A sensational sale
One of the investment cases that I have previously written positively about on this site is Alibaba. It therefore raised a few eyebrows when the highly competent and respected Indian investor, Mohnish Pabrai, published his latest portfolio (SEC 13F filing) in November. It showed that he had sold 78% of his investment in Alibaba. What made it even more remarkable was that Pabrai bought Alibaba in Q1 and Q2 2021, which effectively means that he has realized a loss in the range of 40-50%. All this for a fundamental and thorough investor with a long time horizon.
At the same time, two other respected investors continued their acquisitions of Alibaba in Q3 and Q4 2021, namely Charlie Munger (vice chairman of Buffett’s Berkshire) and Tweedy Brown. On a side note, Pabrai is personal friends with Charlie Munger and Munger is one of Pabrai’s biggest idols. Someone he often brings up himself. So what made him sell? In an interview, Pabrai now tells the story (YouTube link below).
There can be many reasons for a sale
“There is very strong signal value when someone buys something. There is very weak signal value when someone sells something.”
In the US, you can sell a stock, wait a minimum of 30 days and then buy the same stock again and deduct the loss in taxes. The idea is that after this period, there has been sufficient price risk for an investor not to do so simply for tax reasons. This maneuver is called ‘tax harvesting’ and often happens at the end of each calendar year – both in the US and Denmark.
However, Pabrai was not so keen on doing this maneuver with Alibaba, as he still believed that the company was significantly undervalued and could therefore risk selling at a low price and then having to buy the company again after it had risen perhaps 20%, 30% or even more after the 30 days. So he opted for a different tactic. After his investment in Alibaba, Pabrai had started to read up on other Chinese companies and more specifically Tencent. When Alibaba fell in price, so did Tencent, creating an opportunity to replace the two companies in the portfolio and get a tax deduction at the same time. In Pabrai’s own words“I’m moving from a business that’s good to a business that is even better”.
According to Pabrai, there were two main reasons why he sold:
- To take advantage of the tax deduction on a sale at a loss (“tax harvesting”).
- Because a unique opportunity arose to sell a good company and replace it with an even better company that had fallen for the same macroeconomic reasons.
“We buy things for only one reason: To make money. We sell things for 100 reasons.”
Pabrai’s point is worth reflecting on for a moment. When we regularly follow the trades of ‘guru’ investors, as we do here at Børsgade, there is a big difference between the signal value of a buy and a sell. When an investor buys a company, there will really only be one reason: Because the investor believes the company will increase in value. But when the same investor sells a company, there can be a multitude of reasons – and they don’t have to have anything to do with the specific investment case. It may be that a large investor in the fund wants to withdraw its money, making a sale necessary, that the fund wants to change its allocation of its investments to get a tax deduction, etc. etc.
However, we may occasionally be lucky that the investor in question tells the world the rationale behind their sale. Which Pabrai is gracious enough to do in the interview below. In this case, investors in Alibaba can sleep a little better at night and consider whether Tencent and Prosus could be a good investment.
Watch the full interview with Pabrai here:
Full transparency:
The author of this article does not work directly or indirectly for the companies mentioned.
At the time of publishing this post, the author or a related party has invested in Alibaba and Prosus.
