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Rupert Hargreaves
Rupert Hargreaves
Articles (660)  | Author's Website |

Charlie Munger on Why You Should Be Buying Chinese Stocks

Some thoughts on the state of China from Buffett's right-hand man

November 23, 2018 | About:

Charlie Munger (Trades, Portfolio) is undoubtedly one of the greatest investors of all time. From his early investment partnerships to his leadership of the Daily Journal (NASDAQ:DJCO) and vice chairmanship of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), he has created billions of dollars in value for his investors and shareholders around the world by making intelligent, well-timed investment decisions.

His best quality by far is his ability to be patient.

Waiting for the opportunity

Charlie Munger (Trades, Portfolio) can sit on his hands for decades, but when the time is right, he is more than able to act with conviction, just as he did in the financial crisis at the Daily Journal.

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In September 2008, the Daily Journal held $20.7 million of U.S. Treasury securities. Munger had been letting this cash balance grow while he waited for the perfect opportunity.

At the beginning of 2009, he was granted this opportunity, and he invested the entire balance in two dirt-cheap bank stocks, Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC).

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Over the next six years, the value of this portfolio rose five-fold, and the returns were so impressive they attracted the attention of the SEC, which asked the newspaper to explain why it suddenly had a $131 million investment portfolio.

Hindsight is a beautiful thing. Unfortunately, the only thing we can learn from this scenario is that it pays to wait for the perfect opportunity. Putting it into practice in real life is more difficult. We only usually learn what Charlie Munger (Trades, Portfolio) and Warren Buffett (Trades, Portfolio) have been investing in after they have invested, and by then, the opportunity has often passed by.

However, we do know of one investment theme that Charlie Munger (Trades, Portfolio) is currently interested in and that is China. This is not a backward-looking play. It is an investment theme that he expects to play out over the next few decades as China's economic transformation continues.

Time to invest in China?

Warren Buffett (Trades, Portfolio)'s right-hand man spoke about the opportunity that he believes exists in China at this year's Berkshire Hathaway annual meeting.

Responding to a question from the audience, Munger told listeners that he believes "American investors are missing China," before going on to say, "It just looks too hard, sitting in Omaha, to outsmart the Chinese market. But I think you're absolutely right. It's where they should be looking."

He later told CNBC that he believes "The best companies in China are cheaper than the best companies in the United States," and he went on to say, "I don't think it would be all that hard for any smart person to find four or five great companies in China to invest in."

It seems Munger eats his own cooking. He went on to say that he and his family is "substantially" invested in China and they began buying stocks in the country more than a decade ago.

Charlie Munger (Trades, Portfolio)'s advice could be worth following, and we are lucky today that there are so many different ways to gain exposure to the Chinese equity market. However, because it is difficult to get information on individual equities, I think the best way to play this trend is to invest in the market as a whole, or in other words, to follow Warren Buffett (Trades, Portfolio)'s advice on how to invest: If you don't have the time and experience to research each security individually, Buffett believes the best strategy for time-poor investors is to buy the S&P 500, and due to the complications of investing in China, indexing is probably the best strategy to gain exposure to the region.

I am not saying for certain that I believe Chinese stocks will outperform U.S. equities, but considering Charlie Munger (Trades, Portfolio)'s record of picking stocks and his unrivaled experience as well as connections across China, I think it could be worth following this advice and devoting at least a portion of your portfolio to the Chinese growth story.

Disclosure: The author owns shares in Berkshire Hathaway.

About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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