Investment Wisdom

41. DJCO Annual Meeting 2017: Part 1: 6 Lessons From The Maestro

Excellent Book: Charlie Munger For All Seasons

Ref: Adam Blum’s Notes

Lesson 1: The ethos of doing it right is a good ethos. Besides, it’s a pleasure to watch.

Lesson 2: If You Really Want To Invest Outside Your Circle of Competence, Judge Which People Are Capable of Running Those Businesses

Adam Blum’s notes from February 15, 2017 Daily Journal (DJCO) annual meeting.

This morning in Los Angeles, Charlie Munger spoke for a few minutes and then took questions for just short of two hours. CNBC cameras were there today filming the meeting for the first time. Charlie is in great spirits and looks great for age 93, and it was great to see him, as always. Here are the notes I typed out on my phone – apologies in advance for any errors.

-Adam Blum


“Nice to see you all.”

“Can you hear me? I need a script. We’re going to follow the procedure of the Berkshire meetings where we go through all the perfunctory stuff very quickly. And then we’ll get to the other stuff for a while for the cult. Many of you have come a long way to be here. We’re happy to be here when instead we should be dead.”

Gerry [Salzman, DJCO’s CEO with several other listed roles] has so many titles – it’s like a one man show.”

“We like our present accountants a lot more than our old ones who made us late.”

“Gerry Salzman – well I won’t go through all his titles – if you haven’t given your proxies, please give them to somebody.”

“And somebody is going to give a report that it’s all been mailed out as it should be? And how many shares are here? Do we have a majority?”

“Has everyone been elected?” In response to personally getting fewer votes than some of the other directors, “Everyone likes everyone better than me. I must say we’ve improved this place enormously – the average age

used to be 90, and now it’s down to 88 – we’ve really gone through a renewal.”

“All those opposed? Warren [Buffett] used to say ‘please leave.’”

DJCO Commentary

“The essence of what’s going on here is we have a corporation that was in a branch of the newspaper business, and our branch, like most others, has gone to hell. Almost every other branch is going to hell with no pardon – just disappearing. But we have this computer software business where we are serving the same customers but they’re located all over the country and other places. Our software business is of a type that it’s a long, tough slog. We’re slogging very well, and we love all the people in it – all the coders and them. It’s amazing the things that our happening in our little software business – it’s a fair amount of fun to watch. The ethos of the place is good in doing it right – it’s a pleasure to people like Rick [JP] Guerin and myself to watch all these people do it when of course we should be dead. A lot of you people came into this because of Berkshire’s or Guerin’s past success, and for some odd reason we accidentally fell into it [software/technology business]. We don’t do this venture stuff. If there’s  nything wrong, you’re looking at the man here to blame (pointing at Guerin and laughing); I’ll take credit for the successes. It’s amazing to me we are getting contracts from places like South Australia – I hardly know where that is. I would have never imagined this as a young boy.”

“I’ve never been able to enjoy losses like some people – I’d much rather win.”

“We’ve got all these folks in Utah who we really like and all these programmers around here, they’re great.”

“Our people try to get ahead by doing the work right instead of hiring some politician like a few others. What I learned in my career is that the best business-getter any lawyer has is the work that’s already on his desk. If we just keep doing it right, we won’t have to worry about the future.”

“Guerin and I know practically nothing about software; we are judging people, because we don’t understand anything about what the people do. That’s what Andrew Carnegie did with steel and what Berkshire does – judge which people are capable of running businesses I know nothing about.”

“It’s a long, slow business with RFPs and that. The cycle can be five years. It’s like prospecting for oil in Borneo.”  “I love when I think we’re taking territory – if it makes sense in the long term, we just don’t  give a damn what it looks like in the short term. After all, we’re running a cult, not a normal company.”

“I lived my whole life with people who have deferred gratification, they don’t have fun, but they get wealthy. You end up with a lot of rich dead people – what good is that? But it does work. Your grave will look nice to outsiders and incite a lot of envy.”

“We don’t take salaries or fees – we are a peculiar example – if you’re wealthy and own a share of a company and get to decide what it does and doesn’t do, maybe you shouldn’t try to grab all the money. Carnegie never to took a salary; Cornelius [Vanderbilt] lived on the dividends.”

General Q&A

“I don’t see you very well, so Gerry or somebody, point out where they are.”

On the DJCO revenue decline: “Gerry – you take that one – I’ll answer that it’s going fine (laughing).”

To Gerry: “[Put the microphone] closer to your mouth. It’s high tech.”

More on DJCO: “One good thing about what we’re doing is that it’s slow, but once you succeed it’s very sticky business, and the fact that it’s difficult to do means it’s difficult for people to change much – if you slog through, it’s a big market and the people have no option but to charge ahead – the fact that’s it’s so awful to grind through means people may not want to get in.”

On competitors of DJCO: “If I were buying software, I’d rather buy ours than theirs [Tyler Technologies]. I like our ethos better.”

On DJCO lower results: “We bought a bunch of contracts, and we knew that they were gonna end, and so we are amortizing the cost of those contracts, which was anticipated; the business is so big that there are whole states untapped with courts and public defenders and others – everyone is scrambling in a business that is growing bigger and bigger.”

Lesson 3: One thing about doing something dumb is that you’re unlikely to do it again.

On Wells Fargo’s scandal: “Wells Fargo had a glitch – the truth of the matter is they made a business judgment that was wrong. I don’t think anything is fundamentally wrong. They got so caught up in cross-selling and incentive systems [that] some people reacted badly and did things they shouldn’t. There’s nothing wrong with the long pull for Wells Fargo. They made a mistake. And it was an easy mistake to make. I don’t regard setting incentives aggressively as a mistake. I think the mistake was, when the bad news came, they didn’t recognize it directly. I don’t think that impairs the future of Wells Fargo. They’ll be better for it. One thing about doing something dumb is that you’re unlikely to do it again. Henry Singleton was smartest man I ever knew. He made the same mistake at Teledyne. His customer was the government, and it’s not hard to cheat the government.

With aggressive incentives, two or three of Henry’s subsidiaries cheated the government, and he got blindsided. It can happen to anybody. Capitalism is nice in its self-correction – make a mistake like that and pretty soon, you’re gone.”

More on the competitors of DJCO: “I am not dissatisfied by Tyler’s trouble – I don’t want to criticize them more than I have – one of our customers is having a problem with them. You can see the tears running down my cheeks (laughter).”

Lesson 4:  Software revenue is recurring versus non-recurring and it’s complicated.

On software revenue that’s recurring versus non-recurring: That is so complicated that I am not even going to try. To answer in substance, there’s a lot that’s recurring if we stay in there (chuckle). Our financials confuse us a little bit – they’re very complicated with all these RFPs and such.”

Why is the building in Logan, Utah used by the tech business owned by the traditional business and not the tech business? “Gerry – I give you that one – that’s some quirk of accounting – it doesn’t really matter.”

More on Wells Fargo and aggressive incentives: “How do you know they’re aggressive until you try?

Incentives. They didn’t react enough to the bad news fast enough. It’s dangerous to do but doesn’t impair their [Wells Fargo’s] future. They will be better, that’s the nice thing about doing something dumb – you won’t do it again.”

Lesson 5: In terms of picking what to do, in my whole life I’ve never succeeded much in something I wasn’t interested in. It’s too much to expect of human nature that you’re gonna be good at something you dislike.

Choosing what to do in life: “In terms of picking what to do, in my whole life I’ve never succeeded much in something I wasn’t interested in. It’s too much to expect of human nature that you’re gonna be good at something you dislike. Play in a game where you’ve got unusual talents, not basketball when you’re 5’1 going up against someone who is 8’3. Of course you want to be ethical, but you can’t be dreaming of how you think the world should be run and think it’s too dirty to get near it and get so consumed by ideological notions polluting you from left-wing universities that you’re just not working and smoking a little pot. My hero is Maimonides [Jewish scholar in the 1100s]. He did all his writing after working ten hours a day as a doctor. – I recommend the engaged life. Maimonides lived and worked with the people in the real world, which informed his philosophy and work. Be more like him and less like Bernie Sanders.”

Lesson 6: If You Can Predict Right Now What American Express and IBM Will Be Like, Are you Clever? You are probably in some state of delusion.

On confusion about American Express’ future: “I am going to give you an answer that will be very helpful – I am confused too – if you think you know what’s going to happen to payment systems ten years out, you’re probably under some state of delusion. If you’re confused, welcome to the club; I don’t know if IBM is going to sell that much of Watson either. If you keep trying to do the right thing and playing hard, chances are better, but these things are not knowable.”

On domestic gas production: “I have a different feeling than the rest of America. I wish we weren’t producing all this natural gas. I’d be delighted to just have it lie there untapped for decades in the future and pay extra once Arabs use up their oil. Our reserves not going away are like retaining the topsoil of Iowa. You wouldn’t ship the topsoil to Greenland. There’s not enough deferred gratification to sell our oil. Same for chemical feedstocks – use them slowly. I am sure I am right and the other 99% of the people are wrong. Nobody else in America seems to feel my way, but I believe in deferred gratification. I don’t think hastening to use our oil and gas is a good idea. I don’t see any advantage. People who succeed in most other businesses do more volume, but Exxon Mobil does less volume, yet the price of oil grows faster than the volume drop, so they do better. It’s very peculiar. If I were a benign despot, I wouldn’t ship any gas outside of the US.”