BABA -Softbank.

It seems Softbank are looking to exit their BABA position, opportunity for Berkshire?

I hope not

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I’m sure Charlie would’ve had a look at it.

I think Charlie has more than taken a look at it!

Balls of steel.

Funny perception isn’t it… The cheaper BABA becomes the more of a no brainer I see it.

Softbank are selling due to their fund being 85% invested in BABA and c25% of total BABA shares. I understand there is shareholder activism around the sale and linked to share buybacks of softback stock. Nothing wrong with BABA itself…

I would love to hear Jim’s thoughts on BRK taking a BABA stake. Given the huge $$$$ involved I would guess that BRK might be able to buy a big stake at a discount.

“Nothing wrong with BABA itself…”

that probably is true but isn’t the issue the Chinese government and impact on BABA’s future operating earnings?

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Imagine too much uncertainty for WEB to invest in BABA but maybe Todd or Ted, but I doubt it. Prefer we stay clear honestly.

So Softbanks stake must be worth c$75bn.

I would love to hear Jim’s thoughts on BRK taking a BABA stake.

I don’t think it suits Mr Buffett’s (and by extension, Berkshire’s ) Rule #1 mentality.

Nobody knows the odds. But what do you do with an investment opportunity with a 95% probability of tripling your money and a 5% chance of wipe-out?
The logical answer would be a small position, as a collection of many such investments would do very well if reasonably uncorrelated.
That’s why casinos have bet limits: having the odds in your favour isn’t enough to protect you from a very big but rare downside.
Berkshire doesn’t really get much benefit from a small position, so from my point of view it doesn’t seem to suit Berkshire’s main portfolio.

That being said, I wouldn’t be hugely surprised to see that suitably small position in Todd’s or Ted’s portfolio.

Or, whisper it softly, a derivative position we probably wouldn’t hear about. As I’ve mused before, the payoff matrix probably suits call options.
Heads I win a whole lot (though not quite as much), tails I only lose a little.
Besides, all Cayman BABA units are in effect derivatives in my view.

Jim

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I once looked at calls (when BABA was falling but higher than it is now), and didn’t fall in love with the possible payoff matrix. But it in large part depends on your assumptions.
I was wondering what positions in particular you thought interesting in terms of potential payoff?

Jim didn’t you take out a bunch of calls at 160-180, you mentioned it?

Jim didn’t you take out a bunch of calls at 160-180, you mentioned it?

Actually, and unfortunately for me, I bought calls when it was still mostly a “dip” rather than a “crash”.
I think I added in three chunks when the BABA price was $209, $207, and $172.
I then did a little fancy-footwork option trading to reduce my breakeven, but that’s just dancing around the issue—obviously it’s not a pretty colour on my screen.
One mitigating factor…I’ve down mark-to-market a whole lot less than I would have had I bought the same number of shares of stock.

The calls let me buy time to see how the news developed before deciding to commit more capital by exercising or rolling, without risking much capital.
Thus far the news has been unremittingly bad, I’d say.
It seems like a more barbell outcome now: probably extremely good returns and getting better, possibly extremely bad and getting worse.

Jim

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The BABA obsession of this board is amusing. Berkshire didn’t touch Amazon, Google, Microsoft and scores of US tech firms, and somehow you are expecting Berkshire is going to touch BABA?

What exactly that WEB did in the past that gives you he is going to do this?

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Nobody knows the odds. But what do you do with an investment opportunity with a 95% probability of tripling your money and a 5% chance of wipe-out?
The logical answer would be a small position, as a collection of many such investments would do very well if reasonably uncorrelated.

I dunno, couldn’t you make the opposite case? Berkshire’s #8 stock position is in Moody’s, worth $7.5b, or a touch over 1% of Berkshire’s market cap ($708b). Berkshire also owns BYD, a Chinese carmaker, currently worth about $7.4b, also just over 1%, so I guess that would be #9. What about a 1% stake in another Chinese company? Berkshire has tons of stock investments worth less than 1%, and although Alibaba does involve a China-specific risk, so does BYD, so if Rule #1 doesn’t apply to BYD, why should it apply to Alibaba?

And if the odds are anything like what you mention, a bettor should be making those kinds of bets with pleasure - the 1% size even seems on the small side. If you make 20 bets like that and expect to lose on one of them, you would triple your money on 19 and lose the twentieth, an awesome return. Hell, if you lost 10 of those bets (a 50% probability of winning, instead of 95%), you would still make out like a thief (hopefully like Alibaba, not one of the other forth thieves).

dtb

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I dunno, couldn’t you make the opposite case? Berkshire’s #8 stock position is in Moody’s, worth
$7.5b, or a touch over 1% of Berkshire’s market cap ($708b). Berkshire also owns BYD, a Chinese
carmaker, currently worth about $7.4b, also just over 1%, so I guess that would be #9.
What about a 1% stake in another Chinese company? Berkshire has tons of stock investments worth less
than 1%, and although Alibaba does involve a China-specific risk, so does BYD, so if Rule #1 doesn’t
apply to BYD, why should it apply to Alibaba?

I’d look at them all in terms of percentage of portfolio at risk the day the position is entered: the downside from entry.
A cluster, like the airlines or the sogo shosha, could be considered a single position for that purpose.
If the BYD position had been a total wipe-out or nearly so, it would have been a pretty trivial percentage of the overall portfolio.
I kinda think this might be part of the way Mr Buffett thinks: he’s never had a realized loss over 1% of portfolio size.
That seems so consistent that I almost think it might be a mental goal.

So, in that sense, I expect Mr Buffett never to invest 2-5% of the portfolio in something with any discernible chance of near wipe-out.
And I also expect him not to bother with many positions under 1% at date of entry–just not worth his time.
Other than the brief newspaper enthusiasm, I can’t think of one in recent years.

As an aside, in the case of BYD, I presume Mr Buffett had essentially nothing to do with that one other than not overruling it.
Not his pick, not his normal “personally managed” portfolio (MidAmerican?)
Also quite qualitatively different from Alibaba, as it’s not in a proscribed sector that requires a dodgy VIE to get access.

Jim

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Well it’s because Munger has a big DJCO position and he’s double doubled down and doubled down again.

We know what Charlie’s like. It’s a very rare thing, he’s bought one other stock in the last decade if I remember.

His mantra is to buy good businesses with conviction at fair prices, opportunities rarely present and a few companies are all you need to have a very good outcome.

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" The BABA obsession of this board is amusing. Berkshire didn’t touch Amazon, Google, Microsoft and scores of US tech firms, and somehow you are expecting Berkshire is going to touch BABA?

What exactly that WEB did in the past that gives you he is going to do this?

A few things:

  1. Munger is apparently “obsessed” with BABA. Three separate purchases last year. Last QTR doubling down on previous position. As far as we know he hasn’t bought AMZN, GOOG, MSFT either.
  2. Charlie and Warren apparently talk a lot.
  3. Story goes Charlie (And Li Liu and Sokol)convinced Warren to buy the stake in BYD (Chinese equity).
  4. BABA is arguably “cheap” and yes, risky.
  5. A significant and impactful position could be built with a 3x (or higher) upside over time.
  6. Charlie likes the risk/reward. Can he convince Warren of the same?
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"Thus far the news has been unremittingly bad, I’d say.
It seems like a more barbell outcome now: probably extremely good returns and getting better, possibly extremely bad and getting worse."

Other than BABA’s price action, how has the news “been unwittingly bad”? And looking at barbell outcome, how can negative outcome “get worse” than BABA POS goes to zero?

It’ll probably be the the buy of the decade if we look back im 10 years. A bit like the Amazon chart now IMO. That’s what Charlie sees I reckon. I think he’s right.