One of my favorite investors is Guy Spier. His book, "The Education of a Value Investor," was one of the first investing books that stood out to me, as I was able to connect with the writer and investor.
Since first reading the book, I have been following the investor and his hedge fund, Aquamarine Capital.
Something I have noticed about Spier's strategy is that he trades very infrequently. Since the first quarter of 2016, he has only bought eight new positions and sold seven. That's less than one trade per quarter (although this excludes any additions to existing positions or reducing holdings).
He made two new additions to his portfolio in the second quarter of 2021. These were Alibaba Group Holding Ltd. (BABA, Financial) and the Daily Journal Corp. (DJCO, Financial).
If I were to hazard a guess at the reasoning behind these trades, I would say that the value investor is copying Charlie Munger (Trades, Portfolio) with his position in the Chinese e-commerce company.
Munger, the chairman of the Daily Journal, bought Alibaba for the publisher's portfolio in the second quarter of 2021.
This was his first significant addition to the portfolio since the financial crisis.
I have written several times about this position in the past, so I'm not going to cover it again. However, I am interested in Spier's holding of the Daily Journal.
Is the Daily Journal a value investment?
I have considered initiating a position in this company several times. It is the only way investors can buy exposure to Munger's investment ideas (Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) portfolio is primarily managed by Warren Buffett (Trades, Portfolio) with minimal input from his right-hand man).
According to Aquamarine's second-quarter 13-F, the investment fund owned 11,500 shares in the Daily Journal at the end of June, making it a 1.8% portfolio weight. It also owned 47,500 shares of Alibaba, making it a 5.1% portfolio weight.
At the time of writing, the Daily Journal has a market capitalization of just under $476 million. According to the company's fiscal first-half 10-Q, its marketable securities were valued at $294 million at the end of March. Using a basic back-of-the-envelope calculation, these figures imply the market is valuing the rest of the business at $182 million.
The rest of the business is quite tricky to value. Based on my analysis, what we have in the traditional business is a highly specialized legal company that develops unique software to help the legal profession across the country. Munger has said that this software is incredibly complex, suggesting this could be valuable intellectual property.
However, this side of the business does not earn a lot of money. Operating income from the traditional legal side of the business totaled just $1.3 million in the three months to the end of March. That was greatly improved from a loss of $1.1 million in the same period a year ago.
Revenue may be a better indicator of company performance. Group revenue totaled $24.4 million in the six months to the end of March, up from $24 million in the prior-year period. This works out at $48.8 million on an annualized basis.
Using these figures, after deducting the value of the investment portfolio, but without giving any weight to other liabilities, the business side of the Daily Journal is currently valued at 3.7 times sales. That does not look cheap, but it does not look expensive either.
These figures imply the Daily Journal's equity is neither cheap nor expensive. Still, they do not credit its intellectual property or the potential for growth from the equity portfolio. This is where the real value may lie, so it might be worth investigating further.
