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Charlie Munger and the Daily Journal Corporation

December 12, 2009 | About:
Harry Long

Harry Long

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I am usually not given over to flights of fancy, but today, I thought I would make an exception when it comes to irresponsible speculation. For the record, everything outlined below is merely guesswork. Perhaps it would be too generous to even call it educated guesswork. But the kind reader can come to his or her own conclusions.

Long-time students of Charlie Munger are quite aware of Wesco (WSC), which Charlie has been Chairman of for some years.

However, the Daily Journal Corporation (DJCO), while smaller, is perhaps the fullest public expression of Charlie Munger's business creativity. According to the DJCO's latest proxy statement, Munger, Marshall & Co control 41.1% of the company's stock. Mr. Munger and Mr. Marshall are the sole general partners of the Munger, Marshall & Co partnership.

DJCO consistently achieves return on capital, margin, and free cash flow metrics which make it the envy of its less well run, larger peers, as TheStreet.com recently pointed out (link: www.thestreet.com/_yahoo/story/10605504/...).

As a canvass upon which Charlie might paint, it could be an interesting window into his personal investing (or maybe not). To be clear, I cannot prove that Charlie Munger controls the investment policy and portfolio of the Daily Journal Corporation. However, I would be highly surprised, as a general partner of its major shareholder, if he did not.

Throughout the financial crisis, and indeed, for many years, the DJCO has sat on a massive portfolio of U.S. Treasury Notes and Bills (http://sec.gov/cgi-bin/browse-edgar?company=&match=&CIK=djco&filenum=&State=&Country=&SIC=&owner=exclude&Find=Find+Companies&action=getcompany).

In my estimation, it looks like DJCO took much of its considerable cash flow for many years, and let it pile up on its balance sheet. DJCO is, and has been, very cheap on a price/cash flow basis once one recognizes that it's investment portfolio is not actually needed in daily publishing operations, but is a wonderful bonus.

Then, quite suddenly, in the quarter ending March 31st, DJCO reported owning $24.7 million in common stocks, after not holding any common stocks for years according to 10-K filings. In my estimation, Charlie Munger pounced. But on what?

In the next quarter ending on June 30th, DJCO reported holdings of $41,126,000 in common stocks. Page 8 of 17 in the latest 10-Q reports that the common stocks had an amortized cost basis of $15,501,000. Even with the market's rise and Charlie's investment acumen, I doubt that such an increase in the fair value of the common stocks could represent a diversified portfolio, but I could be wrong. Charlie is known for advocating concentration.

If we follow the dictates of Occam's Razor, what would be the most obvious candidate? Call me Master of the Obvious, but it doesn't take a genius to guess that one mystery stock might be BYD Company Limited (symbol 1211 in HK), maker of, among other things, batteries and electric cars.

What are my reasons for the speculation that BYD is the most obvious candidate?

I. Charlie Munger found BYD and recommended that Warren invest in it through Berkshire Hathaway (BRK.A) (link: online.wsj.com/article/SB124113732066375...)

II. Charlie Munger is extremely enthusiastic about BYD's management. According to the Wall Street Journal, Charlie Munger described Wang Chuanfu, BYD's CEO as, "likely to be one of the most important business people who ever lived." Charlie often puts his money where his mouth is. I would be surprised if DJCO's investment portfolio was an exception.

According to Fortune, Charlie says CEO Wang Chuanfu "is a combination of Thomas Edison and Jack Welch - something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I have never seen anything like it." (link: money.cnn.com/2009/04/13/technology/gunt.../)

III. During the quarters in question, BYD has had a rapid appreciation in stock price which, if my calculations are correct, would make an increase in any DJCO stake from roughly $15.5 million to $41.1 million possible.

Of course, I would be very embarrassed to be wrong, and don't want to get sued for suggesting that a large part of DJCO's portfolio may be in one company, or even in BYD at all.

It is possible that Charlie Munger has nothing to do with DJCO's investment portfolio, it is possible that DJCO holds no BYD, and it is possible that DJCO's portfolio is chock full of dozens of common stocks which, on average, have gone up tremendously. DJCO could own anything. Somehow, though, I doubt it. J.P “Rick” Guerin is another board member and an investor, so it is possible that other board members, or even management itself is allocating capital (but somehow I doubt it).

Perhaps, I am focusing on a publicly disclosed investment by Berkshire, at the expense of considering that Charlie, as a discreet man, may have dozens of stock ideas like BYD which might have similar appreciation potential. I am merely speculating.

However, when a company Charlie controls, directly or indirectly, by virtue of such a large ownership interest suddenly moves a large part of its holdings from Treasuries to common stocks, I take notice and cannot help but guess as to what they are buying.

If BYD is in DJCO's portfolio, however, it has appreciated significantly from the latest quarterly filing. But perhaps it doesn't really matter what stocks are in DJCO's portfolio, or who is investing it. Whoever it is, they are doing a wonderful job since moving a large chunk of capital from cash to stocks.

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Disclosure: Harry Long has no positions in BYD Company Limited or DJCO, but may soon.


Rating: 3.8/5 (24 votes)

Comments

batbeer2
Batbeer2 premium member - 4 years ago
http://sec.gov/Archives/edgar/data/783412/000114036109018729/form10q.htm

From the march 10q:

”Cash and cash equivalents and U.S Treasury Notes and Bills were used primarily for the purchase of marketable securities of $15,501,000…. All the marketable securities are common stocks, and almost all of the unrealized appreciation was in common stocks.

Meaning: Between dec 31 and mar 31, DJCO spent 15,5m on stocks.

Mar. 31, 2009; Fair value of Common Stock $24,7 million at a cost of 15,5 m

a 60% gain within the march quarter

Jun. 30, 2009; Fair value of common Stock $41,126 at a cost of 15,5m

a 66% gain for the full june quarter.

I believe the BYD ADRs closed near 20 at the end of march and never traded below 16 in that quarter. Unless someone sold BYD far below the market price, it just can't be BYD.

Assuming there was no trading (unlikely given the constant cost basis) and also assuming we are dealing with a single stock, this could be 1,7m shares of WFC bought at $9 in the first week of march.

P.S. Replace BYD with WFC in the article and I give it five stars :-)
Harry Long
Harry Long - 4 years ago
Batbeer, you are exactly right. Unless they got a private placement (and there is no mention of that anywhere), the March quarter rules out BYD .Thank you for catching that note in the filings.

dew_nay
Dew_nay - 4 years ago
If the portfolio consists of only one stock, it is not likely to be either BYD or WFC. Measured from end Mar to end Jun, BYD increased by more than 100% while WFC by 70%. Which is more than the 66% during the same period for DJCO's portfolio. Even the portfolio is a combination of either of these two, it is not possible either because if it is, then the DJCO return must show between 70% to 100%. It could be some other obscure stocks that got on their radar - mostly likely a small cap stock that did not got Berkshire interested.
dew_nay
Dew_nay - 4 years ago
If the portfolio consists of only one stock, it is not likely to be either BYD or WFC. Measured from end Mar to end Jun, BYD increased by more than 100% while WFC by 70%. Which is more than the 66% during the same period for DJCO's portfolio. Even the portfolio is a combination of either of these two, it is not possible either because if it is, then the DJCO return must show between 70% to 100%. It could be some other obscure stocks that got on their radar - mostly likely a small cap stock that did not got Berkshire interested. If it is only one stock, the mystery is in solving which stock increased exactly by 66.4% from the closing of Mar 31 to Jun 30.
batbeer2
Batbeer2 premium member - 4 years ago
Just for giggles.....

DJCO owns 70 000 sq. ft. of office space in LA. Some say it is in a prime location. Given that net PPE on the balance sheet is 10m; that works out to $ 140 per sq. foot; Ignoring the other assets that is.

Any LA locals on this forum ?

musicneverstops
Musicneverstops - 4 years ago
Using a (legal) newspaper company to invest in electric car manufacturer equities... Notwithstanding the theory being disproven above, does anyone else see irony here?
batbeer2
Batbeer2 premium member - 4 years ago
does anyone else see irony here?

Ehm..... no.

Then again, I do not think of DJCO as a newspaper company. Most of the operating income is probably from software services. They could choose to pay out all profits as dividends (check out PMD) but I think Charles munger is a better investor than I. If he reinvests the dividends for me (without the tax drag); I don't mind much.
musicneverstops
Musicneverstops - 4 years ago
"Then again, I do not think of DJCO as a newspaper company. Most of the operating income is probably from software services."Munger is a great capital allocator who, as demonstrated by his comments at the Berkshire annual meeting, understands the impending death of the newspaper industry. He would be wise to invest DJCO assets in more forward-looking, growing industries. But your assumption is baseless. DJCO net income comes mostly from advertising and circulations/subscriptions.

From their 2008 10K income statement:

Revenues

$23,751,000 from Advertising

$8,538,000 from Circulation

$4,777,000 from Information systems and services (including Sustain case management software)

$3,539,000 from Advertising service fees and other

Income before taxes

$11,588,000

It's impossible that $4,777,000 in revenue from software services earned "most of the operating income". The revenue doesn't even amount to half of the operating income.

The irony is that Munger may be moving the assets of a dying industry (newspapers) to an emerging industry (electric cars). I can't think of two industries more divergent in their future prospects. As further irony, some other notable investors are dumping money earned from growing industries into the newspaper industry (i.e. telecom billionaire Carlos Slim and the NY Times).

batbeer2
Batbeer2 premium member - 4 years ago
I stand corrected.
dew_nay
Dew_nay - 4 years ago
10K is out. Value of the stock portfolio increased by 16% plus over the last quarter. Very unlikely that it consists of BYD. Instead, it looks more like WFC. If it is WFC, the portfolio is poised to be lesser today than it was on the closing day of Sep 30, 2009.

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