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Charlie Munger and the Daily Journal Corporation

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Dec 12, 2009
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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.


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