Thursday, February 13, 2014

Munger's Daily Journal Reveals Holdings

Charlie Munger has, on prior occasions, talked about the importance of patience combined with acting decisively when opportunity presents itself:

If you took the top 15 decisions out, we'd have a pretty average record. It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor. - Charlie Munger at the 2004 Wesco Shareholder Meeting


Success means being very patient, but aggressive when it's time. - Charlie Munger at the 2004 Wesco Shareholder Meeting

In addition to his role as vice chairman at Berkshire Hathaway (BRKa), Munger also serves as chairman of Daily Journal (DJCO) and naturally has plenty of influence over their investments.*

Well, earlier this week, the company provided details for the first time of their common stock positions.

More on that in a bit but first some background.

Marketable securities first showed up on their balance sheet in this 10-Q from May of 2009 with no other details provided.

Then, in this 10-Q from May 2010, finally some additional information was provided about their moves (without naming specifics) into marketable securities:

In February 2009, the Company took advantage of near-panic selling in the stock market and redeployed some of its cash, which had been invested in Treasury securities and was generating only nominal interest, to purchase the common stock of two Fortune 200 companies and certain bonds of a third.

In May 2011,they expanded this somewhat:

In February 2009, the Company purchased shares of common stock of two Fortune 200 companies and certain bonds of a third. During the second quarter of fiscal 2011, the Company bought shares of common stock of two foreign manufacturing companies.

Then, in February 2012, they revealed a fifth common stock:

In February 2009, the Company purchased shares of common stock of two Fortune 200 companies and certain bonds of a third, and during the second and the third quarters of fiscal 2011, the Company bought shares of common stock of two foreign manufacturing companies. During the first quarter of fiscal 2012, the Company bought shares of common stock of another Fortune 200 company.

Now, according to this 8-K that was filed earlier this week:

At December 31, 2013, the Company held marketable securities valued at $150,747,000, including unrealized gains of $102,770,000.

It goes on to say:

The marketable securities consist of common stocks of three Fortune 200 companies, two foreign companies and certain bonds of a sixth, and most of the unrealized gains were in the common stocks.

So it at least appears they still basically have the same positions that were established between February 2009 and early in fiscal 2012 (though, since the cost basis has risen slightly, at least some additional moves -- even if minor in percentage terms -- have been made since then), and we now have a relatively up-to-date view of how well these moves have worked out (so far).

For some context, keep in mind that Daily Journal had a bit less than $ 22 million in cash, U.S. Treasury Notes and Bills at the end of their 2008 fiscal year. They wisely held this rather conservative allocation until prices became extremely attractive in early 2009 then deployed it, along with retained earnings, aggressively into shares of businesses they apparently consider attractive.**

So I'd say they've allocated their capital rather well and that this exemplifies being very patient then acting decisively when the opportunity arises.

As I mentioned above, thanks to this 13F-HR, we also now know what four of the marketable securities they invested in happen to be:

Wells Fargo (WFC): $ 72.3 million
Bank of America (BAC): $ 35.8 million
U.S. Bancorp (USB): 5.7 million
POSCO (PKX): 5.0 million

That leaves, after subtracting the value of these four stocks from the total of $ 150.7 million noted in the 8-K filing, roughly $ 31 million for the remaining marketable securities. So nearly 80% of the portfolio is in just four stocks and, to say the very least, is heavily weighted toward financials. 

Not exactly textbook portfolio management and, well, not exactly surprising.

Munger has talked in the past about his views on the need (or lack thereof) for diversification.***

"The academics have done a terrible disservice to intelligent investors by glorifying the idea of diversification. Because I just think the whole concept is literally almost insane. It emphasizes feeling good about not having your investment results depart very much from average investment results. But why would you get on the bandwagon like that if somebody didn't make you with a whip and a gun?" - Charlie Munger in Kiplinger's

"I have more than skepticism regarding the orthodox view that huge diversification is a must for those wise enough so that indexation is not the logical mode for equity investment. I think the orthodox view is grossly mistaken." - Charlie Munger in a 1998 speech to the Foundation Financial Officers Group

I'd say that the concentration of this portfolio more than reinforces his point.

Unlike the position in POSCO, which is an ADR, it might turn out that the fifth stock (as indicated in the 8-K filing), is listed on an exchange outside the United States. 
(Shares not listed on an exchange inside the United States need not be included in a 13F-HR.)

It seems fair to say that, other than possibly the common stock of Bank of America, none of these positions should really come as a surprise.

Berkshire owns the common shares of Wells Fargo, U.S. Bancorp, and POSCO along with preferred shares of Bank of America.


(Correction: Charlie Munger's thoughts above on the need for lots of patience followed by aggressive action when the opportunity presents itself are from Whitney Tilson's notes taken at the 2004 Wesco meeting. The initial version of this post had it as the 2004 Berkshire meeting.)

No position in DJCO. Long positions in BRKb, WFC, USB, and BAC established at less than recent market prices. Also, small long position in PKX established near current prices.

* From this 10-Q: The Company's Chairman of the Board, Charles Munger, is also the vice chairman of Berkshire Hathaway Inc., which maintains a substantial investment portfolio. The Company's Board of Directors has utilized his judgment and suggestions, as well as those of J.P. Guerin, the Company's vice chairman, when selecting investments, and both of them will continue to play an important role in monitoring existing investments and selecting any future investments.
** Earnings for Daily Journal came in at ~ $ 8 million per year or slightly less in 2009-11 but was down substantially from those levels in 2012-13. Now, comprehensive full year 2013 financials and the most recent fiscal 1st quarter financials have not yet been made available. The company has said they won't submit a filing (for either reporting period) until internal controls are properly assessed. Here's how they explained it in December of 2013:
Due to a significant increase in the Company's stock price in 2013, the Company no longer qualifies as a smaller reporting company and is now an accelerated filer for the first time. Accordingly, this is the first fiscal year for which an audit of the Company's internal control over financial reporting is required...
So, instead, we only have preliminary full year results. It's worth noting that, during the fiscal year 2013, the company also took on $ 14 million of margin debt, bought New Dawn Technologies, Inc. for $ 14 million -- $ 11.8 million net of cash acquired -- and bought ISD Corporation for approximately $ 16 million.
*** Munger clearly doesn't think much of diversification but does say most individual investors should probably be buying index funds: "Our standard prescription for the know-nothing investor with a long-term time horizon is a no-load index fund." As far as picking stocks he says: "You're back to basic Ben Graham, with a few modifications. You really have to know a lot about business. You have to know a lot about competitive advantage. You have to know a lot about the maintainability of competitive advantage. You have to have a mind that quantifies things in terms of value. And you have to be able to compare those values with other values available in the stock market. So you're talking about a pretty complex body of knowledge." 

Some will underestimate the difficulty of getting satisfactory results picking individual stocks over the long haul and, mistakenly, will also underestimate the wisdom of owning (i.e. not trading) low cost index funds instead. Those who concentrate their holdings and are overconfident in (or overestimate) their own investment capabilities seem destined for poor or even disastrous results. Portfolio concentration may make lots of sense for the likes of Munger and similarly capable investors, but it's probably going to make a whole lot less sense for many others. So it's knowing limits and staying well within them.
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