Notes

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Very few things bring the highest payoff for time spent than listening to and learning from Charlie Munger.

At the Daily Journal Corporation’s annual meeting in Los Angeles on Feb 12, 2020, Charlie spoke at great length. And in this Note, you find the full 13,400 word transcript of the entire meeting.

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Once again, Charlie didn’t disappoint with his thoughtful wisdom, insights, and now precious time with us all.

Enjoy!

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Charlie Munger: Welcome to the Catholic cathedral.

This is the most amazing place. If some of you haven’t seen it you should go see it from the inside. It looks like hell from the outside but from the inside it’s a startlingly architectural work and it’s quite interesting. Our director Peter Kaufman is on the committee who runs the cathedral and if you want to be buried in the same column of the ashes of Gregory Peck, he’ll arrange it for a $100,000. This is a very commercial crowd. You can’t even die without paying.

Okay, I have a script to go through and after we’re through this script, which take care of the formal business of the meeting, we’ll answer questions in the usual way – after one little brief explanation from the chairman.

I want to first introduce the people who are here. I’m Charlie Munger, Chairman, and the other officers are Rick Guerin, Vice Chairman, Gerry Salzman, who really runs the place, Peter Kaufman, who many of you know. […] I can’t read very well but that’s a problem of age. [Continues] Gary Wilcox, Mary Conlan, our new director, and Michelle Stevens, Vice President of the Daily Journal. Michelle was the one that ran the foreclosure notice business who made all the money. She is a hero around here.

This is our main financial accountants: Maryjoe Rodriguez, who is a pillar of the place and Vice President of the Daily Journal Technologies, Ellen Ireland, who has been here forever and is a mother pillar of the place, Ernest Miranda, Andy Richardson, Martin Cassis, and Guat Milner.

Having fired two previous accountants, we really love these.

Accounting, by the way, is really difficult now. It’s not an easy profession, particularly at a place like this. Imagine whoever is auditing Boeing this year is earning his money. Can you imagine how hard that would be to do?

Formal Business
I will now proceed to the formal business of the meeting and then go on to the questions.

If anybody has a proxy delivered, ignore it, because we got enough proxies anyway.

Ellen will you please report the number of shares presented at the meeting.

[Recitation of shareholder attendance]

Thank you. We will now proceed to the individual items.

The first order of business is the election of the Board of Directors. We have enough proxies to elect all Directors that we’ve named and I hereby declare them all elected.

The number of shares voting in favor of the Directors is rather interesting. I do not lead the list and the single most useful person is place, Salzman, has the lowest number of votes. But I’m fighting to do as well as he does. Anyway, we all got practically the same number of votes.

It’s rather interesting: With some previous occasion, Price Waterhouse had fired somebody and so somebody came to the meeting and did a long diatribe against Price Waterhouse, our auditor. It was very humorous.

Annual meetings are very peculiar in America. And of course, we now have the chief shareholder frankly of every big company in America as some index fund and it’s weird that the voting power of America goes so much to index fund operators. Nobody planned it. It just happened. And God knows what the consequences will be.

Alright, the second proposal is the ratification of the selection of the independent public accountants. Again we have proxies for that and that is just passed.

The Auditing Committee of the Board of directors have selected Scott Milner be the accountants. We need a ratification of that and again we have enough proxies and that passes.

The third proposal is to approve the amendment to the company’s Articles of Incorporation to adopt a majority vote standard for election of the Directors. The state of California asked us to pass this and so we’re passing it.

The fourth proposal concerns the advisory vote on what Gerry’s salary is at and that also passes. If there ever was anybody who earns his pay around here it’s Gerry.

We need a motion to adjourn the meeting and go on to the questioning.. Is there a second?.. On favour?.. We are adjourned.

Charlie Munger Monologue Before Questions
I will discuss briefly the state of affairs that’s reflected in our reports and then I will take questions.

This company, of course, started as a public notice rag which made money by doing public notices and morphed into a very successful legal daily newspaper which had a monopoly on publishing the opinions of all the appellate courts in California and every law firm had to buy it. It did a lot of other useful things and was a small but very profitable paper occupying an ideal niche.

Many of the newspapers in America had similar niches where they just made regular, substantial profits – a very easy, simple business to run.

Of course what’s happened is that technological change is destroying the daily newspapers in America including the little one’s like ours. The revenue goes away and the expenses remain and they’re all dying.

Berkshire Hathaway owns – what – about a hundred of them, and truth of the matter is they’re all going to die and there’s nothing that can be done with good management to save them. It’s a sad thing because those newspapers was an accidental part of the government. They called them the fort of the state and each one had come into being sort of by accident of capitalism without any planning by the founding fathers. The people who ran them became very powerful people due to two great American institutions; one is nepotism and the other is monopoly.

And all those nepotistic monopolists, many of whom drank too much, actually morphed into a function where they were more useful than our legislators. And of course we’re losing them all.

What we get is these opinion services on TV that everybody watches where everybody believes some ridiculous version of things that’s led as much as anybody good. It’s not a good thing in America that we lose Newsweek-type magazines and all our daily newspapers and get back Rush Limbaugh and his ilk on the other side. That’s what’s happened and it’s a sad thing.

Nobody planned that we would have a Fourth Estate that really is a branch of the government that worked really well for us and that took pride in being accurate and so on. And nobody planned it would go away. It just happened.

Now, Daily Journal Corporation strangely is not going to disappear. If all our business fails, we still have a lot of marketable securities, so we’re going to do better than these other newspapers. I’m not counting the ones like the Wall Street Journal and the New York Times. There are a few that will survive no matter what, but basically they’re all going away. The Daily Journal is not going to go away and leave the shareholders with nothing because of our big marketable securities.

We also have a second business which we’re trying to use to replace the economic strength of the newspaper that is imperilled and that’s Journal Technologies. That is a computer software business that helps courts and government agencies replace human error-prone inefficient procedures with simpler and better procedures run by software. That is a very difficult business.

Ordinary software, like the software a teacher uses to help teach a class or the software that’s used in accounting if you’re a dealer in Chevrolets or something, is a gold mine because it’s just standard and you crank it out and everybody uses it; it’s efficient.

What we’re doing is we’re servicing all these government departments of a lot of different kinds and they all have special requirements and they’re almost all quite bureaucratic, and they’re also political. It takes forever. They’re full of lawyers and consultants – the RFP process. So it’s a branch of the software that is intrinsically very, very difficult where everything takes forever, is very hard to do, and so on. A lot of people just totally avoid it for that reason. They just want to crank out a few bits of software and where just everything is on the cloud – whatever they do – and count the money.

Of course, we’re in a business where we need armies of people to help these courts all over the world automate probation officing work or court filings and so on.

All this automation and effective software is all going to happen but it’s unbelievably difficult.

An RFP involving a government and a bunch of consultants is intrinsically very, very difficult. You have to keep good nature, have huge patience, have huge talent, and you have to just keep rolling with it and then the money comes in slowly and has more bureaucracy. It’s very, very difficult.

In spite of all these difficulties and the fact that everybody at the very top of this company is very old, we’ve done fairly well and don’t ask me why. It was kind of a miracle. A lot was done right just to make it to our present state. And it’s a big market, but it’s not going to be easy and it’s not going to be fast.

On the other hand, we all like the customers.

I’ve fallen in love with the government of Australia. It’s just such nice people and I think it’s wonderful that Australia wants automated courts and it’s wonderful that they’re smart enough to hire us. Imagine hiring the little Daily Journal company for the courts of Australia. My guess is it’s all going to work for them and for us. It’s a miracle that they figured out this little company would be a pretty safe choice.

I think that part of the reason we’ve been succesful is because so many of our competitors are so awful. So we don’t deserve as much credit as we’re climbing.

It’s going to take a long, long time and it’s an everlasting struggle. It’s kind of fun to watch because we have the most unlikely cast of characters and a lot of them are quite successful.

Gerry just made a big report to the Board of Directors. It’s just amazing the goodwill with which the people attack this very difficult work and just keep everlastingly at it. They have problems where they go around or somebody goes crazy and they tell them no.

You know, there are many opportunities to do this wrong but I think it’s all going to happen and we may end up with a big share of it. But it’s all done where you shareholders will need a lot of patience. It’s really hard. This is not the easy part of the software business. This is more like trying to create another Price Waterhouse. That would be difficult and this is difficult. And, of course, we can’t guarantee that we will succeed but I consider it likely. I just think it will be slow and awful. I don’t anticipate any easy times for a long time but I suspect it will keep growing.

Gerry, how well do you think we’re going to do in the next two or three years?

Gerald Salzman: We certainly devoted a lot of energy and resources to Journal Technology. We have approximately 250 employees in Journal Technology and have offices here in Los Angeles, obviously, in Corona, because we acquired a company in 2013 with an office in Corona, California. We have an office in Logan, Utah, where we acquired a company there in 2013, and we have an officer in Denver because our original interest in this system of serving courts started because we’ve seen that the court of Los Angeles, the largest in the United States at least, had sufficient resources in a service provider. That’s how we got started in 1999.

We’re seeing lots of changes. Take for example in Los Angeles. Los Angeles now uses our system to do electronic filing. Attorneys do the filing electronically. If you go down to the courts in Los Angeles where people used to have to stand in line or have a service provider stand in line on behalf of the lawyers, there’s nobody there. Also in conjunction with LA, we’re able to enable lawyers to determine when they would come to court and see the judge. So, attorneys are now setting their own schedule and that reduces some of the personnel requirements at the court. These are some of the innovations that are taking place.

If, for example, you get a traffic ticket in the Riverside, you’re using our system to pay for that. So drive fast through riverside.

And we make some good inroads into other California courts. We have one basic system and we have three, four, or five different configurations of the system; one for courts, one for public defenders, one for district attorneys, and one for probation officers.

So, we have to only modify one system and make sure the configuration of the main system is appropriate for other agencies. This is big advantage when we come to the point of doing installations.

And Charlie mentioned the people in the projects at the government of Australia. We now have four, five, six, or seven people down in Australia and we work for the state of South Australia and Victoria at the present time, which is Melbourne. So we have all the courts in those two states and they range from mineral courts to other types of courts that we sometimes don’t see here.

In Los Angeles, California, each county only has one court. If you went to other states you’d find that there was a probate court, a civil court, a family law court, and on and on.

In California, they’re much more efficient than you can imagine when it comes to comparison where they have all the administrators – four or five administrators – and separate systems and separate IT departments. Very inefficient. That’s what we are confronted with all the time.

As we move forward, the financial results will depend upon the number of users in these various justice agencies.

Yes, we do get implementation fees but we can only take that into income when everything is delivered. So, we focus on trying to get to the point where everything is delivered and then we can take it into income and reflected in the financial statements.

Charlie Munger: This is a very important thing that everyone in this room should understand.

We have no simple way of just counting up ours and sending little invoices to the government. That’s what most consultants like to do; bill hours. We don’t get the right to collect money until the thing works and we do that on purpose.

It reminds me of one of my favorite tales which really happened.

When I was young, a lot of the earthmoving was not done with bulldozers. It was done by teams of mules who were guided by contractors who ran these mule teams and their big plows that they use. And there was a Latino contractor who had an enormous number of mules, and when the war came the big builder came in and said: “I’ve got a plus-cost contract with the government and I’m going to make you cost-plus. I want your mules to start tomorrow morning on this big project.” The owner of the mules said, “I can’t do that.” The big builder asked: “Why not?” and the contractor said: “I get business all these years because I’m so efficient. But when I take a cost-plus contract even my mules seem to know it and they all go to hell.”

And that’s the Daily Journal’s policy. We’re trying to avoid deteriorating by taking this awful contracting course. We’re trying to be good like that Latino contractor. My guess is it’s going to work but you have to be very cheerful to take it because it’s agony.

I can’t tell you how the people like Microsoft and Google don’t want our branch of the software business. I kind of like it. Peter kind of likes it. Peter likes it difficult if he thinks he will keep it forever once he gets it. That’s our system. But I sure can’t guarantee it’s going to work. It’s a lot of very difficult work.

I would like to tell you that we’re just ass-deep in talent and we have four qualified people for every job, but we’re just the opposite. We’re like a bunch of one-armed paper hangers and so far it’s working.

What’s happened in America, of course, is that software has grown enormously. If you take every big college in the engineering department, the most popular course is computer science. If you went to venture capital, the most popular investment is software.

I do not find venture capital’s backing of software companies pretty because there’s just so much of it and there’s some wretched excess in following high prices and so on. It’s not a scene that attracts a normal Berkshire Hathaway type.

I’m not saying it won’t work for a great many of the very well but there’s also going to be a lot of casualties.

Sketch of bullshit EBITDA
And I don’t like when investment bankers talk about EBITDA which I would translate as bullshit earnings.

And I don’t like all those talks about J-curves and these private sales of software companies. It looks like a daisy-chain to me. So I think there’s a lot of wretched excess in it but it reflects an underlying sound development which is this huge growth of software changing the technology of the world. But it’s going to have some unpleasant consequences because there’s so much wretches excess in it.

Practically everybody in this room has someone in software in the family. I got two people in private equity in my family and private equity has grown into the trillions. Of course it’s a very peculiar development because there’s a lot of promotion a lot of crazy buying.

It’s what I call fee-driven buying, much of it, where people are buying things to get the fees.

As the owner, I’m not thinking about scraping fees off along the way so it makes me very nervous to have all this fee-driven buying.

And whenever they’re successful, they just raise a fund that’s twice as big as the last one and throw more money at more deals. And of course with more money and more overhead, it’s an end in demand for fees.

But will the world provide wonderful results for all these people?

The answer is no, it won’t. It’s going to be a lot of tragedy.

In the past, the people who did well in venture capital were the clients of Sequoia which is one of the best venture firms that ever existed in the history of the earth. But there aren’t that many Sequoias.

Sequioa had such a wonderful record because it kept itself small and now everybody is trying to be enormously large and to grow enormously and hire more and more people, and collect more and more fees. It’s weird and it’s not going to work perfectly.

I’m trying to give you the same service my old Harvard Law professor gave me when he said: “Tell me what your problem is and I’ll try and make it more difficult for you.”

By the way, the guy who told me that was doing me a favour. It’s a pretty good way to proceed.

I have this saying that “a problem thoroughly understood is half solved.” It’s hard to understand it well.

Well, I guess that’s enough for the Daily Journal – you’re in for a long, difficult ride. And not only that: The damn leaders look like an old people’s home.

I’m 96, Rick is 90, our CEO is 80. I mean, if you’re not the crapper, you don’t belong here.

I think we will gradually work things out in spite of this agent group of Directors. After all, we got a young man like Wilcox who’s past retirement age. And we got a new Director, Mary Conlan, who’s up here partly to make the rest of us look good, or bad rather.

It is always odd results in capitalism. It is peculiar that one little newspaper full of marketable securities and is probably not dying and may actually succeed in the business none of the people understood. None of the people I named is a computer software engineer. It’s weird. And yet you people have come from all over the world to this place – you’re as nutty as we are.

If you ask me, I think it’s slightly more likely to work than not work. And it’s a very good thing to be doing. The world needs what we’re trying to do. We’re trying to reward the right people and really trying to serve the customers.

When it comes to customers, my ambition is to be as close to Costco as I can possibly be.

I’ve never been associated with a company that works harder than Costco to make sure the customers are served well. I mean I just love success that occurs this way and I hate success where you’re deliberately trying to cheat people or something that’s not good for them, like gambling service in Las Vegas.

By the way, I’m not trying to irritate our customers in Las Vegas. I’m doing it by accident.

Anyway, I do think there’s something to be said that you have the option for selling stuff that’s good for people instead of stuff that tricks them. That’s our approach and I would choose that approach even if I made less money. In fact, I think you make more.

It reminds me of Warren Buffett’s favorite saying: “You should always take the high road because it’s less crowded.” That’s the system.

I think the politics of the country is weirdly awful because of the excesses of hatred that you see everywhere. In California, with a gerrymandered House of Representatives, the only danger of getting tossed out of legislature is if you’re a leftist and someone to the left of you may come in and if you’re a rightist and someone to the right of you may come into the primary.

This creates an awful Legislature where the individuals hate each other. And there may would be ten sort of sensible Republicans and ten kind of sensible Democrats in the California Legislature. And every ten years, these nutcases of the right and left get together and throw all the sensible people out, or gerrymandering them out, because they all agree that within their own party the middlers are horrible. That is a crazy way to be governed. It is not pretty and I have no solution. It’s just interesting.

Warren said to me the other day: “It’s so interesting now. I would like to stick around for another 30 years if I couldn’t participate. If I could just watch.” And I said, “I would like to sign up for that too. It is very interesting.”

It’s weird. Think about how different television is when Cronkite is gone and we have all these clowns and the opinion servers lying to us in a very shrewd way. They’re really good at it.

You know, the ability to mislead people is greatly underestimated.

Any good magician can make anybody see a lot of things happening without happening and not see a lot of things happening that are happening.

And, of course, we’re all dealing with various people who through practice of evolution have been good at misleading us. So it’s very, very hard to be rational and stay sane.

Of course, that’s some of the reasons why some of the companies that I’ve been affiliated with have been so successful. It’s not that we’re so smart. It’s that we stayed sane. Because a lot of what goes on is absolutely nuts.

We all see it in politics, of course. It’s even sillier than it is in business, although sometimes we businessmen try and get into our share of stupidity.

You people come from all over the world to this thing out of some hunger. I regard you as nerds because I was once one of you, and I know a nerd when I see one.

You come here because some fellow nerd managed to succeed in spite of defects and you need a similar result.

And you know something that’s really odd? It’s that you’re right. If you can learn some of our tricks, you can get more success out of life than you deserve. That’s what has happened to me.

How did it happen? I tell you how it happened.

It’s obvious that I got better life outcomes than I deserved based on energy or intellect. Of course, it’s an interesting process that everybody would like more of. Who doesn’t like to get a lot more than one deserves?

I stumbled into a few mental tricks early in life and I just used them over and over again. I take the high road because it’s less crowded. Of course, that’s a smart thing to do.

Then I was raised by people who thought it was a moral duty to be as rational as you could possibly make yourself. That notion which was just inherited, basically, from my upbringings and my surroundings has served me enormously well.

It’s like Kipling’s: If you can keep your head when all round you are losing theirs, it’s a big advantage. Just think of all the dumb things that are done by our politicians and our business leaders, and the wretched excess you see in the system.

I can remember one of the earlier crazy booms that caused one of our earlier recessions. All these traders would go to Las Vegas and people would hand them free stacks of they would have strippers – that was our securities market. I mean, it was grossly awful and a lot goes on now that is grossly awful.

Imagine politicians who never understood Adam Smith. It would be like hiring an engineer to design your airplane and he didn’t believe in gravity.

I laughed too, but there are tears in my laughter.

This business of being determinedly rational does work. You should keep everlastingly at it.

One of the things that’s wrong with the present system is the way their heads get cabbaged up by the activity and the owners of the head don’t know what’s happening.

One of my favourite actors when I was young, Mr. Cedric Hardwicke, was such a good British actor he was knighted by his monarch. Sir



Cedric Hardwicke got old and he kept acting right – on and on. Until towards the end of his life he made one of the great statements in the history of acting. He said: “I have been a great actor for so long that I no longer know what I truly think on any subject.”

If you stop to think about it, that’s exactly what’s happened to most of our politicians expect they don’t know it. Sir Cedric Hardwicke at least knew his brain has been turned to cabbage, whereas our politicians like cabbage.

For all the young people that want to shout out their resentment of this and that – I always say that what they’re doing is pounding it in. Nobody’s listening to them when they shout out. They’re just pounding a lot of nonsense in.

It’s a big mistake to pretend to practically anything because you become what you pretend to be.

Now, sometimes that works. I knew a couple of no good Nicks in my youth who became leading philanthropists. They did it just to mislead people but after they had done it for a while, they became legitimate philanthropists. It always gave me the conclusion that hypocrisy really is better than most people think.

It does change you to constantly pretend one thing and another. It changes you to say something repeatedly. I always felt that Ronald Reagan who Shifted from Democrat to Republican – his acting career failed. And he was hired by General Electric to tour around and give right-wing speeches.

In a world where that’s the way your mind tricks you – of course, if you have some prophylactic measures where you’re more cautious about your views – think about how we’d all love to have a bunch of children where we’re a little more cautious about their views.

I’ve got some children in the audience. They’re by and large a pretty good bunch but if I had my druthers, there’s a thing or two I would change. You laugh but that’s the way life works.

Imagine coming to listen to some 96 year-old man. Amazing.

I’ll take questions now from anybody.