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Charlie Munger and the Daily Journal Corporation (DJCO)


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Guest HarryLong

Hi Guys,

 

Here is something I just posted on my seekingalpha instablog, hope y'all like it. I would be delighted if I could get some feedback on my theory.

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Charlie Munger and the Daily Journal Corporation (DJCO)

 

http://seekingalpha.com/author/harry-long/instablog

 

 

 

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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  • 4 years later...

 

 

 

 

There was no mention of a BYD investment. It does however examine the stocks that Wesco has and concludes that DJCO may have exposure to similar stocks (primarily KO, PG, WFC).

 

With Charlie and Warren, you have to learn to read btw the lines.  This is from the 10K:

 

During fiscal 2013, the Company's cash and cash equivalents, and marketable security positions increased by $44,391,000. Cash and cash equivalents were used primarily for the purchase of capital assets of $280,000 (mostly computer software and office equipment). During the first quarter of fiscal 2013, the Company borrowed $14 million from its investment margin account to purchase all of the outstanding stock of New Dawn, and during the fourth quarter of fiscal 2013, it borrowed another $15.5 million to acquire substantially all assets and liabilities of ISD Corporation, in each case pledging its marketable securities to obtain favorable financing. During the first quarter of fiscal 2012, the Company bought shares of common stock of a Fortune 200 company, and during the third quarter of fiscal 2012, it bought additional shares of common stock of one of the foreign manufacturing companies in which it had previously invested. There were no additional purchases in fiscal 2013. The investments in marketable securities, which cost approximately $47,976,000 and had a market value of about $136,994,000 at September 30, 2013, generated approximately $2,541,000 in dividends and interest income, which lowers the Company’s effective income tax rate because of the dividends received deduction. As of September 30, 2013, there were unrealized investment pretax gains of $89,018,000 as compared to $52,464,000 as of September 30, 2012. Most of the unrealized gains were in the common stocks of three U.S. financial institutions.
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HarryLong,

 

Thanks for sharing the article you penned on SA, but I truly believe you are WAY OFF the mark.

 

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).

 

Charlie Munger has everything to do with the DJCO's investment portfolio and decision of what go into that portfolio.  Before any of you or most of people on this board ever heard of the DJCO's portfolio, I was there in 2009 at his DJCO annual meeting when there was only 15-20 of us in a small conference room.  We got Charlie all to ourselves for 2 hrs for unadulterated, frank discussion about finance and investing.  It was an amazing day!  I still have those notes that I wrote because there were a few of us who asked Charlie how long did it take for Charlie to make a decision to buy into WFC.  Do you know what his response was?  2 SECONDS!  Imagine that.  He and Rick Guerin took 2 SECONDS to decide to buy WFC.  In order to do that, one must have a very good filter and a very good mental model to act with "gumption" as Charlie talked about often at last year's annual meeting.

 

At the 2010 DJCO annual meeting, the crowd got a little larger, but Charlie spent quite a long time talking BYD and raving about it along with the slew of banks he was holding.  Last year, he had Li Lu took all of the questions on BYD bc Li Lu was the one that came up with the BYD investment idea originally when both Charlie and Buffett first bought in a few years back.  Needless to say, if you had followed DJCO's filings, you would see a pattern of "foreign manufacturing" purchase in 2012. 

 

More importantly, you do some basic math by looking into DJCO's 13F and then subtract that against the value of investment on the balance sheet, and you shall draw your own conclusion about BYD.

 

Nice article, but it's nothing more than conjecture reading to entertain the eyeballs...

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As much as I love the Daily Journal and Charlie, a significant deviation between market value and intrinsic value has developed. Once you back out the net investment portfolio (the portfolio is pretty predictable), the market puts an ever increasing value on a declining business. If you would regard this extra premium as the price to be in business with Charlie, it sure gets expensive, especially since he rarely changes the composition of the portfolio and less net cash is added to the investable assets each year.

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As much as I love the Daily Journal and Charlie, a significant deviation between market value and intrinsic value has developed. Once you back out the net investment portfolio (the portfolio is pretty predictable), the market puts an ever increasing value on a declining business. If you would regard this extra premium as the price to be in business with Charlie, it sure gets expensive, especially since he rarely changes the composition of the portfolio and less net cash is added to the investable assets each year.

 

+1

 

The operating business is now valued at 30x earnings.

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so you wouldn't invest 200 bucks to see him speak every year for the next 3 or so years at least?

 

in the end if the valuation is corrected, you could be down like 33 bucks per event. that's a pretty cheap price to pay to hear this guy speak his mind. if i lived any closer i would've probably bought a share. never mind the valuation.

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I was referring to the Berkshire Hathaway meetings, and you can buy entry into those for just $5 on eBay for a shareholder pass.

 

I'm not sure about the specific rules of the DJCO meeting, but I think it's the case that you don't have to be a shareholder for that one either -- someone who has gone should chime in here on whether that's the case.

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I was referring to the Berkshire Hathaway meetings

great stuff!

 

Charlie's annual meetings (Wesco, DJCO) have always been open to public. You do not need to be a shareholder to attend.

i thought this might be the case. he seems like a great guy :) wish i could go some day. reading transcripts never really is the same as seeing and hearing.

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  • 4 months later...

I have taken a small short position in DJCO today, as its market cap reached $300mln today. The implicit Munger premium (market cap - (stock portfolio + net cash - minus margin debt + 4x EBITDA for the ongoing business)) has reached an unsustainable all time high at a point where he is towards the end of his career, the upside of the stock portfolio is limited and the core business is crumbling. I love Charlie, but a 30% discount to today's price (which is still a substantial premium) should be warranted.

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  • 5 weeks later...

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