Charlie Munger’s Investing Genius with the Portfolio of Daily Journal
Unlike many other newspapers, Daily Journal Corporation’s market cap is growing rapidly. In the last ten years, it gained 173.65% to trade for $78 on Wednesday. Meanwhile, revenue has been relatively flat, falling annually since 2009 to $34.5 million, compared to $34 million for 2002. Earnings have grown more, and increased from $1.2 million to $7.8 million in 2011, while free cash flow grew each year since 2006.
Thanks to Charlie Munger’s investing advice, almost half of the company’s value now lies in its deftly managed portfolio. “The Company’s Chairman of the Board, Charles Munger, is also the vice chairman of Berkshire Hathaway Inc., which maintains a substantial investment portfolio. The Company’s Board of Directors has utilized his judgment and suggestions, as well as those of J.P. Guerin, the Company’s vice chairman, when selecting investments, and both of them will continue to play an important role in monitoring existing investments and selecting any future investments,” the company said.
The moves made in the last decade reflect Charlie Munger’s investing style. In the last decade, from 2002 to 2008, Daily Journal only invested in U.S. Treasury notes, as seen in the table below:
Yields for 2-year and 10-year Treasury notes reached over 5% in 2006 and 2007. By 2008, the portfolio had allocated more than $20 million to U.S. Treasury bills and owned no common stocks. Charlie Munger is known to be able to go years without investing anything if prices are too high. In 2008, when prices came crashing down with the market, the portfolio allocation abruptly changed.
In 2009, Daily Journal dropped its investment in Treasury notes to $6.6 million and bought $15.5 million in common stocks and $4.9 million in bonds. Its 10-K that year read, “In 2009, the Company used approximately $20 million of its cash to purchase marketable securities, consisting of common stocks and bonds of other companies, in hopes of generating a better return than that offered by U.S. Treasury Notes and Bills. The market value of the securities purchased by the Company has increased significantly since they were purchased, providing the Company with even more working capital (although subject to the normal risks associated with owning stocks and bonds).”
Later, the company disclosed that the stocks purchased that year were two Fortune 200 companies, though it did not say the names. Some have speculated that they are Wells Fargo (WFC) and U.S. Bancorp (USB) due to the timing and subsequent value of the holdings. There is also speculation that one of the securities is BYD, the electric battery and car manufacturer, as Munger was the one who introduced the stock to Warren Buffett for Berkshire’s portfolio.
In its 2010 10-K, the company began showing its gains in these securities, which were substantial. Its $15.5 million in marketable securities and common stocks already had a $43 million aggregate fair value – $27.5 million in unrealized gains. Bonds also did well. The portfolio’s $4.9 million of bonds ballooned to a value of $7.1 million – a $2.2 million gain.
The next year he increased the company’s stock position to $26.7 million and kept the same amount of bonds. In the second and third quarters of 2011, the company bought shares of two foreign manufacturing companies. The cost of $31.6 million it paid for the securities had a market value of $56.1 million at Sept. 30, 2011, and generated about $1.2 million in dividends and interest income. As of September 30, 2011, there were unrealized pretax gains of $24,532,000 as compared to $29,655,000 at September 30, 2010. Most of the unrealized gains were in the common stocks,” the company said in its 10-K.
In its most recent 10-Q, Daily Journal said it sold all but $500,000 of the company’s U.S. Treasury bills and bought common stock in one more Fortune 200 company in the three months ended December 31. At that date it had $40.2 million invested in six stocks, with a value of $68.7 million, representing $28.5 million in gains.
The portfolio’s total value of $76.7 million now represents over half of the company’s $107.7 million market cap and is more than seven times its 2011 free cash flow of $10.2 million.
The names of the companies Daily Journal owns are unknown, except that they are two foreign manufacturing companies, and a total of three Fortune 200 companies. He has also left Treasuries, as has Prem Watsa, either because they’re less attractive or stocks are even more so.