Over the past decade, a little-known company called the Daily Journal Corp. (DJCO, Financial) has become one of the most followed businesses on the market. The reason why this company has been attracting so much attention is because of its chairman, Charlie Munger (Trades, Portfolio), who is also the vice-chairman of Berkshire Hathaway Inc. (BRK.A, Financial) (BRK.B, Financial) and Warren Buffett (Trades, Portfolio)'s right-hand man.
I thought it would be interesting to take a look at the Daily Journal story in a bit more depth because it's an exciting tale of mobile capital. In much the same way Buffett transformed Berkshire Hathaway from a struggling textile mill into one of the world's largest insurance groups, Munger has been able to use the Daily Journal's excess capital to reinvent the business, stave off decline and give the company options to grow ahead of its peers.
Building a portfolio
The company is a publisher specializing in legal texts and information services. It provides news of interest to members of the legal profession, specializes in public notice advertising, publishing state-mandated notices of death and fictitious business names, and sells software used to administer court cases. Despite the company's position in this market, however, the prevalence of information online and competitor growth has eaten away at its edge over the past two decades. Indeed, until the financial crisis, return on equity averaged 25% to 30% per annum, cash conversion was 70% per annum on average and book value doubled between 2005 and 2008.
In 2009, seeing blood in the streets, Munger decided to use the company's excess cash to make the most of the opportunities Mr. Market was offering. He deployed $15.5 million into the market. For a time, these positions were shrouded in secrecy.
This post from The Value Investors Club blog post, written only a few months after Munger started buying, highlights the secrecy surrounding the transactions:
“During the first quarter of 2009, Charlie Munger, Chairman of Daily Journal Corp, made a significant redeployment of the company’s excess cash into an investment in common equities. Based on circumstantial evidence, we believe (but cannot be 100% certain since the Company has not disclosed what its invested in) that Munger purchased shares of Wells Fargo & Co. (WFC, Financial) and/or possibly U.S. Bancorp (USB, Financial) at their recent early-March lows."
"As such, DJCO now contains a hidden asset that may not be fully reflected in its current share price."
“Based on circumstantial evidence, it appears possible that Munger plunked $15.5 mm of DJCO cash to buy WFC (or USB or both). If this speculation on DJCO's equity purchase(s) is correct, then that $15.5 million investment which rose to $24.7mm at the end of March would now be up to $33-42 million at today's prices for USB/WFC. Thus in summary, DJCO looks cheap at a market cap of $64.5 million...we believe there is good value in DJCO based on the strength of Munger's legendary capital allocation skills.”
Several years later, when asked why he decided to dive into the market, Munger responded:
“We bought Wells Fargo & Co. stock when it was at $8, and I don’t think we will have another opportunity like that.”Â
Today, this portfolio is worth an estimated $160 million, with Wells Fargo and Bank of America (BAC, Financial) making up the bulk of the assets. The portfolio accounts for around 50% of the Daily Journal's current market value today.
Changing with the times
It is interesting how the Daily Journal has shrunk as a business and is essentially more of a mutual fund than anything else, although it's still producing income from the legal side of the business. Management is looking to unlock more profit from this side of the business by digitizing records, but even these efforts are unlikely to bring back the glory days. As Munger described at the 2018 annual meeting:
"We are surviving but at a very modest profit, and it’s quite interesting what’s going on. There’s a huge…trove of valuable information burred in the court system that nobody could get out before under the computing power of the procedures of yore...But of course there are a horde of people trying to get into that...The chances that we get as dominant a position as we had before when we were the only newspaper that had timely publications and print, all the court opinions of course where lawyers needed to have them is zero. In other words, our glory days are behind us in this traditional business."
The business is now evolving around its software arm, which is slowly winning customers. Munger and team believe the one advantage they have over competitors on this front is the fact the Daily Journal has its equity portfolio to back it up, so there's no need to rush to book revenues:
"Buyers are very wary. And we are playing to that by…one of the advantages of being very rich is that we can behave better than other people. Not only are we very rich, we don’t give a damn about what we report in any given quarter, and that gives us an advantage in saying to these government agencies, “You’re not going to take a big risk with us because you’re not going to pay us until the system is working.” And I think it’s a very good idea that we’re using conservative accounting and have that attitude towards dealing with our customers. We want the customers to be right when they trust us."
It is interesting how this has worked out. Munger's decision to try and make the most of Mr. Market's manic nature has resulted in the Daily Journal becoming a much stronger and competitive business, which can afford to let the customer be right, an attractive trait from the customer's side. Maybe other newspaper groups would have benefited from using a similar approach.
Disclosure: The author owns no stocks mentioned.
