Why you shouldn’t sell Alibaba just because Charlie Munger did

A business overseen by Charlie Munger just halved its investment in Chinese e-commerce giant Alibaba, but there’s good reason why other investors shouldn’t also rush to sell.

Social media was sent into a frenzy this week when a company called Daily Journal Corp sold 50.17% of its shares in Alibaba (NYSE: BABA).

The reason is that Daily Journal Corp has long been overseen by Warren Buffet’s friend and business partner Charlie Munger, who had until now been unwaveringly bullish on the Asian stock.

Munger, a legendary investor in his own right, had approved purchases of Alibaba stock in the first, third and fourth quarters of 2021. Daily Journal Corp held 600,000 shares at around US$108 until the sale this week (the details of which you can see in the table immediately below).

So does the fact that Munger is selling so many of his shares mean the company is doomed and all investors should exit stage left?

Not necessarily, no.

Investors can sell for any number of reasons. In fact, Mohnish Pabrai, another major investor in Alibaba (and a friend of Munger’s) also just sold a huge amount of shares in the company (78%) and he says it was not because he thinks the company’s share price is going to plummet.

“One of the reasons I sold Alibaba was for tax loss harvesting,” Pabrai said.

“We buy things only for one reason – we buy things to make money (but) we sell things for one hundred reasons.

“There’s very strong signal value when someone buys something. There is very weak signal value when someone sells something.

“So in general, if you’re looking at Buffet’s portfolio and we see that he bought something, that is very important to pay attention to. But when he sells something, that is not as relevant.”

As many have pointed out, if Munger thought Alibaba was a bad long-term investment, he wouldn’t have sold half of his shares – he would have sold the lot.