Charlie Munger, vice chairman of Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) and Warren Buffett’s longtime business partner, is still a force to reckon with in the world of finance. He is one of the best investors and business thinkers ever.
Even before starting his legendary career at Berkshire, he managed an investment partnership averaging a 20% return every year from 1962 to 1975. During the same time, the S&P 500 returned just 5%. Hence, if you find navigating the markets tough at the moment, Berkshire Hathaway is an excellent portfolio to track.
However, on the flip side, certain multi-baggers do not feature in the fund’s holdings. Some of these stocks are excellent investments that have sound fundamentals. Some have been helped more by speculation rather than performance. But one thing is for sure: It’s always better to understand why there are certain stocks that Charlie Munger and Berkshire Hathaway chose to stay away from, despite their profile and ubiquitousness.
With all of that in mind, let’s find out why one of the world’s greatest investors believes these stocks aren’t a good fit for the widely followed Berkshire Hathaway stock investment portfolio. These seven companies are:
- Tesla (NASDAQ:TSLA)
- Alibaba Group (NYSE:BABA)
- Netflix (NASDAQ:NFLX)
- Alphabet (NASDAQ:GOOGL)
- American Airlines Group (NASDAQ:AAL)
- Marathon Digital Holdings (NASDAQ:MARA)
- Microsoft (NASDAQ:MSFT)
Now, let’s dive in and take a closer look at each one.
Stocks That Charlie Munger Avoids: Tesla (TSLA)
Charlie Munger recently headlined the annual shareholders meeting for newspaper company Daily Journal on Wednesday, Feb. 24. And during that meeting, he discussed a range of topics, including Tesla stock.
When questioned whether it was crazier for bitcoin to hit $50,000 or Tesla to reach $1 trillion in market value, he had the following to say: “Well, I have the same difficulty that Samuel Johnson once had when he got a similar question, he said, ‘I can’t decide the order of precedence between a flea and a louse,’ and I feel the same way about those choices. I don’t know which is worse.”
“I would never buy [Tesla], and I would never sell it short,” he added. Sound advice since short-sellers collectively lost $40 billion in 2020 betting against Elon Musk’s billion-dollar baby.
In such a situation, advocating against TSLA stock seems like a bold prediction. But it makes sense. Analysts’ consensus is that the stock is highly overvalued. The bubble hasn’t burst so far, but any stock trading at 934 time trailing price-earnings (P/E) ratio is not trading on fundamentals. The company is posting excellent delivery numbers, but they are still a fraction of the sales made by Ford (NYSE:F) and General Motors (NYSE:GM).
Plus, even though administrations worldwide are keen on green policies, it will take time for all that infrastructure to get built. Right now, every government is looking to invest massively in the healthcare sector.
Alibaba Group (BABA)
Another big name not on Charlie Munger’s radar is Chinese multinational technology company Alibaba. One of the reasons why it seems strange is that Amazon (NASDAQ:AMZN) is a prominent name in Berkshire’s portfolio. Alibaba is often termed as the Chinese version of Amazon. In many ways, that is true. However, BABA becomes an even more enticing stock, considering the size of the Chinese market. So why has Munger chosen to stay away?
Well, there could be several reasons why this is so. First, Chinese companies have never had a great corporate governance record. Granted, that may not be important to many investors, but it certainly is to Berkshire and the man behind it all, Warren Buffet.
The Securities and Exchange Commission (SEC) has probed the company in the past. We all know what happened with the Chinese coffeehouse chain Luckin Coffee (OTCMKTS:LKNCY), which fell from grace after its own set of accounting issues became apparent to the authorities. I don’t think that it can happen to a company as successful and diversified as Alibaba. But it’s a point to keep in your head.
Separately, the ongoing U.S.-China trade tensions may also be bearing on Munger’s mind. The Biden administration may not be as aggressive when it comes to dealing with China. But don’t expect the new president to be soft on Xi Jinping Administration either. Plus, with China and the U.S. at loggerheads, Alibaba has had a tough time creating a presence in the world’s biggest economy.
Overall, there are a lot of reasons to be bullish on BABA stock. It has sound management, excellent returns, and an enviable business model. However, it’s not everyone’s cup of tea.
Another prominent name that does not feature on the list of Berkshire Hathaway holdings is Netflix. I believe that has a lot to do with NFLX stock rising 427% in a five-year span. We all know that Warren Buffett, above all, is a value investor. Charlie Munger also understands and appreciates this investment strategy.
Hence, Netflix is probably a boat that has already sailed. Shares presented an excellent opportunity when the streaming giant went public back in 2002. But at the moment, the stock is trading at a 84.9 times trailing P/E ratio, and shows no signs of pulling back substantially. This is despite being embroiled in streaming wars with the top companies in the world like AT&T (NYSE:T), Disney (NYSE:DIS) and Amazon (NASDAQ:AMZN). And every year, new companies are throwing their hat in the ringer — making margins razor sharp.
Lastly, Berkshire Hathaway does not usually engage in day trading. Instead, their approach is to buy shares and keep them for a long time to come. This philosophy’s bedrock rests on earning stable dividends and capital growth by investing in rock-solid companies trading at a discount. NFLX stock doesn’t offer a dividend at the moment, and the prospect of a payout is bleak. Why? Consider the billions it spends on original content.
Our next entrant on the list is another one that is now too expensive for Charlie Munger to get his hands on. Google is one of the more famous “misses” that Warren Buffet has had in his investing life. “We missed it,” he had said in an interview with CNBC in May 2017, adding that “I should have got Google” in 2018.
Even Charlie Munger has acknowledged this mistake. “We could see in our own operations how well that Google advertising was working,” he informed investors at Berkshire’s annual shareholder meeting in 2019. “And we just sat there sucking our thumbs.”
“I feel like a horse’s ass for not identifying Google,” the vice-chairman of Berkshire Hathaway continued. “I think Warren feels the same way. …We screwed up.” At the meeting, Buffett attributed not pulling the trigger to not being a techie. Strong words, considering this is an investor that rarely goes wrong.
Last year, Alphabet became the fourth U.S. company to hit a $1 trillion market capitalization after Apple (NASDAQ:AAPL), Amazon and Microsoft. And despite the overall business market remaining stretched, 2020 was a solid year for the tech titan. In the fourth quarter alone, the company reported a 40.3% positive earnings surprise. This is the third consecutive earnings beat for the company.
Looking ahead, revenues are expected to grow 23.9% and 16.7% in fiscal 2021 and 2022, respectively. Also, shares are trading at 30 times forward P/E. Clearly, the company is one of the rare missteps for Berkshire Hathaway.
American Airlines Group (AAL)
Last year was a tough one for the airline industry. With the novel coronavirus pandemic, several airlines were caught off guard and suffered a heavy price. Understandably, Berkshire Hathaway decided to cut its losses and dump its entire holdings in the airline space in response to the crisis.
Among the stocks that got dumped was American Airlines, the largest carrier in the world by several measures. The company already had a substantial amount of debt when this crisis started. But the situation deteriorated substantially due to the coronavirus.
“Warren learned better over time; I’ve learned better. The nice thing about the game we’re in is you can keep learning, and we’re still doing it,” Munger had said in 2017 when he was quizzed regarding Berkshire Hathaway’s decision to invest in airlines after several years of staying away. However, last year, speaking at Berkshire’s annual shareholder meeting, Buffett said, “I was wrong about that business.” One of the casualties was 42.5 million shares of American Airlines, about 0.5% of Berkshire.
Considering that passenger traffic will take some time to return, it’s a wise decision. Understandably, Charlie Munger will feel the same way about the sector in general and AAL stock in particular.
Marathon Digital Holdings (MARA)
No surprises that MARA stock finds itself on this list. Considering Charlie Munger’s views on crypto, I don’t believe Berkshire Hathaway is likely to invest in this one. Munger has made no secret that he doesn’t feel the current bitcoin valuation is warranted.
Hence, investing in crypto mining operation Marathon feels like a stretch. On its own, MARA stock is doing exceptionally well. Shares have risen 693% in the last three months alone. The sharp rise in bitcoin prices is undoubtedly the main reason we see such an exponential increase in MARA stock price.
However, there is a flip side to this as well. If bitcoin prices go south, which they have in the past, MARA stock will also plummet. Its share price often doesn’t respect technical patterns or fundamentals. Instead, fortunes will seesaw along with the broader crypto market. On its own, it has struggled in the past. According to its own estimates, based on the Bitcoin network’s current difficulty rate, it can produce around 55 to 60 bitcoins per day. However, considering Munger’s views on bitcoin, I don’t foresee an investment in the company soon.
One of the glaring omissions in Warren Buffett’s holdings is MSFT stock. Considered a bellwether for the tech world, Microsoft seems an odd miss for the ace investor, especially considering his excellent track record of picking multi-baggers.
However, he has not seemed too hung up on it whenever he has been questioned on this. He believes stocks like MSFT and Amazon are outside his area of expertise. “Those aren’t my games,” Buffett has said.
The most important thing for him is knowing the ins and outs of the business. Even if the number of companies he is interested in is small, he believes that he should have a firm grip on those companies rather than spread himself thin.
Plus, now that the ship has sailed, I do not believe MSFT stock will cause either Buffet or Munger any sleepless nights. In a 1996 speech, Charlie Munger introduced Mr. Glotz, modeled after the legendary Buffett. That character wants to turn $2 million into $2 trillion over the next 150 years. He used Coca-Cola (NYSE:KO) as an example of the ideal company for Mr. Glotz.
With MSFT stock, you know that you are investing in a very mature and well-entrenched business. There are incremental gains to be made. But it’s certainly not a value investment anymore, which is why Munger would not be interested.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.