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There's a lesson from Charlie Munger's increased bet on Alibaba

By Steve Goldstein

Critical information for the trading day

You wouldn't expect a 97-year-old to necessarily have a lot of patience, but legendary investor Charlie Munger is doing just that with one of his holdings.

Munger's Daily Journal (DJCO) nearly doubled its stake in Chinese internet giant Alibaba Group Holding (9988.HK) in the third quarter, a Securities and Exchange Commission filing released this week showed. (Holdings in Bank of America (BAC), Posco (005490.SE), US Bancorp (USB) and Wells Fargo (WFC) were unchanged.)

Munger, also the vice chairman of Berkshire Hathaway (BRKA), now has about 18% of Daily Journal's portfolio in Alibaba, at a basis of between $180 and $200 per share, says Tom Hayes, chairman and managing member of Great Hill Capital, who has also invested in Alibaba. Alibaba closed Thursday at $156.

Hayes says there are key lessons to be learned from Munger's investment. "For starters, successful people do what unsuccessful people won't. He's willing to take some short-term pain for long-term gain. Not on the basis of wishing or hoping, but on the basis of facts and data," says Hayes.

Granted, yes, Alibaba has been fined for monopolistic practices, and China has aggressively sought to tame its big businesses. There also are efforts afoot by the Securities and Exchange Commission to delist Chinese companies, though Hayes points out that Alibaba's auditor is PwC, and he doesn't believe Chinese listings with big four auditors will be removed.

Alibaba has been growing its top line, and cash flow is forecast to more than double in the next few years. You can now pay less for Alibaba than it was when the company was less than a third of its current size, says Hayes. And it will be tough to find one billion users elsewhere. "And that's why Buffett and Munger are the best investors around," Hayes said.

The chart

The spread between the yield on the 10-year Treasury note and the 3-month bill has the highest correlation to gross domestic product growth one year out, of any yield curve indicator. And, at the current spread, the economy will expand at 2.3% next year, a far cry from the 3.8% the Federal Reserve is projecting. "While the yield curve may not be able to give an exact estimate of future economic activity, it sure can give an indication about the general direction of growth. And right now, what the curve is saying is that growth will be way below where the consensus and the Fed expect it to be, thus leaving enough room for disappointment," said David Rosenberg, chief economist and strategist at Rosenberg Research.

The buzz

The U.S. added a smaller-than-forecast 194,000 nonfarm jobs in September, while the unemployment rate dropped to 4.8% from 5.2%, the Labor Department reported. A sharp 123,000 decline in government payrolls held back the overall number, as 317,000 private-sector jobs were created.

U.S. stock futures started to extend gains, while the yield on the 10-year Treasury declined to 1.56%.

The Senate voted Thursday night to lift the debt ceiling by $480 billion, moving the legislation to the House, which is expected to do likewise.

Electric-car maker Tesla (TSLA) announced it was moving its headquarters to Texas from California.

Oshkosh (OSK) warned that supply-chain and logistics disruptions were hurting its ability to make and ship units, as it lowered guidance for its fiscal fourth quarter.

Chubb (CB) has agreed to buy the Asia-Pacific insurance business of Cigna (CI) for $5.75 billion in cash.

The 2021 Nobel Peace Prize was awarded to journalists Maria Ressa of the Philippines and Dmitry Muratov of Russia for their fight for freedom of expression.

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-Steve Goldstein


(END) Dow Jones Newswires

10-08-21 0843ET

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