The Digest #107
Munger's Alibaba Investment, The Battle of Actium, Cyberattack Insurance, Stanley Druckenmiller, Howard Marks
Charlie Munger’s Alibaba Investment
“In fact, you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century, you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”
As Charlie Munger has pointed out many times, investing in equities requires equanimity when it comes to market price declines. This has certainly been true for Mr. Munger’s investment in Alibaba over the past year. The chart below shows the price action for Alibaba over the past two years along with Mr. Munger’s purchases of the stock as disclosed in 13-F filings to the SEC and reported by dataroma.com.
Alibaba shares closed at $76.76 on March 15 before rebounding strongly to $104.98 on March 16. If the March 15 low holds, that would represent a 66% decline from the price of the stock when Daily Journal initially disclosed a position at the end of Q1 2021. As the stock price declined last year, Mr. Munger added more shares. Assuming his opinion of Alibaba and China is unchanged from his comments at the Daily Journal meeting, I wouldn’t be surprised if he’s adding even more shares this quarter.
One of the better articles I’ve read on China in recent months was published by Aswath Damodaran on September 1, 2021. In the article, China's Tech Crackdown: It’s about Control, not Consumers or Competition!, Professor Damodaran provides a history of the rise of China and focuses on several of the big tech companies including Alibaba. He also includes a discussion of the variable interest entity (VIE) structure which has some concerning implications for owners of publicly traded BABA stock:
Why do Chinese tech companies favor this convoluted structure? The answer lies in Chinese laws and regulations that restrict the types of business that foreign investors are allowed to own shares in, and technology is one of those restricted businesses. Variable interest entities are a technicality that allows Chinese tech companies to get around the law, but they hold up only because the Chinese government has looked the other way, perhaps because the benefits to China (of tapping into foreign capital) exceed the costs. The legality of variable interest entities is still much debates, but if its gets litigated, stockholders in these companies may find themselves with limited standing. As an added complication, each of these companies has elaborate subsidiary structures, including wholly owned, majority owned and minority owned subsidiaries that are, at best, opaquely reported upon, and at worst, a blank slate.
At the Daily Journal annual meeting in February, Charlie Munger seemed unconcerned about the VIE structure:
Question: 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? Is that the same? Net-net, what do we own?
Charlie Munger: 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.
Time will tell whether Mr. Munger has been buying more Alibaba stock during the recent market decline and how the company will fare over time. It is certainly an interesting situation to watch from the sidelines. But I have always been skeptical about coat-tailing famous investors into situations that I do not fully understand.
The War that Made the West: Barry Strauss on the Battle of Actium by Richard Hurowitz, March 15, 2022. “The stakes at Actium were enormous: would the world’s future lie in the East or the West? What system of government would predominate? And would Rome remain a backwater or become the world’s capital? Actium ended a time of terrible violence and chaos, ushered in a Golden Age of peace, prosperity, and cultural flourishing, and opened the way for a more ecumenical society. Yet is also put to death the ideals of the Roman Republic, paved the way for the creation of a monarchical state, and began the eclipse of Greek and Eastern cultures.” (The Octavian Report)
Santa Barbara could declare Chick-fil-A drive-through a public nuisance by Nathan Solis, March 14, 2022. This story is a great example of the unintended consequences of excessive regulation. Over four decades ago, Santa Barbara banned the construction of new drive-thru restaurants, but grandfathered existing locations. In 2013, Chick-fil-a took over a grandfathered Burger King location. Business boomed and now local streets are clogged for hours every day (except Sunday) as drivers wait to be served. City officials might declare Chick-fil-a to be a “public nuisance”. They might want to instead reconsider the regulation banning new drive-thrus! (Los Angeles Times)
Ukraine War Has Insurers Worried About Cyber Policies by Alice Uribe, March 14, 2022. This article is reminiscent of the controversy surrounding insurance policies during the early stages of the pandemic. Businesses that had paid for business interruption insurance found that, in many cases, coverage was excluded for interruptions due to a pandemic. Today, there are questions regarding whether cyberattack insurance policies are valid when the cyberattacks are triggered by state actors during times of war. So far, major cyberattacks by Russia have not been reported, but the capability exists, and the risk increases as the war drags on. (WSJ)
The Young Gun Finds His Game by Frederik Gieschen, March 17, 2022. This is a very interesting profile of Stanley Druckenmiller. One of many good quotations: “I get to gamble for a living and channel it through the markets instead of illegal activity. That was just sort of nirvana for me that I could constantly be making these bets, watch the market moving, and get my grades in the newspaper every day.” (Insecurity Analysis)
The Current Thing by Ben Thompson, March 17, 2022. “It is very counter-intuitive to see how “bad” ideas are in fact extremely valuable: not only do they highlight why the good ideas are better, but they also sometimes show that the “good” ideas are in fact wrong. Arguing that the earth was not the center of the universe was once a “bad” idea; it was also correct. At the same time, to think that the Catholic church of 500 years ago was the only time where the dominant mode of thinking clearly missed the mark seems exceptionally arrogant; we rightly believe that allowing room for dissidents was, in the past, a good thing. It seems clear to me that doing the same today is likely to prove more valuable than not.” (Stratechery)
You Actually Should Do Something That Scares You Every Day by Ryan Holiday, March 16, 2022. The case for doing hard (and scary) things as a form of self-discipline seems to have merit, but I’m not sold on the daily cold shower idea. “Why do you think you can endure the cold reception of a bold idea if you can’t even endure cold water? How can you trust that you’ll step forward when the stakes are high when you regularly don’t do that when the stakes are low? What gives you any confidence you’ll do the hard thing when people are watching if you can’t do that even when no one is watching?” (RyanHoliday.net)
The Ultimate Productivity Tool by Sahil Bloom, March 16, 2022. “The Eisenhower Decision Matrix is a simple, powerful tool anyone can use to prioritize effectively and enhance daily productivity. It’s a visualization tool that forces you to differentiate between the urgent and the important.” (The Curiosity Chronicle)
The Restaurant Economy, March 8, 2022. Jim Grant discusses the current state of the restaurant economy with John Hamburger, founder and president of Franchise Times Corp. Of course, there isn’t just one “restaurant economy” and post-pandemic trends differ significantly between fast-food, fast-casual, and more upscale establishments, as the discussion reveals. (Grant’s Current Yield Podcast)
Investing in an Uncertain World with Howard Marks, March 14, 2022. William Green speaks to Howard Marks about the current investing climate. Although I’ve heard Howard Marks speak about investing countless times, I continue to provide a link whenever he appears on a podcast because his insights always feel fresh and timely. This podcast is no exception. Related: Book review of Mastering the Market Cycle by Howard Marks. (Richer, Wiser, Happier)
Focusing in an Unfocused World, March 16, 2022. Geoff Gannon and Andrew Kuhn discuss strategies for focusing in a noisy world. They discuss social media, particularly Twitter, and how important is to use fintwit on your own terms, if at all. Not having Twitter on your phone is a good first step. (Focused Compounding)
Revisiting Geoff's Singular Diligence Writeups, March 17, 2022. I’m a big fan of the Focused Compounding podcast, especially when Geoff and Andrew discuss a company that I’m familiar with. The first fifteen minutes of this episode is a discussion of America’s Car Mart, a company that I profiled five years ago but never purchased. (Focused Compounding)
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