number of them could, in theory, purchase several entire businesses among hundreds of choices within the S&P 1500 Index, using just a year’s cash earnings without dipping into capital. This is theoretical, as financial companies would not be in the business of buying healthcare or technology companies, for example, but we point out these facts to illustrate the sheer scale of the economics produced by single financial companies in a given year, which is often a multiple of the cash earnings yielded by companies in a host of other industries.
Given this cash-generation power, we are naturally drawn to what we believe are strong and profitable financial institutions when the price is right. Presently, we believe the valuations of our financial holdings are not only reasonable, but extremely compelling, and our portfolio composition reflects this view. Representative financial holdings in the Fund includes Wells Fargo & Company (NYSE:WFC).”
3. Alibaba Group Holding Limited (NYSE:BABA)
Number of Hedge Fund Holders: 96
Alibaba Group Holding Limited (NYSE:BABA) is a diversified technology company based in China. 13F data reveals that the fund chaired by Munger owned 602,060 shares in the company at the end of the fourth quarter of 2021 worth $71.5 million, representing 27.65% of the portfolio. The fund increased its stake in the firm by 300,000 shares during the fourth quarter of 2021 compared to third quarter filings.
On March 14, JPMorgan analyst Alex Yao downgraded Alibaba Group Holding Limited (NYSE:BABA) stock to Underweight from Overweight and reduced the price target to $65 from $180, citing geopolitical and macro risks as the reasons behind the downgrade.
Among the hedge funds being tracked by Insider Monkey, Washington-based investment firm Fisher Asset Management is a leading shareholder in Alibaba Group Holding Limited (NYSE:BABA) with 14 million shares worth more than $1.6 billion.
At the end of the fourth quarter of 2021, 96 hedge funds in the database of Insider Monkey held stakes worth $6.9 billion in Alibaba Group Holding Limited (NYSE:BABA), compared to 115 in the previous quarter worth $10.2 billion.
In addition to Berkshire Hathaway Inc. (NYSE:BRK-B), Costco Wholesale Corporation (NASDAQ:COST), and American Express Company (NYSE:AXP), Alibaba Group Holding Limited (NYSE:BABA) is one of the stocks on the radar of hedge funds.
In its Q4 2021 investor letter, Longleaf Partners Fund, an asset management firm, highlighted a few stocks and Alibaba Group Holding Limited (NYSE:BABA) was one of them. Here is what the fund said:
“Alibaba Group Holding Limited (NYSE:BABA) (-50%, -2.26%; -22%, -0.82%), the largest online retail platform in China, was another top detractor for the year and in the fourth quarter. Alibaba Group Holding Limited (NYSE:BABA) reported weak quarterly results and downgraded its sales outlook for the current fiscal year to 20- 23% growth, down from original guidance of 29-32% growth. Macro headwinds, weak consumer sentiment, regulatory scrutiny and competitive forces are having a larger than expected impact on overall retail sales and Alibaba’s market share. Notably, overall retail sales in China slowed down to a meager 5% growth in the September quarter. Slowing consumption, combined with stiff competition from new entrants in livestreaming ecommerce, have resulted in transitory deceleration in Alibaba’s core ecommerce growth trajectory. Additionally, Alibaba Group Holding Limited (NYSE:BABA) is accelerating strategic investments in new initiatives, including Community Group Buying (Taocaicai), Taobao Deals, Local Consumer Services and International Ecommerce. These are future growth drivers but are depressing company’s earnings today. In December, we exited our full position in Alibaba. This was more of a tactical move than a change in investment conviction. We initiated the position early in 2021, and the continued challenges in the second half of the year resulted in a loss that was material enough to be helpful from a tax distribution management point of view. We are sensitive to taxable gains and try to minimize where sensible, so we took advantage of the opportunity to reduce that liability and plan on revisiting the Alibaba Group Holding Limited (NYSE:BABA) opportunity in 2022. We continue to own Alibaba in our Asia Pacific strategy.”
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Disclosure. None. Charlie Munger’s Thoughts on China and His 5 Favorite Stock Picks is originally published on Insider Monkey.
