Munger Calls Alibaba Investment One of His Worst Mistakes, Scale Creates Barriers, Migration Costs Form Moats
Charlie Munger stated at the 2023 Daily Journal shareholder meeting that Alibaba is one of his "worst mistakes": he was attracted by its position in the Chinese internet but overlooked that it is essentially a fiercely competitive retail platform.
Daily Journal first purchased approximately 165,000 shares of Alibaba ADR in the first quarter of 2021. As the stock price fell that year, the company continued to increase its holdings, ending 2021 with 602,060 shares, with an estimated average purchase cost between $180 and $200 per share, at one point accounting for about 28% of Daily Journal's portfolio.
In the first quarter of 2022, Daily Journal reduced its Alibaba position by about half to lock in some losses; it continued to reduce its holdings thereafter. Based on its historical 13F trading data, the company cumulatively bought 602,060 shares and sold 407,060 shares, retaining 195,000 shares as of June 30, 2026.
Munger's original investment logic was that Taobao and Tmall gather consumers, merchants, advertising budgets, and transaction scale, and the platform's network effects provide Alibaba with a long-term competitive moat. However, he later believed he overestimated the stability of this scale: e-commerce users and merchants can migrate between Taobao, Pinduoduo, JD.com, Douyin, and other channels, and the platform does not possess the more difficult-to-replace lock-in structure of Apple's hardware ecosystem or Alphabet's search distribution.
Alibaba's commercialization heavily relies on merchant spending. Customer management revenue mainly includes marketing service fees paid by merchants to acquire traffic and conversions. When consumer demand and platform transaction activity decline, merchants' advertising and commission budgets will shrink simultaneously. In fiscal year 2022, Alibaba's adjusted net profit fell by 21% year-on-year; in fiscal year 2023, customer management revenue decreased by 8% year-on-year, reflecting the pressure on its core Chinese retail business from competition and the consumption environment.
Regulation further changed Alibaba's original platform advantages. In 2021, China's market regulators determined that Alibaba engaged in "pick one from two" practices, ordering it to cease illegal activities and imposing a fine of 18.228 billion yuan; the suspension of Ant Group's IPO and subsequent rectifications also led the market to reassess uncertainties regarding platform economic regulation, financial business constraints, and corporate governance.
To maintain users, merchants, and transaction volumes, Alibaba continues to invest in low-cost e-commerce, instant retail, logistics, merchant support, and local life services. While its scale remains large, the rising costs of maintaining market share make the judgment that "platform network effects lead to high profit margins" no longer easily extrapolated; low-cost competition, content e-commerce, and instant fulfillment have pulled the previously lighter traffic business towards retail competition that requires subsidies, supply chain, and fulfillment investments.
In market mechanisms, Alibaba's buyers are long-term investors betting on the recovery of e-commerce, cloud computing, AI, and international business growth, while sellers are holders who factor in regulatory risks, competitive investments, profit margin pressures, and geopolitical discounts into valuations. Capital is shifting from a profit model that purely relies on core e-commerce advertising and commissions to low-cost supply, instant retail, logistics, cloud, and AI capital expenditures; platforms that can improve user retention and merchant ROI benefit, while those relying on historical traffic advantages to maintain high fees struggle to prove returns on new investments.
Source: Public Information
ABAB AI Insight
Munger's Alibaba case illustrates that in value investing, "cheap" cannot replace the judgment of business nature. After building a position in the first quarter of 2021, Daily Journal increased its holdings to 602,060 shares during the stock price decline and used leverage to increase portfolio concentration; he viewed the entry point to the Chinese internet, consumer scale, and merchant network as a highly solid moat. He later admitted that his mistake was not being unaware of regulatory risks or stock price fluctuations, but rather valuing a retail platform that must continuously compete for traffic, merchants, and fulfillment capabilities as a more stable internet monopoly asset.
In terms of capital pathways, Alibaba's core business model converts consumer attention into merchant marketing budgets and transaction commissions. Consumers stay on Taobao and Tmall, prompting merchants to purchase search ads, display ads, and various traffic tools; increased merchant budgets then support platform profits and service investments. Pinduoduo's low-cost supply, JD.com's self-operated logistics, and Douyin's content distribution and live e-commerce each disrupt this cycle from the price, fulfillment, and attention sides. Consequently, Alibaba needs to reinvest cash flow into Taote, Taocai, instant retail, logistics, merchant services, and user subsidies, shifting capital from high-margin advertising commissions to more competitive, slower-recovering defensive businesses.
Historically, Yahoo once had an advantage in internet portal traffic but was redefined by Google through search quality and advertising intent; eBay had seller network effects but still lost some growth momentum in competition with Amazon's self-operated fulfillment, platform services, and Prime membership system. Alibaba's situation is similar to these cases: network effects can lower the entry barriers for competitors but cannot guarantee that consumers will not migrate for lower prices, shorter delivery times, or stronger content recommendations. Apple creates multi-layer switching costs through hardware, operating systems, services, and developer ecosystems; Alphabet forms a flywheel through default entry points, search indexes, and advertiser returns; the bilateral network of users and merchants on a pure e-commerce platform is more easily rebalanced amid changes in subsidies and distribution.
This represents a shift in pricing power. Alibaba's historical profits came from charging merchants for traffic, ad displays, and transaction conversions; when low-cost platforms, content platforms, and instant retail platforms compete for the same group of consumers, consumer attention shifts from single-shelf searches, and merchant budgets also migrate with ROI. Platforms can no longer unilaterally raise fees but must compete to repurchase traffic through subsidies, algorithms, logistics, supply, and services. What Munger underestimated was this mechanism: scale remains, but scale no longer automatically translates into sustainable high pricing power.
ABAB News · Cognitive Laws
Scale can create barriers, but migration costs form moats.
Cheap is not logic; logic failing will lead to cheaper.
Platforms control traffic; competition determines pricing power.