The Daily Journal Corporation (DJCO, Financial) had recently acquired a significant position in Chinese e-commerce giant Alibaba Group (BABA, Financial) in the first quarter of 2021.
According to the firm's latest 13F, it owned 165,320 shares in the e-commerce and tech conglomerate, giving it a 19% portfolio weight as of the end of March.
Charlie Munger's latest investment
Warren Buffett (Trades, Portfolio)'s right-hand man, Charlie Munger (Trades, Portfolio), manages the Daily Journal's portfolio, and he rarely makes changes. So, this trade has ignited quite a bit of speculation and conversation in the investment community.
The financial magazine Barron's recently published the following statement from the Daily Journal offering some insight on why the company had decided to take the position:
"Daily Journal Corporation has and needs securities held as cash equivalents. These cash equivalents would normally be U.S. Treasury Bills. But, with returns on Treasury Bills now so low, the company instead, invests in common stock."
The statement added that unless the long-term prospects of a stock "seem good," it is not considered a good cash equivalent.
This statement seems to confirm my initial speculation that Munger is excited about the long-term prospects of Alibaba and the Chinese e-commerce sector. So excited, in fact, that he believes the stock can be considered a suitable substitute for cash.
Substitute for cash
In the statement to Barron's, the Daily Journal noted that the company invested a small amount of the money previously invested in Treasury Bills into Alibaba. The total value of the position at the end of the first quarter was $37.4 million. At the end of December 2020, the most recent financial data we have available for the Daily Journal, the company had $9.6 million of cash and cash equivalents.
Where could the balance of the $37.4 million have come from? We have no way of knowing the answer to this without further info from Munger or the Daily Journal. Perhaps the group allocated funds from a different source. The Daily Journal has made use of margin loans in the past, for example, and I think it could have done the same this time around, though this is only speculation on my part.
If we look at the corporation's latest 10-Q, which details the company's financials at the end of December 2020, we can see that at the end of 2020, the firm had marketable securities worth just under $261 million, cash and equivalents of $9.6 million and restricted cash of $2 million. For the period ending September 2020, the figures were $180 million, $27 million and $2 million, respectively.
The reported cash flow figures show the company did not invest any large amount of cash in marketable securities during the fourth quarter of 2020. However, it did make a "payment to margin loan principal" of $14.5 million. At the end of September 2020, investment margin account borrowings totaled $29.5 million. The figure was $15 million at the end of 2020.
Borrowing to invest
I find the above figures quite interesting. We know that when he was managing his investment partnership in the past, Munger was quite happy to borrow large amounts of money to improve investment returns. This margin borrowing suggests that he is still comfortable following the strategy and has been using it to improve the Daily Journal's investment returns.
Once again, this is only my speculation. I am only using the publicly available figures and have no inside information. Still, I don't think it's unrealistic to speculate that the firm could have used additional margin borrowing to build the position in Alibaba. It wouldn't be the first time Munger has used borrowed money to aggressively build a position in a company with what he believes are attractive prospects.
Disclosure: The author owns no share mentioned.
Read more here:
- Reviewing Warren Buffett's Small Position in Globe Life
- Charlie Munger's Daily Journal Buys Alibaba
- Why Buying Blue Chip Stamps Was One of Buffett's Best Deals
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