The first rule of investing is don’t lose money. And for rule number two… don’t forget rule number one.
Earlier this year I put a good chunk of my savings into Alibaba. I bought 100 shares in June for $211.47 per share. The price started dropping and it wasn’t fun to watch. Although, my investment thesis didn’t change and it was trading at an even more attractive price. So, I bought another 100 shares in September for $145.16.
Since, we’ve seen it drop even further. Some of the recent downward pressure has been sparked by headlines around the delisting of Didi Global. And the VIE structure has always been questionable. Chinese stocks across the board have seen billions of dollars evaporate from their market caps.
At the recent low point on Alibaba stock, I was down more than $13,000. Not a great feeling to watch some hard-earned savings vanish… but these are just paper losses for now. I still haven’t sold any of my shares and the important questions… has my investment thesis changed? Is the risk-to-reward still looking good? Or should I cut my losses and sell Alibaba stock now?
I’m not going to rehash my entire thesis here. You can check out my Alibaba stock research for that. It’s packed with some useful analysis and charts. Instead, I wanted to give an update. I’m going to go into more detail on a few of the points I’ve already touched on… the biggest risks I see, as well as the huge opportunity ahead.
Alibaba Stock Risks
As a U.S. investor, one of the biggest risks with Alibaba stock is the geopolitical tension. China has a very different system than the U.S. There’s not similar checks and balances that we’re used to. As a one-party system, the CCP has a lot more control and we can see abrupt changes with policy and enforcement. In the recent words of Ray Dalio, the Chinese government is a “strict parent.” I’ve heard this analogy from some other big investors as well.
As far as the CCP’s control, I saw some of this firsthand. About seven years ago I worked in Beijing. I speak a little Mandarin and I’ve gotten some insight into news and media in different countries. I’ve been fortunate to travel many other places as well.
Due to internet restrictions, I had to use a VPN to access many websites. And many of my Chinese coworkers had to do the same. The flow of information is more restricted. Or said a better way, restricted in different ways. The U.S. has many controls in place as well and there’s plenty of bias on both sides.
Nonetheless, the geopolitical risk is high when factoring in national security on both sides. And some big moves are simply used as political bargaining chips. The recent de-listings aren’t great to see and Alibaba could easily follow. But before I even bought my first position in the company, I was prepared for that possibility. I bought shares on U.S. exchanges and if delisted, I should be able to convert them to foreign listings.
Investor sentiment is already low, as we’ve seen with BABA’s dropping share price. But a delisting would push shares down further. It’s not fun to watch but my long-term thesis still remains mostly unchanged…
The recent actions from the CCP are sending shockwaves to certain industries and markets. Although, limiting access to foreign investment on the large scale is a net negative. Of course, you can protect certain industries and help make them more competitive on a global scale. But it can lead to retaliation and other less desirable side effects.
I believe with some of the restrictions, China is doing more damage to itself than the U.S. possibly could.
By limiting access to capital, tighter controls on video games, etc., it’s a less rewarding place for innovators to set up shop and expand. This will push more entrepreneurs away to less restrictive countries.
Why Invest in Alibaba Stock?
Even with the new restrictions and downsides, Alibaba, Tencent and the other large Chinese companies are still crown jewels for the country. They help China compete on the global landscape. And it’s a tough balancing act to regulate them without stifling too much growth.
I’m sure we’ll see some more fines and restrictions to rein in these tech companies, similar to what we’re seeing in the U.S. And with Tencent’s financial operations, I see bigger risk. That’s one reason I haven’t bought into Tencent. But with Alibaba, I’m hoping we’re past the worst of it (pressure on Jack Ma, the abrupt halt of the Ant Group IPO, and the recent $2.8 billion fine). And of course, a delisting wouldn’t be great for the share price, but long-term, Alibaba should continue to grow with China’s economy…
Investing in Chinese Stocks
Valuation-wise, Alibaba is still one of the best opportunities to invest in China’s growth today. Just like any large government, there are plenty of Chinese policies I don’t agree with. But what’s hard to disagree with is the impressive growth of the Chinese economy.
Over the past three or four decades, China has shifted towards opening up to the rest of the world and capitalism. And as we’ve continued to see throughout history, this is one of the best recipes for growth and raising standards of living. It creates better incentives and opportunities for adding value to others and innovation in general.
Businesses only survive as long as they continue to add value to customers, barring government protections (aka crony capitalism). And this survive or thrive rule based on adding value is the same for governments as well… but the feedback loop is faster for businesses to fail. With governments, huge inefficiencies can sustain much longer and they tend to end in a bigger bang. But I digress…
China has already become the wealthiest nation in the world. In 2020, it had the highest number of billionaires… more than the U.S. and India combined! And another fun fact is that as of January 2021, China had 85 female billionaires, roughly two-thirds of the world’s total.
China continues to grow at a faster rate on many levels. Based on the trendlines, China will continue to outpace the U.S. I wouldn’t be surprised to see the Renminbi take over as the world’s reserve currency in the next few decades. There’s a good probability of that happening.
… and does all this play into why I decided to work in Beijing and learn some Mandarin… yes! Either way, the continued growth of China bodes well for an e-commerce business like Alibaba.
Final Thoughts on Investing in Alibaba
With beaten down Chinese stock prices, it’s an even better time to buy in. For one more piece of wisdom from Warren Buffett, be fearful when others are greedy, and greedy when others are fearful.
China isn’t disappearing anytime soon and with Alibaba stock, you can get a much better price than me, as well as Charlie Munger. Of course, it’s going to continue being a bumpy ride and the investment still might not work out. But adding some exposure to Chinese stocks might be one of the best long-term moves today.
I hope you’ve found this insight useful and here’s the Alibaba stock analysis that I mentioned before. Also, please let me know if you have any questions in the comments below. Or to see more discussion, check out the videos on my YouTube channel.