{"id":428,"date":"2017-03-08T19:56:31","date_gmt":"2017-03-08T19:56:31","guid":{"rendered":"http:\/\/charliemungersays.com\/?p=428"},"modified":"2017-10-24T23:26:19","modified_gmt":"2017-10-24T23:26:19","slug":"53-charlie-mungers-wisdom-nuggets-djco-annual-meeting-2014-part-1-nugget-1-6","status":"publish","type":"post","link":"https:\/\/charliemungersays.com\/index.php\/2017\/03\/08\/53-charlie-mungers-wisdom-nuggets-djco-annual-meeting-2014-part-1-nugget-1-6\/","title":{"rendered":"53. Charlie Munger’s Wisdom Nuggets: DJCO Annual Meeting 2014: Part 1 Nugget 1-6"},"content":{"rendered":"

<\/a><\/p>\n

Excellent Book: Charlie Munger For All Seasons<\/a><\/p>\n

Ref: https:\/\/www.forbes.com\/sites\/phildemuth\/2014\/09\/19\/charlie-munger-and-the-2014-daily-journal-annual-meeting-a-fans-notes\/#7c92323d7d2c<\/a><\/p>\n

https:\/\/www.facebook.com\/groups\/charliemungersays\/<\/a><\/p>\n

Nugget 1: Don\u2019t be like the doctor who wants to fix a nose bleed by feeling around in the groin, and charge for it by the hour.<\/strong><\/p>\n

Chairman Charles T. Munger began with some opening remarks:<\/p>\n

I\u2019m Charlie Munger, Chairman of the Board of the Daily Journal Corporation (DJCO), and I welcome all of you, including the groupies\u2026.Our [new] independent accounting firm is here. We prefer you to our old one. You remind me of my own personal circumstances. They once asked me what one person accounted for most of my personal felicity in life, and I said, \u201cThat\u2019s easy \u2013 that would be my wife\u2019s first husband.\u201d You have an ideal position of the same sort.\u00a0 I\u2019m going to talk briefly on accounting and then I\u2019m not going to talk any more on the subject.<\/p>\n

To be as late in publishing an audit as the Daily Journal is absolutely unheard of. It\u2019s unbelievable. Had the mafia been running the company with the worst excesses in the world you wouldn\u2019t expect an audit to be this late. It set a new record in the history of the world. We obviously had an audit from hell, and the question is, what caused it? Our auditor would say it was our sloppiness in internal controls. God knows, we\u2019ve had a few imperfections, but in my judgment they were trivial and of no practical consequence to anybody with any sense. The auditors would say that our difficulties were really serious. They were confused by the difficulties of our business, which God knows are confusing and difficult, but that\u2019s external reality. They were like the doctor who wants to fix a nose bleed by feeling around in the groin, and charge for it by the hour.<\/p>\n

It wasn\u2019t malevolent. They\u2019re a big bureaucracy and they did us enormous damage, the way an elephant would do damage if it went through a barnyard and stomped the chickens. It just comes with modern life, but [DJCO Board Member] Peter Kaufman always says that no occasion, no matter how terrible, is totally un-useful. It can always serve as a useful bad example. That\u2019s the way I feel about this audit.<\/p>\n

We are a service operation ourselves. We\u2019re a bureaucracy, and we have plenty of power in this complicated software business of disappointing some customer who trusts us. We\u2019re using our audit as an example of the kind of thing we never want to do to anybody else ourselves: just unwittingly do something stupid that does a lot of damage.<\/p>\n

Now of course our main competitor in this software struggle just loves our being in the headlines for not getting audits out on time. Just think of how a commissioned sales force reacts to that. The auditor was feeding our main competitor lots of red meat and billing us for it. It was not the happiest occasion in the history of auditing.<\/p>\n

I don\u2019t think it hurt us at all in the financial community. Any ordinary company would have been crucified, but we have a reservoir of trust and reputation, so I think it was a non-event to people like you. I do think it hurt us with the customers. Whether our auditors hurt us five million dollars (counting opportunity costs) or some larger sum I cannot tell you, but it was a significant unpleasantness, and it was \u2013 in my judgment \u2013 totally unnecessary. But there is no feeling on our part that our auditor was any worse than any other member of the Big Four. I think when we have big bureaucracies and new responsibilities under the law you get some odd occasions.\u00a0 Our business situation being a venture capital-type situation would have confused practically anybody who was restricted to auditing experience. It was sort of a natural human craziness and it\u2019s not unexpected.<\/p>\n

Nugget 2: Turn The Other Cheek Can Be A Business Strategy (Sic: Situation based?) Aristotle thought it was crazy to spend your time trying to get even based on some injury. You just suck up your gut.<\/strong><\/p>\n

The right way to react to it I think is clear. Turning the other cheek didn\u2019t start with Jesus at all. The real guy who figured that out was Aristotle. He just thought it was crazy to spend your time trying to get even based on some injury. You just suck up your gut. We paid all the invoices with the extra payments so they could hurt us more. We\u2019re not going to do any more. Our new auditor at least is local and we\u2019re a bigger client to it than we were to the old one. Part of our trouble was that our business situation was complicated and I\u2019m sure we didn\u2019t draw the top talent to our tiny little business.<\/p>\n

I also think that when something bad happens it\u2019s always partly your own fault. With 20\/20 hindsight both Gerry [Salzman, DJCO CEO] and I have a fault, and I have it way worse than Gerry, and that is we get along beautifully with people we trust and admire \u2013 it really causes something more like love, which I like in business and in life \u2013 but the people we don\u2019t admire, neither of us is very good at disguising it. I think that this went from bad to worse, and I don\u2019t know how to fix people as old as Gerry, and of course I\u2019m old, so we just have to soldier on as best we can.<\/p>\n

Hopefully, the new auditors will be more admirable. It\u2019s hard to imagine that they could be worse. They have one of the easiest jobs in the whole world in satisfying a client. We\u2019re treating it like Aristotle. It may have cost the company quite a bit of money, counting its competitive effects. They did not do it on purpose. They did it utterly unwittingly, without the faintest idea that maybe if they delayed our audit report month after month after month it would hurt us in the market with a big competitor with a bunch of commissioned salesmen around spreading the happy news that the Daily Journal\u2019s internal controls were non-existent and they were no good and so on. That\u2019s all I\u2019m going to say about auditing.<\/p>\n

Nugget 3: Some business can be like being an undertaker during the Black Death.\u00a0 For two or three years it was a wonderful business and the population of Europe declined by 40 percent. [Sic: Thankfully the Black Death Didn\u2019t Last Forever.]<\/strong><\/p>\n

As we have said over and over again, we have a declining business. The business of running a newspaper with information content delivered by printing presses, even when it\u2019s a legal newspaper, is declining. The golden revenues were from publishing foreclosures notices. We made a lot of money for a while.\u00a0 It was sort of like being an undertaker during the Black Death.\u00a0 For two or three years it was a wonderful business and the population of Europe declined by 40 percent. That\u2019s what we went through.<\/p>\n

We kept the money. I would say that we handled our situation very well, and we still have a 90% share of the public notices in foreclosures, but there practically aren\u2019t any right now. The banks, the lenders, have all tightened their standards and the real estate prices are back up, so of course the foreclosures are pretty close to zero. We have a declining business in its very nature.<\/p>\n

If you take the whole history of businesses that make a fair amount of money and have a little surplus but their basic business goes to hell based on technological developments, the results are lousy. The normal result is Kodak (ticker: KODK). Imagine having a business like Kodak and having it go all the way to bankruptcy. That\u2019s the normal occurrence: technological obsolescence.<\/p>\n

There are few exceptions in the history of the world. One of them is Thompson Reuters (ticker: TRI). They were a newspaper company with a few television stations added and they basically milked them as long as they could, sold them for high prices, and went into a different business \u2013 online information \u2013 and they successfully made the transition.\u00a0 That is really rare.<\/p>\n

Nugget 4: If You Think It Is Amazing That Berkshire Hathaway Came From One Failed Business To Be One Of The World\u2019s Largest Company. Well, how about three failed businesses? Wow, Respect!<\/strong><\/p>\n

The other rare example, of course, is Berkshire Hathaway. Berkshire started with three failing companies: a textile business in New England that was totally doomed because textiles are congealed electricity and the power rates were way higher in New England than they were down in TVA country in Georgia. A totally doomed, certain-to-fail business.\u00a0 We had one of four department stores in Baltimore [Hochschild Kohn], absolutely certain to go broke, and of course it did in due course, and a trading stamp company [Blue Chip Stamps] absolutely certain to do nothing which it eventually did. Out of those three failing businesses came Berkshire Hathaway. That\u2019s the most successful failing business transaction in the history of the world. We didn\u2019t have one failing business \u2013 we had three. Out of that little nothing, the excess capital that we took out and put somewhere else did better than anybody\u2019s ever done. As a matter of fact, we recently passed General Electric [ticker: GE] in terms of market capitalization, and GE was founded by Thomas Edison himself in 1892, and one of the most powerful companies in the world.<\/p>\n

Nugget 5: Inventions Alone Do Not Make Company Successful – Think Xerox<\/strong><\/p>\n

It was a considerable stunt. But the normal result is more like Kodak. Xerox [ticker: XRX] is an interesting case. They went to the brink of extinction and then came back, but they are a pale shadow of their former greatness. They actually invented most of the stuff other people made so much money out of, and they still failed. Bill Gates is a big student of this subject, and he says that the standard result is failure. Imagine General Motors [ticker: GM] who went bankrupt. Can you imagine how they towered over the economy when I was young? It was the biggest, more valuable, most admired company, and it took the shareholders to zero.<\/p>\n

What Daily Journal is left with is a declining business. It may last quite a while, but at really modest profits. The future is our software business and we really like that. We think all these courts should be automated, and it should be a configurable system and it should be in the cloud and these public agencies should be serviced lovingly and honorably and loyally, and that\u2019s exactly what we plan doing. New Dawn Technologies, which so worried our auditors, I asked them a question today before we came in here: of your existing clients, how many are threatening to leave?\u00a0 They have about four hundred clients and they named one. As far as I\u2019m concerned, I like the way that\u2019s worked out, as a venture capital type of investment. I like the people and I like the ethos and I like what we\u2019re trying to do. It\u2019s a great big market.<\/p>\n

Most big software companies hate dealing with the government. IBM [ticker: IBM] got very good at it, but everybody else just hates it. You have a business like Microsoft [ticker: MSFT] and you don\u2019t need a bunch of RFPs [Request For Proposals] \u2013 it\u2019s just agony. We actually kinda like the agony. The people really need better products. Who knows, we may actually pull it off, but the objective evidence would be that we\u2019re trying to do something that very few people have ever succeeded at: take a successful business, clobbered by a change in competition, and have it out of the ashes raise something that\u2019s pretty damn good. That\u2019s what we\u2019re trying to do.<\/p>\n

I think the odds are better than even that we pull it off creditably. I don\u2019t think it will be a super-bonanza, but our standards of creditable are pretty satisfactory. As to the surplus money, thank God we have it. Most of the newspaper businesses \u2013 about half of them went broke or nearly broke and they borrowed so much to buy other newspapers because that\u2019s all they know how to do, with the aid of so many friendly investment bankers and consultants, that they basically took their own shareholders to zero after having long years of monopoly. That has not been the result here. We have all this extra money on the balance sheet and we\u2019re using it to create a software business.<\/p>\n

Nugget 6: I actually kind of like it even though I don\u2019t understand it. [Sic: Working With Honorable, Intelligent and Cheerful People Helps.]<\/strong><\/p>\n

I think you all would have liked the board meeting we had before we came in here. The people strike me as honorable, intelligent and cheerful about the difficulties of this very difficult business, which are a whole lot of bureaucracies, governmental in nature, with a whole lot of different consultants influencing the customer. It\u2019s not a bit easy, with very difficult questions of what you do and why you should do it, whether the new system is going to work, and if so, why? I actually kind of like it even though I don\u2019t understand it. I have the feeling that we\u2019re not going to get a lot of new entrants into this business.\u00a0 Our main competitor is in a formidable place, but if I were buying the product, I\u2019d buy ours and not theirs, and that\u2019s my test of proper competition.<\/p>\n","protected":false},"excerpt":{"rendered":"

Excellent Book: Charlie Munger For All Seasons Ref: https:\/\/www.forbes.com\/sites\/phildemuth\/2014\/09\/19\/charlie-munger-and-the-2014-daily-journal-annual-meeting-a-fans-notes\/#7c92323d7d2c https:\/\/www.facebook.com\/groups\/charliemungersays\/ Nugget 1: Don\u2019t be like the doctor who wants to<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"footnotes":""},"categories":[3,5,4],"tags":[],"class_list":["post-428","post","type-post","status-publish","format-standard","hentry","category-investment","category-philanthropy","category-wisdom"],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/428","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/comments?post=428"}],"version-history":[{"count":2,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/428\/revisions"}],"predecessor-version":[{"id":882,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/posts\/428\/revisions\/882"}],"wp:attachment":[{"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/media?parent=428"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/categories?post=428"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/charliemungersays.com\/index.php\/wp-json\/wp\/v2\/tags?post=428"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}