Pointer 1: I don’t think either Rick or I felt at all comfortable telling somebody else what we thought on every subject as if we were God, and so we never did it.
Charlie Munger: and this building, which, of course, is on a site that we cleared old buildings off of. You have the Tilmet Building (sp?). That was very cheap to construct. You can look around at how nicely it works. It’s a very inexpensive building. It has high ceilings and good lighting et cetera.
First, we’ll talk briefly about the Daily Journal business. And, of course, the Daily Journal is really two businesses. It’s the traditional…Well, it’s really three businesses. First, it’s the traditional information-providing newspaper for lawyers. Second, it’s the newspaper that publishes a lot of public notices that are required by law, which is where a lot of the money has been made, of course. And third, of course, we have this relatively new software business, which is really a form of venture capital since a lot of meaningful money has not been made, and a fair amount has been lost from the two businesses that are now combined. The traditional information business is suffering tremendous headwinds. This business made a lot a money out of lawyers’ subscriptions for a long time because there was no way a lawyer could get information about the recent decisions in, say, the appellate courts in California and the federal appellate courts in California except by picking up the “Daily Appellate Report,” which we included in our newspapers. We had something that lawyers had to have, and there was no way in the old technology for them to get it on time except through our newspaper. When the electronic stuff came, the lawyers were all trained to use electronic media to keep up with the courts. And the new lawyers coming out could hardly do anything else but pound keys on a computer. It wasn’t good for our traditional information model and our subscriptions continue to shrink year after year after year.
The public notice business, of course, is an ancient business. The old technology where the law wanted people to have some public way of getting notice and the only way to do it was with a printing press. They passed all these laws. The people who pass laws have not been quick to change from the old printed method to the modern post ink and storage basis, accessible by computer.And that has preserved revenues from the old business, and then you had the foreclosure boom, of course. There was a torrent of revenues. I don’t think there ever was a foreclosure boom — let’s call it a boom, it was a boom for us — as big as the one we’ve just been through.
There’s never been anything like it. And it’s not over. There’s still a considerable pipeline of underwater homes. Of course, it’s through the press. That’s the traditional business. Of course, we’ve made an unholy amount of money out of the public notice business, which I do not regard as a business I would bet on for the next 50 years. In other words, it’s got a Sword of Damocles hanging over its head, and the traditional print business presents a very interesting problem. Of course, practically all newspapers in America have faced the same technological revolution from changing technology, and the standard result has been an enormous impairment of the business that was a total monopoly for most proprietors of the only daily newspaper in a city or community. They own the world. An idiot could make money, and a man who’s half-way competent could make an enormous amount of money.
The by-product that happened with that, and that with all this impregnable economic power, the people who controlled the newspapers, influenced by the ethos of the journalists that worked for them, by and large behaved pretty well. Whether they were Republicans or Democrats, and they got … the fourth estate. They helped run the country.
Here was a totally independent part of the governmental system in functioning actuality that served very well. That’s why they call it the fourth estate. Nobody who created the Constitution had any thought of deliberately creating local monopolies. That we would have a separate branch of the government that just sort of arose through accident and had this enormous power, but that system which evolved by accident served this country very well.
The daily press with all its power is by and large civic-minded and honest all through the country, and of course, it’s horribly threatened. The country is going to pay a terrible price for losing this constructive influence. … isn’t like we don’t have any other journalism, but I think that we are losing something.
We never used The Daily Journal, which you people own part of, as a mouthpiece for our personal political opinions. For one thing, we didn’t have an impregnable monopoly. For another thing, we just didn’t want… we had very intelligent readers, judges and lawyers. Half of them were in one party, and half of them were in another. I don’t think either Rick or I felt at all comfortable telling somebody else what we thought on every subject as if we were God, and so we never did it.
I also think that was the best business policy. We always wanted the paper to be trusted, and I think it by and large is. I think the judges and lawyers who read it, they don’t think we’ve got some crazy personal agenda. We’re trying to tell it like it is. That’s, of course, the ultimate, correct journalistic ethos.
How people cope with a technological revolution is interesting. A great number of the great collections of newspapers borrowed a lot of money to buy more papers. They like
monopoly and they like to buy more of it on credit. When the technology changed, two or three or four of them got hung out to dry. That basically destroyed the entire common equity of the shareholder. That happened at a lot of places. Even places that are super-strong like The New York Times destroyed an enormous amount of equity by paying a billion dollars for the newspaper in Boston which now makes no money at all, in fact, is probably losing. There’s been a lot of agony in the field. Around here, all we ever bought was other public notice rags. We bought every one that we could find, occasionally, one case at least, in another state. Did we ever buy anything except Arizona out of state?
Jerry Lee: We bought one in Denver.
Munger: Yes, all right, two. But we bought these public notice rags. They were slightly incremental, and they had this embedded option in case there was ever a flood of public notices and the action was for free, so to speak. That’s the way the average real estate gets rich when he does. Somewhere in his operations there’s an embedded option that he really hasn’t paid for, and the harvest in due time comes, and that’s what happened with us. Jerry was unbelievably good at dealing with all these little proprietorship, where a man and his wife to be making $60,000 a year running a little paper. We bought a lot of them.
Pointer 2: (Fun words.) How do Texans describe people who get rich by accident and think they’re geniuses? They say, “Well, old Charlie was out in the field playing the big bass tuba the day it rained gold.”
Lee: Plus Phoenix.
Munger: Plus Phoenix, and Phoenix was just ridiculous. I don’t know how many percent per annum we made on that investment. It was thousands. I think thousands of percent per annum on the investment. I don’t know how much credit we do get for doing that, but at least…You look around these other newspaper companies which have either had this horrible contraction of earnings, or they’ve gone completely broke. Here we are with…We’re still making money out of the public notices and we’ve got all these marketable securities, which we bought using the proceeds of our public notice boom.
We’re like the fellow who had a funeral parlor, and there was a plague. Well, you can laugh, but that’s what happened. The Texans have a marvelous saying about the people who get rich by accident and think they’re geniuses. They say, “Well, old Charlie was out in the field playing the big bass tuba the day it rained gold.” That type of saying to some extent applies to us, but to some extent we were pretty true in running around and scrambling for these minor little properties, and running them intelligently and coping with the problems. I think we can fairly say that we did not anticipate a harvest like the one that came. Of course, many of you are come here because you’re investment groupies. You’re not really Daily Journal shareholders.
You’re addicts. You’re addicts to a certain attitude toward life. It’s not that large a group, but you’re pretty badly addicted. At any rate, that’s the thing. Now, the software business is something else. I think you would argue correctly if you said, “You never should have bought the first one.” It looked a little bit like a pre-op showing. Spend a few million dollars and maybe we’d get a position which enabled us to have an unusual access to data that lawyers would want and so on. We had various little theories. Of course, the theories didn’t work out, and we kept getting sucked in to perfecting a software system by paying other people by the hour to make it, and we lost quite a bit of your money in our first venture.
Now, we’re still losing money, we’ve just doubled down. We’ve bought another company, which is about five times our size in terms of actual revenues. But it’s got a much better sales team and a much bigger installed base than we have, and we really like the people. We instantly liked and trusted the people. I don’t think you’d like and trust everybody in the modern software business.
In fact somebody ran a public search recently on the name of one of the leading software titans of the world with a deep profanity attached and said, “Can you find any double hits,” and of course there were so many double hits that you couldn’t believe it. So software is not a perfect business or an easy business or anything else.
Pointer 3: I think most lives work best when you simply react intelligently to the opportunities and difficulties you encounter, and just take the results as they fall.
Pointer 4: Some people think that by master planning, you will solve everything, but what I find is that the master plan gets a life of its own, and people believe it because they previously decided on that then, and they make all kinds of mistakes.
You people have the declining remnants of the top tick of an old information business, the newspaper, and this pile of marketable securities, and this very interesting software play, which is like venture capital. Most of you did not buy the Daily Journal company to get this particular outcome, but we didn’t set out to create this outcome either. It just happened. Therein lies a lesson in life. I think most lives work best when you simply react intelligently to the opportunities and difficulties you encounter, and just take the results as they fall. Some people think that by master planning, you will solve everything, but what I find is that the master plan gets a life of its own, and people believe it because they previously decided on that then, and they make all kinds of mistakes.
(Thomas) Carlyle was a very smart man, and one of his favorite sayings was, the task of man is not to see what lies dimly in the distance but to do what lies clearly at hand. (Ed: actual quote: “Our main business is not to see what lies dimly at a distance, but to do what clearly lies at hand.”)
It was that message from Carlyle that caused Sir William Osler to create the medical school, which became a model or revising all the medical schools of the world, which was Johns Hopkins. He didn’t have a master plan for Johns Hopkins. He just reacted to the opportunities and hazards of his time as best he could. And lo and behold, we got the leading medical school in the world. Incidentally, that wouldn’t have happened without money from Carnegie and Rockefeller. So the robber barons of old, when they set out to do charity, were some of the most effective givers in the history of philanthropy. Rockefeller’s $50 million, in the course of two or three years, completely changed medicine in America.
They drove all these charlatans out that had one pill for everything from cancer to impotence, and none of it worked. They drove out a lot of people who should have been driven out, and they caused modern education and research establishments to be created.
There’s interesting precedent given the strength of the Johns Hopkins system and Carlyle’s basic idea, and based on that we have a certain modest prosperity in spite of being through an enormous headwind. And our basic business I think demonstrates that Carlyle might not have been wrong at all. To the extent that any of you have problems in your life, this enlightened opportunism and this resolute desire to fix problems as fast as they come up, which Jerry’s a genius at.
Pointer 5: Jerry’s fixes what’s wrong quickly, and he runs down opportunity quickly.
Jerry’s fixes what’s wrong quickly, and he runs down opportunity quickly. That’s what we’ve been through with the Daily Journal, and it’s interesting to us. Neither (J.P “Rick”) Guerin nor I have taken one penny out in all the years we’ve been invested, and you can see this is the ultimate…What would you call it? Are we misers? I don’t think so. Guerin was like a prince. I don’t look too badly myself. But we’re certainly willing to go through a lot of self-denial, and we really want people we scarcely know who just happened to buy this stock to do well and that isn’t true at a lot of places. They talk the talk, but they don’t really walk the walk. I don’t think many people who work in the executive ranks of General Motors or have served on its board of directors have any feeling of guilt that they destroyed 100 percent of the common equity, starting with the strongest company in the world.
But we’re not like that. We would feel terrible loss, but we don’t mind taking you through a little hell on the way. But we want you to come out all right if you keep the faith. That’s the culture, and I don’t think that’s going to change. Anyway, that’s the Daily Journal. Jerry, do you want to say anything to this group?
Lee: No, I’m fine.
Munger: All right. Now we’ll open the meeting to questions. Yeah.
Shareholder: Why double down now?
Munger: That’s a very good question. You could argue if we were poorer and meaner, we wouldn’t have done it, but we admire the people whose firm we’ve just bought. We admire the people running it. We feel it’s at least a decent gamble. I have no feeling I’m just deliberately wasting money. I’m just taking a gamble I might not have taken if it was the last money I had on earth. I think that’s probably what we should do. We employ a lot of people. We’re located in the state, and it would be very helpful. There is some chance of it working into a bonanza. Now it may be a small chance, but there is some chance. What is interesting about this, for legal information, those of you are students of capitalism, it was a duopoly in the legal information field, including the electronic stuff.
One was Reed-Elsevier, and the other was Thompson-Reuters. These are two very powerful places. Reed-Elsevier got rich on one of the greatest business models ever created. They published scientific journals. They didn’t pay a dime for the content, because people want to be published. Didn’t pay a dime for the reviewing and editing, because the people wanted to do the reviewing and editing as part of their duty to science. With content totally free, they published the journal and every library had to buy them, and every leading scientist. It was just a total racket, and every year they raised the price by 15 percent. Of course, they could then buy all these other papers.
You could say, “Why didn’t we start in scientific publishing?” Well, the accidents of life didn’t present us with that opportunity. But what’s happened there is that duopoly has suddenly gotten a new entrant, which is Bloomberg. Bloomberg is worth tens of billions of dollars and drowns in money, and has a total monopoly of its own with which it can use to do what it damn pleases to try and take territory. It can behave a lot like Amazon if it wants to, where it just takes territory from incumbents by brute force. Now we have a three-way race, and it’s interesting. You guys are professional investors. It’s hard to predict which nice, comfortable two person duopolies will suddenly become a gas leak and competitive miasma. It just happens. Who would have predicted that Bloomberg would have charged into legal publishing? It has, and it’s no fun for the incumbents. You do have this unpredictability in American competition, and it causes weird results.
You give me that question, but I think our chances were good enough to justify the investment, but I don’t think we would have made it, if it was the last dollar we had on Earth. We’re not ashamed of it. We’re glad we did it. We may win. We’re certainly going to try. Of course, when I say, “We’re going to try,” I mean, “They’re going to try.”
Pointer 6: In Principle, Ratings From Rating Agencies Are Ratings and Not Guarantees. So, Do Your Own Due Diligence.
Munger: Any other questions?
Shareholder: Do you have any thoughts on how the legal challenges to the ratings agencies will work out?
Munger: That’s a very interesting question and very topical. Up till now, the rating agencies have avoided any big loss from judgments. Their attitude is that they know how to sell guarantees that securities would be paid off and they weren’t selling guarantees. They were selling opinions. Their attitude is, you want a guarantee, you would have to pay for it but a lot more. All we gave you is an opinion and as long as we believe their opinion and weren’t deliberately lying to you, you can’t recover. That’s probably a correct explanation of the law, but if you ask for a jury in their embarrassing emails and so on, this can be quite expensive. There isn’t any doubt. Both of the rating agencies have admitted to serious mistakes in judgment. Of course, those mistakes in judgment were undoubtedly contributed to by the fact that they’re re-paid to do all this.
I personally don’t think they were consciously lying. I’m not saying there wasn’t a one person there somewhere in our organization that may not have liked his company’s product, but I don’t think they were consciously doing it.
They were stupid and one of the reasons they were stupid is the self-conscious selected their own interest. It’s a serious bit of legal trouble. All I can tell you that I don’t think anybody’s ever paid any big money on this area before, but you do have embarrassing emails and so forth. Generally speaking, the emails are great for lawyers. The record is permanent. You have an army of people. Somebody’s going to say some dumb thing and you can get that dumb thing before a jury. Maybe you can make some money or browbeat somebody into a big settlement.