Charlie Munger on AI, Alibaba,

Charlie Munger (Trades, Portfolio) is one of the most legendary investors of all time. As

Warren Buffett (Trades, Portfolio)’s right-hand man at Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), Munger is among the most successful investors on the planet. Despite being 99 years old, Munger is still practicing his career and recently spent nearly three hours on the 2023 Daily Journal (DJCO, Financial) Meeting on Wednesday to answer questions from investors. In this article, I describe my key takeaways and notes from the session, where Munger touched on topics such as Alibaba (BABA, Financial), artificial intelligence and even Bitcoin; let’s dive in.

Munger on artificial intelligence

Munger believes artificial intelligence is a “mixed blessing.” He said it has benefits in areas such as insurance coverage, but believes it “won’t cure cancer.” Personally, I think Munger could be wrong on this one since a biotech-focused AI model could potentially, if not cure cancer, at least be a key piece of the puzzle to help researchers do so. According to cancer.gov, researchers have already developed AI tools for screening several types of cancer, including breast cancer.

The importance of avoiding bias

Sticking to the topic of AI, a viewer used the popular AI platform ChatGPT to come up with a question to ask Munger. The AI ​​model asked “What is the most challenging bias to overcome? And how best to overcome this bias?”

Munger said “denial” is a challenging bias, as in, if the truth is uncomfortable, people’s minds can “play tricks on them.”

An example Munger gives is the large number of investment managers who aim to beat the market. Munger says that less than 5% manage to do this, and they also charge large fees in the attempt.

Is Bitcoin a good investment?

When asked about it again, Munger repeated his earlier comments that crypto and related companies are running a “gambling casino.” He also humorously called it “Crypto Crapo.”

BYD versus Tesla

In 2008, Berkshire Hathaway bought a $230 million stake in Chinese electric car maker BYD (HKSE:01211, Financial). This has since increased by over 3,000% and is worth approximately $7.7 billion. Buffett made the investment on the advice of Munger, after he stated that BYD founder Wang Chuanfu, a chemist turned entrepreneur, was a cross between “

Bill Gates (Trades, Portfolio), Thomas Edison and Henry Ford.”

Munger also reveals some new information about BYD’s founder, who previously awarded employees shares he personally owned as opposed to using the company’s shares. This kind of leadership, which really has skin in the game, is what Munger likes to see. Munger even took inspiration and offered a similar compensation arrangement for Daily Journal employees with his own personal stock, which avoided dilution for shareholders.

Munger was asked why he chose to bet on BYD rather than Tesla (TSLA, Financial). He noted, “it’s easy,” because last year Tesla “cut the price of its cars twice in China,” while BYD increased the price of its cars. Munger stated “BYD is so far ahead of Tesla in China…it’s ridiculous.”

He also stated that the amount of car manufacturing space BYD has in China is almost the size of Manhattan on a square foot basis. However, Munger states that BYD trades at a high price of approximately 50 times earnings. Therefore, it is no surprise that Berkshire Hathaway sold $600 million worth of stock in the second quarter of 2022, where the stock traded at an average price of $71.35 per share. At the time of writing, the stock is trading at ~$61.90 per share, so this appears to have been a profitable sale for Berkshire, but still, it was only a small cut compared to the rest of the holding.

Buying and selling Alibaba with leverage?

Munger has long spoken about the dangers of using leverage in investing. However, he has admitted to using “a bit of leverage” when he bought Alibaba shares in the second half of 2022.

He made this decision based on the question he always asks himself, “what percentage of my net worth should I put into a stock… If I think it’s an absolute pinch” or a sure thing, then he thinks the logical answer is ” 100% “or 200%.” However, Munger admits this runs counter to traditional financial philosophy.

Munger also revealed that he used leverage on the “way up” and so did Buffett in the Buffett partnership.

Sticking with the theme of Alibaba, Munger sold 300,000 shares, or 50% of the Daily Journal’s position, in the first quarter of 2022. He said Alibaba was one of the “worst mistakes” he ever made. He was “charmed by the internet business” and “forgot that it was a dealer” and thus operates in a competitive market.

Regarding China risks

Munger believes the odds of a confrontation between Taiwan, China and possibly the US have “went down, not up.” I was surprised by this opinion. Munger said the response to the Russia-Ukraine war, which has included massive sanctions and an exorcism of the global financial system, may actually make China “think twice.”

He believes this situation helps the outlook for Chinese stocks. Additionally, you can buy “better strong companies at cheaper valuations” in China relative to the US. Munger also believes that Chinese leader Xi Jinping is a “practical person” and is not all bad.

Semiconductor stocks

Munger’s first instinct is not to be “a fan” of semiconductor stocks, as they have to reinvest all their capital to “stay in the game” and produce the next generation of chips. However, he believes that if a company is “as far ahead” as Taiwan Semiconductor Manufacturing (TSM, Financial), a recent Berkshire investment, “could be a good buy” at these levels.

The challenge of investing

Munger said the big challenge in investing is identifying good businesses — before everyone else realizes, because once they’re known as great businesses, valuations are often higher.

Everyone make mistakes

In life, it can often feel like we have to try to be perfect, but Munger clearly states that he has “never met anyone who hasn’t made a mistake.” This simple thought, which is obvious to most people but is often overlooked, also helps when dealing with others and setting our expectations, which Munger believes is a key to happiness. Munger said he doesn’t “expect to live in a world where people don’t make mistakes.”

A funny irony in life is that we “often get good judgments by making bad judgments.” For example, we can learn a lot from Intel (INTC), which made mistakes and fell behind in the semiconductor world. “We live in a world of sin, sorrow and wrong decision,” Munger said.

Final thoughts

I think Munger is one of the wisest people on the planet. We can learn a lot from him and I am immensely grateful that he still chooses to spend his time answering investor questions despite being 99 years old. Munger revealed some real gems in this recent interview, such as his strong thoughts against Bitcoin and his admission that he thinks he made a mistake with Alibaba.

Munger ends the interview with what he said is “the secret of life”, which is to “climb one inch at a time”.