Transcript of Charlie Munger’s Daily Journal Corporation annual meeting for the year of 2016 – Recording and transcript by Whitney Tilson, Managing Partner, Kase Capital Management, WTilson@kasecapital.com; Edited for clarity by Jesse Koltes, Editor, TheCharlieton.com, firstname.lastname@example.org.
On February 11, 2016, Charlie Munger hosted the 2016 annual meeting of the Daily Journal Corporation (NASDAQ:DJCO) at the company’s headquarters in Los Angeles, California.
[Beginning of recorded material]
Charlie Munger's 2016 Daily Journal Annual Meeting - Transcript
Charlie Munger (opening remarks): What’s interesting about this company, of course, is that it’s a newspaper, historically. Now it’s a newspaper that relies on a combination of public service advertising and circulation revenues, and for a long time it was the only efficient means of delivering decisions of appellate courts promptly, which gave us a monopoly. Every year we raised the price of subscriptions, and every year people had to pay it. A wonderful business.
Of course, like other newspapers, technology changed, and the business went to hell as lawyers no longer needed it for information about the appellate decisions. The result was that our newspaper business shrunk.
So we have this newspaper that formerly had monopolistic qualities and like many newspapers it was a fine business. It required some management even so, but it was foolproof. And, of course, the world changed, for us as for other newspapers, and a million dollars a year pre-tax is what we have left.
Whether it will keep going down a little or hold there I don’t know, but if any of you are holding this stock because you want that newspaper to come back to its former glory, I suspect you’ve developed some different rationale.
What we did as we were shrinking toward oblivion was that we made a lot of money during the foreclosure boom. We had more than 80% of the foreclosure notice business and it was like being an undertaker during a plague year. It was huge prosperity for us coming at a time when everybody else was in total agony. That gave us a lot of money and we used that money to buy securities at low prices during a panic, and aided by that peculiar response to the deterioration of our newspaper business, we have entered this software business, and that has been a slow, expensive, troublesome thing.
We have written off practically everything we spent on it, and we had plenty of taxable income to do that with, and what’s happened is that we now have more software revenues than print revenues, and the software business is doing way better. It isn’t doing better in terms of reported earnings, but on the sales field we’re just doing better and better because our product we honestly believe is way better than the competitors and there’s an endless market for software in these public agencies...district attorneys, adoption agencies, courts...you can hardly imagine anything more sure to keep flourishing and to keep needing more and better software services.
Now it’s agony to do business with a whole bunch of public bodies and their consultants and their bureaucracies and so on. It’s such agony that a lot of companies that are in software don’t come near it. If you’re Microsoft, you’re used to easy money. This just looks like agony. Microsoft did buy one little business that’s about half as difficult as ours, and I think it’s worth more than they paid for it, but it’s not a great success. The really big boys find our niche in the software market such agony that they tend to stay out of it.
I think our products are probably better than those of our main opposition but of course our opposition has way more of the market. As nearly as I can tell we are gaining every month. So what you people have now is sort of a venture capital operation in the software business and the tag-end remnants of a newspaper attached. The stock may be reasonable if you like highly valued venture capital investments. But for you old-time Ben Graham groupies, you’re in a new territory. I’m not saying it won’t work, but if it works you don’t really deserve it. [Laughter]
All right, now I’ll take questions.
Questioner: One question is about Journal Technologies. The other is about your philanthropic efforts. So, with Journal Technologies: in the next year could you tell us about one or two opportunities that you feel real excited about for Journal Technologies. And also in the next year, what are one or two hurdles or threats that you’re concerned about?
Charlie Munger: The one I was most excited about was getting the contract from the Los Angeles courts. That’s one of the biggest court systems on earth, and that was a crucial milestone as far as I was concerned....
The new business is interesting because it’s a big market, and if we get entrenched in it, it will be very sticky. Which has occurred to us as we suffered all this agony. At least we were suffering agonies in the attempt to get in a position from which we’d be hard to dislodge.
The main threat or hurdle is that we want to be the most important player in this new niche. I don’t regard that battle as won. I regard that as going well but not won. I’d go further: going very well but not won.
Questioner: You’ve said that the only thing you want to know is where you’re going to die so you never go there. It is a very powerful philosophy. And when you talk about investing, you want to stay in that circle of competence. And a few years ago, Warren Buffett decided to buy IBM, and then I think he’s still very optimistic. And some people would say he maybe stepped out of his circle of competence?
Charlie Munger: IBM is a lot like us. They have a traditional business that is very large and very steady. And of course the world changed, and in a lot of what was the new world they were not the leader of. Oracle and Microsoft and all kinds of other people that were formerly not so large. And they didn’t do well in personal computers, even though they pretty well started it.
And so IBM is in a position a lot like us in that they have an old business from which cash continues to flow, but they want a new product that’s a hit. Now, the product they have chosen to back is this automated checklist. Well, automated checklists are a very good idea and it may be particularly useful in things like medicine.
I would say the jury is out on that. I don’t really have an opinion. I’m neither a believer nor a disbeliever . . . It could happen, it could not happen, as far as I’m concerned. I do think the old business of IBM is very sticky and will die slowly. . . . the matter is . . . we make great big bets and hold them for long periods. That’s a tough game. We have to make bets that are not the kind of shooting fish in a barrel [bets] . . . and that’s one of them. So on that one, the answer my friend is blowin’ in the wind. It may work in a mediocre way, it may work big. I just don’t know.
Questioner: What advice do you give your grandchildren? And the second question is do you have a favorite investment story?
Charlie Munger: Concerning the grandchildren: I was not able to change my children very much . . . Clarence Darrow quoted, “I am the master of my fate, I am the captain of my soul.” Clarence Darrow said, “Master of my fate? Hell, I don’t even pull an oar.” That’s the way I feel about changing the children. As for my grandchildren, I think, thank God they’re somebody else’s problem. I served my time.
Investment stories from my younger days: This is one I’ve never told. Years ago, 1962, my friend Al Marshall came to me and said he wanted my help in bidding for some oil royalties being put up for auction. I soon realized that under the peculiar rules of an idiot civilization, the only people who were going to bid for these oil royalties were oil royalty brokers, who were a scroungy, dishonorable, cheap bunch of bastards who realized that nobody would ever bid at their price. [Unintelligible]. [The auction] excluded everybody but these kind of shady difficult cheap bastards.
So we bid for the oil royalties and financed [the purchase]. I think we each put up a thousand dollars? And fifty years later we were getting $100,000 a year on that investment. The trouble with that story is that it only happened once. That’s true of most investment stories. You don’t get very many. It isn’t like that kind of opportunity comes along every day. The trick in life is when you get the one, or two or three that is your fair allotment for a lifetime, you’ve got to do something about it. So that’s my story from my youthful days.
Questioner: How does the current energy environment compare to the early ‘80s when you were in Wesco?
Charlie Munger: Of course, we owned Wesco for a long time. What was interesting about [the acquisitions of] Wesco is that they were eventually among the most successful investments in the history of mankind. What’s interesting about those outcomes is that it was only five or six transactions that carried all the freight. We focused on doing a few things over a long period of time and having them work out well.
Those little nothing companies? They were all doomed savings and loan associations, and savings and loans [were] pretty well gone, and yet they worked out fairly well. There again, just a few decisions over a long period of time. Someone with great investment success once said you make your money by the waiting. That doesn’t mean you sit around waiting for the next depression. You can’t do that. But a fair amount of patience is required . . . Patience followed by pretty aggressive conduct.
Imagine sitting there having all this money rolling in from the foreclosure boom and in like one day [being fully invested]. Now that was luck [but] it wasn’t luck that we had the money on hand when other people didn’t and were willing to deploy it when other people [didn’t].
Questioner: Historically, Berkshire was built around its insurance operations to provide a low-cost source of capital. What other business models did you try/consider but ultimately did not pursue?
Charlie Munger: Well, we were always opportunistic. We wanted to buy the best thing that was conveniently available that we could understand. In the early days we thought we had a special advantage as investors in marketable securities. So we tended to look carefully at float businesses.
Nowadays, of course, we have enormous float but not [of] much usefulness. Such is the nature of life. We made so much money out of those float businesses it was obscene in the early days. It is not a tragedy that now our float businesses don’t get much advantage above the . . . . Berkshire’s cash, which is large, is not getting much of a return. In Europe the rates are negative. In Japan the rates are negative.
Questioner: What do you think about the attractiveness of the average software business?
Charlie Munger: The software-based businesses: some of ‘em have become some of the most profitable businesses on earth. Other software companies are shrinking and failing. So it’s like the rest of capitalism. It has its good spots and its bad spots. As I said, the ones we’re pursuing I think will be sticky if we succeed in it.
Questioner: Journal Technologies is growing slower than some of the competitors are paying high multiples for acquisitions, would you ever consider selling Journal Technologies?
Charlie Munger: Well nobody’s offered us a high multiple, and so we haven’t had the problem and/or the opportunity. It’s a peculiar part of the software business involving a lot of agony now for a payoff way later. You can’t judge it as a normal business, or as a normal rollup of profitable companies. It’s venture capital; it just happens to be located in a [newspaper] company.
It’s venture capital that if it works can gradually evolve into a pretty huge business. But of course, everybody’s trying to evolve into a pretty huge business, and only a few will succeed. We’re not like a normal software business. And those little companies – you shouldn’t call -- those are not acquisitions like Berkshire Hathaway makes acquisitions. Those are not established companies that we’re sure to succeed and [are] relatively foolproof.
If we were gonna make our venture capital-type assault on this peculiar part of the software market, we needed momentum from other sales forces and service operations and so forth, so we just bought ‘em. But don’t judge those things by the standards of normal corporate acquisitions. Those are part of venture capital, and if you don’t like it you can lump it.
Questioner: If you were to design CEO compensation for either an insurance company or a bank, how would you do that, and what would you do?
Charlie Munger: At the Daily Journal, there are our own ways of doing things. We don’t follow everybody else’s established patterns. We just try to do whatever makes sense under the circumstances. Around here, we just ask Gary to do everything. So that’s our system here.
Questioner: What are your expectations regarding BYD for the next ten years?
Charlie Munger: Well, we get a lot of questions on a lot of subjects, and I suppose that’s a legitimate question. BYD has 220,000 employees. That is a big company. That too was venture capital. That company has done amazing things.
The man who created that company was the eighth son of a peasant. He went to night school and got a Ph.D. and started off by borrowing $300,000 from a bank in China or somebody like that, and went into small batteries for cell phones, and so forth, which was totally dominated by high-tech Japanese . . . And he succeeded in grabbing up a part of the market and starting BYD. And he won the intellectual property aspects of a litigation that followed, which happened in Japan.
So he was a very remarkable man who did an almost insanely ambitious thing. And out of that he now has 200,000-some employees and a huge lithium battery business. It’s going to be one of the biggest lithium battery makers in the whole world very shortly. And last month he sold 10,000 electric cars in China, which is more than Tesla sold. Of course, nobody’s hardly ever heard of BYD.
It’s an interesting company. Berkshire doesn’t do this venture capital stuff. [I] hope the Daily Journal works out half as well as BYD worked out. BYD is in a position, on purpose, to benefit from this electrification trend in the world. It’s very helpful to them that the people are dying on the streets of Beijing because they can’t breathe the air.
They have to go to electric cars. Grab all these subsidies, and so forth, and be way ahead in terms of [the] efficient manufacturing of electric cars sold.
And electric fork lifts in this country: do you really want a forklift spewing out carbon monoxide in the middle of your warehouse? So electric forklifts are a very big idea. They’re very well-located. That’s a very interesting venture capital investment. That was an accident, sort of, that Berkshire departed from its standard methods and did that one. And it was an accident that Daily Journal is doing its version of venture capital. I only wish our prospects were as good as BYD’s. And by the way, they might be…
Se full transcript below.