Charlie Munger's 3 Undervalued Holdings: Wells Fargo, Bank of America, and Alibaba Waiting for a Price Reassessment

The foundation of value investing is a simple, powerful quote from Warren Buffett's mentor, Benjamin Graham: "Price is what you pay; value is what you get." This is the rule. It separates the investor from the speculator. Price is the market's current number, a fleeting thing driven by fear, greed, and headlines. Value is something far more concrete: the sum of all future free cash flows a business will generate, discounted to today. It is the intrinsic worth of the enterprise itself.

To act on this principle, you must think like a part-owner, not a trader. Your focus shifts from the daily ticker tape to the long-term cash-generating ability of the business. This is the core of the philosophy. As one analysis explains, "The intrinsic value of a business is the sum total of all future free cashflows that you can get out of the business over its lifetime, discounted at an appropriate discount rate." The goal is to buy a company's stock when its market price is below this calculated intrinsic value by a "margin of safety." This cushion protects against error and uncertainty.

Buffett's own career is a masterclass in applying this rule. During the brutal market collapse of 2008, while the S&P 500 lost over a third of its value, Berkshire Hathaway's book value fell by less than a tenth. Why? Because Buffett was buying quality businesses-like Goldman Sachs and General Electric-when their prices had fallen far below their underlying value. The market panicked, but the intrinsic worth of those companies remained intact. He was buying "quality merchandise when it is marked down," as he put it.

This requires discipline and patience. Calculating intrinsic value takes work: understanding the business, its competitive advantages, and projecting its future cash flows. It means resisting the urge to chase momentum and instead focusing on what a company is truly worth. The rule is simple, but following it is hard. It demands a temperament that can withstand volatility and a commitment to the long-term compounding of capital. That is the enduring lesson.

Exemplars of the Rule: Three Stocks for the Patient Investor

The true test of any investment philosophy is its application. For Charlie Munger, the late vice chairman of Berkshire Hathaway, the rule of price versus value was not just theory-it was the blueprint for a concentrated, long-term portfolio. His holdings in Daily Journal Corp reveal a disciplined approach: identify a few exceptional businesses, buy them at a fair price, and hold them for years. The evidence from the Q4 2025 filing shows a portfolio that has been remarkably stable, with 0% portfolio turnover and no new positions initiated recently.

The core of this portfolio is built on two banking giants, held for over a decade. First is Wells Fargo & Company (WFC), with 1.41 million shares valued at $131.69 million, representing 47.60% of the portfolio. This is a foundational holding, with the firm stating it has been held for over 10 years. Second is Bank of America Corporation (BAC), with 2 million shares valued at $110 million, making up 39.76% of the portfolio. This position has been held for nine years, showing a similar long-term conviction.

The third major holding is a more recent addition, though still a multi-year commitment. Alibaba Group Holding Limited (BABA) is held with 195,000 shares valued at $28.58 million, accounting for 10.33% of the portfolio. The firm has held this position for approximately 4.8 years, a testament to Munger's patience in a complex, international business.

The portfolio's stability is its most telling feature. The recent filing shows these three stocks-WFC, BAC, and BABA-have been the consistent anchors. The firm has not been chasing new ideas or reacting to short-term market noise. Instead, it has maintained a concentrated view on businesses it believes possess durable value, a classic value investor's playbook in action.

Assessing the Business: Quality and Competitive Moat

The first step in finding value is to understand the business itself. Price is what you pay; value is what you get. That "what you get" is determined by the quality of the enterprise and the strength of its competitive position. A durable business with a wide moat can compound value for decades, while a narrow or eroding moat leaves shareholders vulnerable to competition and cyclicality.

A key indicator of quality is a high return on equity (ROE). As Warren Buffett emphasized, the primary test of managerial economic performance is achieving a high earnings rate on equity capital employed. This measures how efficiently a company uses its shareholders' capital to generate profits. A consistently high ROE suggests management is not only profitable but also reinvesting capital wisely. For a value investor, this is a hallmark of a quality business.

More importantly, a business must possess a durable competitive advantage-a "moat," as Buffett famously described it. This is the economic equivalent of a castle's moat, protecting profits from competitors. A wide moat can come from brand strength, network effects, cost advantages, or regulatory barriers. Companies with such advantages are better able to maintain high returns on equity over long periods, compounding value for owners.

A practical benchmark for quality is the Standard &Poor's earnings and dividend rating. Benjamin Graham's value criteria recommend focusing on companies with an S&P rating of B or better. This provides a basic filter for financial stability and consistent earnings power, helping to avoid companies with fundamental weaknesses.

Applying these principles to the exemplars in Munger's portfolio reveals a disciplined focus on quality and moat. Wells Fargo and Bank of America are both large, established financial institutions. Their scale, brand recognition, and entrenched customer relationships provide a significant moat in the banking sector. While their ROEs have faced pressure in recent years, the historical strength of their capital bases and franchise value underscores the durability of their competitive positions. Alibaba represents a different kind of moat: a dominant position in China's e-commerce and digital economy. Its scale and network effects have historically driven high returns, though its competitive landscape is more complex and dynamic.

The portfolio's stability-holding these three businesses for years-suggests a belief in their underlying moats. The investor is not chasing short-term earnings beats but is instead betting on the long-term ability of these companies to generate and protect value. This is the essence of value investing: identifying businesses with durable advantages and buying them at a price that offers a margin of safety.

The Investment Decision: Valuation and Catalysts

The business analysis leads directly to the valuation question: what price should we pay for this quality? The answer is not found in the current market ticker, but in a disciplined framework that compares price to value. As the 10 Principles of Value Investing™ state, stocks with low price/earnings ratios historically have outperformed the overall market. This principle, grounded in decades of market data, suggests that paying a low multiple for earnings is a reliable path to better risk-adjusted returns. It is a practical starting point for identifying potential undervaluation.

Yet a low P/E is just one piece. The same framework calls for examining the low price to cash flow and low price to book value metrics. Strong, predictable cash flows are the lifeblood of a business, providing the flexibility to reinvest, pay dividends, or weather downturns. When a stock trades at a discount to its book value, it often signals that the market's sentiment is overly negative, potentially offering a margin of safety. The goal is to synthesize these quantitative signals with qualitative insights to form a view on the company's true intrinsic value.

This brings us to the core investment decision. The market price must offer a sufficient discount to the estimated intrinsic value to justify the investment. As Warren Buffett's partner, Charlie Munger, advised, it is better to buy a wonderful company at a fair price than a fair company at a wonderful price. The "fair price" here is the price that provides that essential margin of safety. Without it, the investment is speculation, not value.

For this margin of safety to be realized, certain catalysts are needed. First is capable management and insider ownership. Leadership that understands the business and has significant personal skin in the game is more likely to allocate capital wisely, protecting and growing shareholder value. Second is sustained operational performance. The business must continue to generate strong cash flows and maintain its competitive moat. Finally, the market environment must allow for patient capital. As the evidence notes, "temperament is of greater importance" than IQ in investing. A patient market, one that eventually recognizes the true worth of a quality business, is the final catalyst for value realization.

The portfolio of Daily Journal Corporation, with its 0% portfolio turnover and holdings in companies like Wells Fargo and Bank of America, exemplifies this patient approach. The firm is not waiting for a dramatic catalyst; it is waiting for the market to reprice these durable businesses. The investment decision is made not on a quarterly earnings beat, but on a long-term view of intrinsic value and the alignment of management incentives. When the price finally offers a sufficient discount, the catalyst is the market's own delayed recognition.