Wednesday, 7 September 2016

Charlie Munger's investments as Chairman of Daily Journal Corporation

Charlie Munger: Daily Journal Corporation

Charlie Munger is best known for his career as Vice-Chairman of Berkshire Hathaway Corporation and for being Warren Buffett’s right hand man. He is also chairman of the Daily Journal Corporation and has been instrumental in the Journal’s growth over the past six years.

The Daily Journal is a publisher specializing in legal text. The Daily Journal provides news of interest to members of the legal profession, specializes in public notice advertising, publishing state-mandated notices of death, fictitious business names, and sells software used to administer court cases. Charlie Munger started his working life as a lawyer, so the Daily Journal is a natural fit for him.

The Daily Journal was a strong business up 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. However, since 2010 revenue growth has slowed to around 2.6% per annum and net income has fallen by 75%. EBITDA has more than halved.

Luckily, during the first quarter of 2009, Charlie Munger used $15.5 million of the Daily Journal’s cash to purchase a number of securities for the company. At first, neither Charlie Munger nor the Journal disclosed these positions, (although with both Munger and Rick Gurin working at the Journal, these positions we certain to value orientated and low-risk). This post from The Value Investors Club blog post, written only a few months after Munger started buying shows the secrecy surround the transactions:

During the first quarter of 2009, Charlie Munger, Chairman of Daily Journal Corp. (DJCO), 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 (NYSE:WFC) and/or possibly U.S. Bancorp (NYSE:USB) 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 $15.5mm 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.” -- Value Investors Club July 2009.

Charlie Munger started buying securities with the Journal’s cash for two reasons. Firstly, value:

“We bought Wells Fargo & Co (NYSE:WFC) stock when it was at $8, and I don’t think we will have another opportunity like that.” --Charlie Munger Daily Journal 2015 Meeting [FULL NOTES]
Secondly, the Journal’s board believed that jumping into stocks was the safest move during the financial crisis:

“The board recognized that this decision would be contrary to the conventional (but questionable) notion that the least risky way to preserve corporate capital for the long-term benefit of stockholders is to invest it in government bonds at interest rates approximating zero,” Source.

From a starting point of just under $16 million, the Daily Journal’s portfolio had grown to $135.3 million as of 31 December 2014. The portfolio’s holding were revealed for the first time during 2014, and they are typical Buffett/Munger style investments. Four main companies account for the bulk of the portfolio; Wells Fargo (by far the largest position around 70% of portfolio), Bank of America, U.S. Bancorp and Korean steel producer Posco.

“Posco is the most efficient steel company in the world. It had a pretty close to a local monopoly position in its country for a long time. It is very hard to avoid being commoditized in the modern world. In the places like The The Dow Chemical Company (NYSE:DOW) Company (NYSE:DOW) with complex chemical process, with 1000 PhDs, it is still hard to not be commoditized. Posco was able to do so.” -- Charlie Munger Daily Journal 2015 Meeting [FULL NOTES]

And Charlie Munger’s investments have put a rocket under the Daily Journal’s book value growth. Here’s the Journal’s book value per share from year-end 2008 to year-end 2014.

Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 CAGR
Book Value Per Share $9.69 $11.31 $14.85 $19.66 $38.23 $43.94 $46.99 $63.17 $82.09 $98.77 29.43%
Data from Morningstar

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