By Jody Chudley
This post My Single Favorite Investing Story of All-Time appeared first on Daily Reckoning.
Born on January 1, 1924, Charlie Munger is now 94 years old.
For decades, Munger has played the role of Warren Buffett’s curmudgeonly right-hand man at Berkshire Hathaway (BRK.A). Together, the two have made billions and billions of dollars.
But before you write Charlie off as being far too old to listen to, I have to tell you about what Charlie did in March of 2009 — at the very bottom of the financial crisis — back when Munger was a fresh-faced 85-year-old.
It is my single favorite investing success story of all-time.
Here’s how it went down…
In addition to being vice-chairman at Berkshire Hathaway, Munger also moonlights as the chairman of Daily Journal Corp. (DJCO), a small company that owns a few newspapers.
To appreciate what Munger did, you need to remember what it felt like at the time.
Everyone was terrified. The global financial system was seizing up.
Investors across the board were reacting with the normal human “flight or fight response,” most choosing to flee from danger. It was hard enough to hold stocks in the face of the panic, never mind buying aggressively.
Even very experienced, successful investors were scared.
At the end of September 2008, as the financial crisis was really kicking into gear, Daily Journal held $20.7 million of U.S. Treasury securities. Munger had been letting this cash balance build for years waiting for what he believed was an exceptional opportunity.
On March 9, 2009, the S&P 500 bottomed at 666 points. At the very moment when investors all over the world were capitulating, the 85-year-old Charlie Munger was literally going “all-in” with Daily Journal cash.
In the absolute depth of the financial panic, Munger invested the entire $20.4 million in the two dirt cheap bank stocks that he knew the best — Wells Fargo (WFC) and Bank of America (BAC).
It is unbelievable, but it is true. Munger timed the bottom perfectly.
The Daily Journal equity portfolio, which was initiated with a $20.4 million investment in March 2009, was worth $131 million by December 31, 2015.1
That’s a 542% return!
Munger made so much money for Daily Journal Corp. that the SEC came knocking and asked how this little newspaper suddenly had a $131 million investment portfolio.
Their response to the SEC was pretty simple:
“There is no question that Daily Journal’s marketable securities currently exceed 40% of its total assets. This is due to the wise decision of the Board of Directors in 2009 to begin shifting the Company’s cash and cash equivalents into marketable securities that have appreciated significantly.”
What else was there to say? They had a lot of cash and the man in charge knew exactly what to do with it and exactly when to do it.
Munger Would Love This Dirt Cheap Global Juggernaut
Today, Charlie Munger has another one of these “call the bottom” investment ideas — Chinese stocks.
In May of this year at the annual Berkshire Hathaway general meeting, Charlie said that American investors were completely missing the big opportunity in Chinese stocks.2
Recently, he repeated his bullish view on Chinese stocks in another interview.3 And we agree with him here at The Daily Edge and have since been pointing you in the direction of China for several months now.
The thesis is simple.
The Trump trade war has caused the Chinese stock market to drop by almost 20 percent in 2018. And while some Chinese stocks likely deserve to be down because of the trade war, many Chinese companies that are in no way impacted by President Trump’s tariffs have also been sold off.
As a result, companies like China Mobile (CHL) offer a terrific opportunity to own a powerhouse business at a rock bottom price.
Meet China Mobile — A Growing (Yet Cheaper) AT&T and Verizon
China Mobile is the largest telecommunications operator on the planet. This company has an unbelievable balance sheet loaded with $60 billion of cash, 900 million subscribers and a duopoly business protected by the Chinese government.
The shares of China Mobile are absurdly cheap.
At the current share price, China Mobile shares trade for just 2.68 times enterprise value to EBITDA. That’s insane!
(Enterprise value is the measure of a company’s total value while EBITDA is earnings before interest, taxes, depreciation and amortization are paid for. The lower the EV/EBITDA, the cheaper the stock.)
What that valuation means is that it will only take China Mobile 2.68 years to generate EBITDA (essentially cash flow) that is equal to the entire current share price.
This would be like a bond yielding 37 percent.
2.68 times EBITDA would be incredibly cheap for a small cap company with no competitive moat. But let me tell you that China Mobile, with 900 million subscribers and $60 billion of cash, is no small cap company lacking a competitive moat.
For some additional perspective, consider that American telecommunications providers AT&T and Verizon trade for 8.74 times and 8.03 times EBITDA, respectively.
That is more than three times the valuation of China Mobile despite those companies having inferior balance sheets, operating in a more competitive market and offering far less growth potential.
Couple this altogether and I think now really is a great time to start looking across the Pacific for investments. Charlie Munger certainly knows what he’s talking about, and who knows, maybe this investment will be the start of my new favorite investing story of all-time.
Here’s to looking through the windshield,
Jody Chudley
Financial Analyst, The Daily Edge
EdgeFeedback@AgoraFinancial.com
1The Daily Journal Corp. UNITED STATES SECURITIES AND EXCHANGE COMMISSION
2Charlie Munger plays Berkshire’s hand in China bet and seeks more opportunities, CNBC
3Charlie Munger & Li Lu Interview by Weekly in Stocks (201808) Part 1, YouTube
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