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How two Chinese companies illustrate my core investing principles. Today’s key takeaway: Sell your Alibaba (BABA) shares instantly, if not sooner.

Sell your Alibaba (BABA) shares

From the Wall Street Journal web site yesterday, March 11, 2021 10:12 am ET

Under founder Jack Ma, Alibaba Group Holding Ltd. had regulators and local officials in its corner as it grew into a Chinese version of Inc. Chinese President Xi Jinping’s recent crackdown on the empire of China’s best-known entrepreneur has put an end to that.

Since late last year, Alibaba has been in Beijing’s crosshairs, along with its financial affiliate Ant Group Co. Regulators already have come down hard on Ant, which they consider a risk to the financial system, forcing it to make changes that will severely hamper its prospects.

Alibaba, though, appears destined for softer treatment. Officials familiar with Beijing’s thinking said regulators don’t want to crush a technology powerhouse popular with both Chinese households and global investors—as long as it disassociates itself from its flashy and outspoken founder and aligns itself more closely with the Communist Party.

Antitrust regulators are considering levying a record fine against Alibaba exceeding the $975 million that Qualcomm Inc. paid in 2015 over anticompetitive practices, so far the largest in China’s corporate history, according to people with knowledge of the matter.

Those people said Alibaba also will be required to end a practice that has been dubbed “er xuan yi”—literally, “choose one out of two”—under which, regulators believe, the tech giant punished certain merchants who sold goods both on Alibaba and its rival platforms, including The precise remedies Alibaba will have to take likely will be hammered out only after a decision is announced, according to one of the people.

In addition, regulators are weighing whether to require Alibaba to divest itself of some assets unrelated to its main online-retailing business. Once final, measures against Alibaba will need to be approved by China’s top leadership.

Alibaba now faces a two-pronged challenge: correcting the anticompetitive behavior alleged by regulators and adhering to the government’s political agenda. The pressure reflects Chinese leadership’s assertion of statist prerogatives over the economy, which could risk dulling the innovation and competitive spirit that powered China’s growth in recent decades.

You can read the rest of this horror here.

Remember the old adage: Power corrupts. Absolute power corrupts absolutely.

Now read three paragraphs from Wikipedia’s biography of China’s President Xi:

Chinese leadership changes every 5 years, and it happens roughly in October/November (for CPC and military) and March next year (for government). In October 2017 and March 2018, Xi was re-elected as party, military and government leader. This started his second term.

By tradition in recent decades, the Chinese leader leads two terms (10 years in total). The second term identifies his successor and prepares for the power transfer. However, Xi stopped this tradition and abandoned his potential successors Hu Chunhua and Sun Zhengcai, who were put to prison in 2018 due to corruption.

On 11 March 2018, the National People’s Congress approved an amendment to the Constitution of the People’s Republic of China, so that Xi and the future presidents could be reelected for president without term limits.[3][4]

In other words, XI is president for life and Alibaba is toast.

Do I need to point out the insanity of one of the world’s largest and most successful entrepreneurial companies now being run by The Chinese Communist Party?

I repeat:

Do I need to point out the insanity of one of the world’s largest and most successful entrepreneurial companies now being run by The Chinese Communist Party?

How’s it working out? Here’s BABA compared to AMZN in the last two years. BABA was doing great until Xi and his Chinese Communist Party started meddling. Amazon is the top brown line, the one that’s doing much better.

BABA’s high in 2020 was $317. Last night it closed at $240.80, down 24%. That’s a big drop.

I’ve never been big on buying the shares of Chinese companies.

The only other Chinese company I own is Futu Holdings (FUTU), which is actually based in Hong Kong. It has something called Futubull, which it positions as “One-Stop Trading Platform for US, Hong Kong and China Connect Stocks.” Sort of a Chinese Robinhood. It bills itself as a commission free way to buy securities. But it has lots of fees — including stamp duty. It’s not free.

Here’s the last year of Futu. Lots of hype and then….

These two stocks — BABA and FUTU — illustrate my core investing principles:

+ I identify companies whose businesses make sense to me — most importantly are scaleable up quickly.

+ I buy small initial positions, watch them and learn more and more about the company. Then, if I like what I see, I scale up.

+ I set stop losses in my brain — typically 15%. I’ll use 15% as reassessment. It’s not firm. But I’ve found that 15% usually stops further losses. I’ve been wrong. I can fall in love. Love is blind and often stupid.

+ It’s hard to figure the on-going internals of any company. Change management, change direction and the stock could blossom. But….

+ When the externals change wildly for the worse — as is happening to these two Chinese stocks, driven by the nutcase who’s running China, then I’m afraid. I can’t predict the insanities of autocrats/dictators in the making — like Xi, or the collection I mentioned yesterday.

For example I don’t understand why Xi singlehandedly kyboshed the IPO of Ant Holdings. Nor do I understand what Xi has it in for Jack Ma, who has created 110,000 Chinese jobs in Alibaba and countless hundreds of thousands more in Alibaba’s suppliers…. This is some sort of power-play madness that I’ve watched happen in Turkey, in Myanmar,  in Russia, in Saudi Arabia, in Syria, in Thailand, in Malaysia. And now more recently in Mexico. It never seems to end right.

I’ve been mulling the insanities of autocrats. Much of what they do doesn’t benefit their people, nor themselves. The autocrats have money, food, homes, luxury. So why? The answer is — drumroll — just because they can. Xi can kill Ant, destroy Alibaba. The Myanmar military can kill the Rohingya. Just because they can.

None of it makes any sense. And that’s the point: searching for “sense” makes no sense.

I don’t know where Xi is taking China. But Xi looks ultra-bad for business. He seems into control at all cost!

I’ll dump my shares of Alibaba and Futu Friday morning.

I’m glad we passed Biden’s $1.9 trillion aid bill. I’m glad the bill will get enough vaccines into people’s arms so we can celebrate July 4 with our families. That’s Biden’s nice, warm wish for all of us. I’m glad that the bill will put business and employment on track to make 2021 a very good year in the United States.

Today, Friday March 12, is an auspicious day for Susan and myself. It’s exactly one year to the day that we fled New York City for what we thought would be a couple of weeks quarantining in the country.

One year later, we’re still here. We lived through the winter. The snow has melted. We now have our vaccines and tonight we’re having dinner with long-time friends we haven’t seen in a year. Ditto tomorrow night for more alta kaka friends (the ones who were eligible for their shots.)

Soon we’ll be seeing the kids and grandkids.

There is a light at the end of this tunnel.

Stay well. — Harry Newton