Investment Notes #10: Buffett, Bloomstran, Mauboussin, Alibaba

23 February 2025

This is the 10th edition of the free HVG Investment Notes, where we explore valuable insights from legendary investor Warren Buffett, Chris Bloomstran (president of Semper Augustus Investments Group), and investment strategist Michael Mauboussin, along with a closer look at Alibaba.

Warren Buffett

Warren Buffett’s annual letter to shareholders is always published on the last Saturday of every February. Over time, his letters have become shorter and more concise. I used to summarise and quote the most interesting parts of his letters, but now I see it as cutting out a masterpiece like Mona Lisa.

This year’s letter is only 13 pages long, all in plain English, followed by two pages of an incredible performance table.

It is worth reading.

A detailed look at Berkshire Hathaway

For longer reading, I highly recommend the 2024 Annual Letter by Christopher Bloomstran, president of Semper Augustus Investments Group, where he covers the state of today’s markets and provides his best-in-class analysis of Berkshire Hathaway.

Won’t Get Fooled Again. Three ways you can go broke; Boggleheads; and – Berkshire Hathaway: Getting in Tune

Expanding your knowledge

Michael Mauboussin, the best-selling author and market strategist, published an insightful report Probabilities and Payoffs The Practicalities and Psychology of Expected Value. He makes the following point:

Investing is an inherently probabilistic activity.

And then continues:

One of the most challenging aspects of understanding expected value is that excess returns can be the product of high probability events with relatively low payoffs, or low probability events with relatively high payoffs. In other words, how often you are right is not all that matters. What is vital is how much money you make when you are right versus how much you lose when you are wrong.

Alibaba Results

Alibaba has been the symbol of all the recent troubles in China especially around confusing domestic politics and the slowing economy. It is also a typical value stock with a net cash balance sheet and low valuation multiples.

As with any other stock, its performance is driven by earnings trajectory and valuation multiple the market is willing to pay on a particular day. The former is the function of the economy, competition, capital allocation and innovation. The latter is much more volatile and emotional, driven by stories.

The main takeaway from the latest results is that the core business is stabilising, especially the local e-commerce (revenue of Taobao and Tmall was up +9%). At the same time, its AI and Cloud business seems to be catching momentum with accelerating growth (Cloud +13%, AI at triple-digit growth) and stronger margins (although this will require more capex).

The perception towards China seems to be changing, too, especially following the DeepSeek news.

So, it is likely that Alibaba’s shares will benefit from both improved earnings and less pessimistic valuation assumptions (i.e. multiple re-rating).

Below is the comment on Alibaba from our latest Premium Quarterly Portfolio Review (published on 26 January 2025).

"Alibaba’s investment case comprises two parts: 1) what happens to China and 2) Alibaba’s competition with local peers. The first call can be broken down into geopolitics (trade wars and Taiwan) and domestic economy.

While I admit my limited knowledge or ability to predict the macro/geopolitical factors, I am less concerned about them than I used to. China accounts for about a fifth of the global economy and is critical for the global supply chain. Looking at how the Russian economy has performed under sanctions, I am sceptical that potential US sanctions will be devastating for China (not to mention the complexity of implementing them).

So, the first driver could bring some positive surprises relative to today’s pessimistic expectations on Alibaba.

As for the domestic competition, I think Alibaba still lags and may never catch up with new and more innovative competitors.

However, this issue has been offset by the company’s pivot from expansion to profitability of the core operations. Alibaba has been cutting investments in loss-making ventures and ramping up buying its own stock. In a way, Alibaba does not need to grow at historical rates for its stock to come back. Given its low valuation, cutting losses and increasing shareholder distributions could be sufficient.

With a $212bn mkt cap and net cash ($24bn) and ST and LT investments ($85bn), Alibaba’s EV is just $103bn. To remind, the company generated $4.4bn of FCF in the past six months (which is not a high retail season).

Using consensus estimates for next year’s EBIT of $21bn, Alibaba is trading at just 4.9x EV/EBIT.

It is also worth noting that the regulator has cleared its 3-year investigation and the company has paid all the penalties, while Jack Ma was seen in China suggesting the company has won back its ‘licence to operate’.”

2025-02-23 09:57