Daily Journal Faces an Uncertain Future
Charlie Munger's death raises many questions for Daily Journal that remain unanswered following the company's 10-K and proxy filings.
“I don’t think it was a mistake to buy the Daily Journal when we did, paying the price we did. We paid $2.5 million for it, we got a dividend of $2.5 million shortly thereafter. Everything you see is profit. I think we’ve coped pretty well so far.”1
— Charlie Munger, 2021 Daily Journal Annual Meeting
On March 28, 2022, Daily Journal announced a major leadership transition. Steven Myhill-Jones, a Canadian software executive, was named as Chairman and Interim Chief Executive Officer.2 He replaced Gerald Salzman who retired at the age of 83 after spending over four decades at Daily Journal as a Director, President, CEO, and CFO. Charlie Munger resigned as Chairman but remained on the board and continued to manage the company’s large portfolio of marketable securities.
The passing of the baton to a young executive with a technical background was an important moment for a company that first entered the software business in 1999. Charlie Munger’s continued presence as a director and manager of the investment portfolio created a sense of continuity despite his advanced age.
In particular, it is unclear who will have authority over the securities portfolio. Valued at over $300 million at the end of the fiscal year, the portfolio is of great importance relative to Daily Journal’s $460 million market capitalization.3 In addition, it is not clear that the current three members of the board have adequate skin in the game in terms of ownership. Institutional knowledge might also be limited given that the longest serving board member joined the company less than five years ago.
Charlie Munger owned 46,280 shares and trusts benefiting the Munger family own 131,297 shares. In combination, this ownership interest is worth $59.3 million and accounts for 12.9% of shares outstanding. While this interest is not a large percentage of Mr. Munger’s estate, it is a large holding in absolute terms. More importantly, Mr. Munger quite clearly cared about the future of Daily Journal. As a result, I approach the situation by seeking to better understand how the current structure might make sense as opposed to assuming that proper planning did not take place.
I first analyzed Daily Journal twelve years ago in Daily Journal Corporation: Declining Publisher or Rising Hedge Fund? I passed on making an investment given that the traditional business was in decline, the software business was unproven, and Charlie Munger, at the age of 88, was not likely to remain involved for very long. When I revisited the company five years later, I could not justify the premium over book value.
Last year, I wrote a comprehensive analysis of Daily Journal for paid subscribers. This report is now freely available in full. Readers with a serious interest in the company should review the report before continuing with this article. I will not attempt to reproduce all historical information and narratives from my report in this article.
In this article, I present a brief update of business developments based on the recently released 10-K for the fiscal year that ended on September 30, 2023. I then turn my attention to the structure and management of the investment portfolio, both in terms of its concentrated nature and its leverage. Finally, I address corporate governance issues and the company’s proposed equity compensation plan that has been seeded by Charlie Munger’s gift of 3,720 shares of his stock which he donated in 2022.
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Daily Journal publishes nine newspapers in California and one newspaper in Arizona. The Los Angeles and San Francisco Daily Journals share a great deal of content. Both were founded in the late nineteenth century and have a distinguished history serving the legal profession. With a subscription rate of $887, these papers are not cheap but are highly valued by judges, lawyers, and others in the legal profession. The combined circulation of the Daily Journals posted a small increase in fiscal 2023 after years of constant decline. Although the papers have historically enjoyed significant pricing power, the subscription rate held steady for only the second time this century.
The following exhibit provides an illustration of the long-term decline of the Daily Journals. The impact of the decline in circulation has been mitigated by a steady increase in the subscription price. While imprecise due to apparent discounting, the “run-rate” of circulation revenue has still been on a clear downward trajectory.