According to the Daily Journal's (DJCO, Financial) latest 13F report, the corporation significantly increased its position in Chinese e-commerce group Alibaba (BABA, Financial) in the fourth quarter of 2021.
According to the report, the corporation increased its holding by 100% to just over 600,000 shares. As the portfolio is managed by the company's chairman, Charlie Munger (Trades, Portfolio), this seems to be a notable change.
Building a position
Alibaba first appeared in the Daily Journal's portfolio back in the first quarter of 2021. Its 13F for the period reported a holding of around 165,000 shares, acquired an average price of $227. In the third quarter, Munger nearly doubled the position, taking the holding to just over 300,000 shares at a price of around $150.
At prices of around $120 per share, the latest additions suggest that the billionaire investor continues to believe that this stock is incredibly undervalued, and the rest of the market is overlooking its potential.
Munger is a far more successful investor than I am, so I am not going to comment on whether or not I think he has made a good decision. Only time will tell in that regard. However, I want to highlight a couple of factors that I believe need to be considered in context.
First of all, while this is a large position for the Daily Journal, it needs to be put in context. According to the latest 13F data, Alibaba makes up 28% of the portfolio, with Wells Fargo (WFC, Financial) making up 30% and Bank of America (BAC, Financial) making up 40%.
Based on this information, I do not think it is unreasonable to say that Munger likes the stock, but he likes the U.S. bank majors more, though he may not think their current prices are attractive enough to acquire more shares.
Another factor to consider is that this is the portfolio of the Daily Journal, not the billionaire investor himself. Most of Munger's wealth is wrapped up in Berkshire and Costco (COST, Financial) by his own admission. His net worth is $2.4 billion. Even after the recent addition, the Alibaba holding is worth $71 million. Even if he owned all of the holding company, this would only make up 2.9% of his net worth.
Limited information
Additionally, we don't have all of the information on the Daily Journal's portfolio. In its third-quarter results, the company announced that it had achieved investment profits of $106 million for the year to the end of September. It also said that one of its biggest holdings was the stock of a foreign manufacturer, and it had an investment denominated in Hong Kong dollars. According to the company, at the end of the third quarter, the portfolio contained seven positions. Just five are listed on its 13F, which only highlights equity holdings that have a listing on U.S. exchanges. Stocks that are not listed in the U.S. do not need to be reported on the 13F, and it seems the Daily Journal has two such positions that we know nothing about.
The third factor to consider is that the Daily Journal carries over $10 million of margin debt. This figure has been much higher in the past, although it varies from quarter to quarter. To put it another way, Munger has been quite happy to use high levels of leverage to increase the size of his holdings. This approach has both benefits and drawbacks. Some investors may not feel entirely comfortable taking on leverage to buy stocks, especially companies like Alibaba, which are high-risk for U.S. investors. The BABA ticker is traded through a variable interest entity (VIE), which technically only has a limited claim on the underlying business.
Still, Munger may know something the rest of the market does not. After all, he counts the highly successful Chinese hedge fund manager Li Lu (Trades, Portfolio) as one of his close friends. Li may have more insight into the workings of the Chinese e-commerce market than many Western investors. Munger could be leaning on this information to help support his investment thesis. This is an advantage other investors do not have, and it is worth thinking about before initiating a position.
