Lessons From The $DJCO 2020 Meeting And Its Transition From Publishing To SaaS

In this episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discuss lessons learnt from attendance at the DJCO Annual Meeting, and its transition from publishing to SaaS. Here’s an excerpt from the episode:

Jake Taylor:
I thought we’d just do some riffing on the daily journal meeting that we went to last week or when was it? Very recently.

Bill Brewster:
It’s probably a good time for me to apologize to the people that last week I told not to ask Munger for life advice. I still do stand by somewhat I said. My tone was not right and I should probably get some nuance.

Tobias Carlisle:
What happened?

Bill Brewster:
No, with me at Daily Journal or generally speaking?

Jake Taylor:
Let’s paint the picture first though. Bill shows up and he’s coming from the beach. He’s wearing like a hoodie and shorts and flip flops. And everyone else is dressed up to come pray at the altar and Bill out of the gates first question of the day is Bill. And so what did you ask him, Bill?

Bill Brewster:
I asked him-

Jake Taylor:
Short version.

Bill Brewster:
… something along the lines of whether or not value investors should be focused on US companies because many of them are quality and I gave them too much wiggle room and I should have just limited it to quality companies because my theory of the case is becoming that the deep value behavioral bias is going to be arbed away by ETFs and Argos. So if you want to survive quality and having a differentiated view on that part of the business is a good way to do so.

Tobias Carlisle:
Quality can be up to it.

Bill Brewster:
Yeah, you need to have some sort of insight that you’re focused on that a computer can’t figure out.

Tobias Carlisle:
But a computer can figure out and at this point if whatever factor you’re trying to figure out, if it’s quality and value, if you think that’s the way forward there’s an ETF that does that. If it’s momentum and value, there’s an ETF that does that. And you think that you’re some unique little snowflake identifying these things, you’re not. You’re subject to the factors like everybody else is. And it’s just that your factor at the moment isn’t sort of, or is either having a good run or a bad run.

Bill Brewster:
Yeah.

Jake Taylor:
But look at this back test bro.

Tobias Carlisle:
Yeah. I mean that’s almost like the how you know that it’s not going to work as if it’s working up to this point. You need to find something that worked really well up until about a decade ago.

Bill Brewster:
Yeah.

Jake Taylor:
So, yeah. One of my notes that I had from the meeting was that Monger said that Chinese companies are stronger than the US companies, which I’ve found to be actually kind of a surprising statement myself.

Bill Brewster:
They’re backed by the government. So you got that going for you.

Jake Taylor:
Yeah, that’s fair. But-

Bill Brewster:
I’m not sure. I understand why. I even felt like he dunked on me a little. I’ve listened to it twice.

Jake Taylor:
You loving it.

Bill Brewster:
I’m not sure that he necessarily would have disagreed if I had phrased my question better.

Tobias Carlisle:
How would you have phrase it better?

Bill Brewster:
I would have excluded the US part because it gave him an out that like you just watched so many years of listening to people ask them questions. They find the thing in the question that they can get out of the question and they do it. And then it allows them to go into their spiel and I’m disappointed in myself.

Tobias Carlisle:
Counselor, that’s why you don’t ask a question that you don’t already know the answer to when you are addressing another attorney then too.

Bill Brewster:
Oh my God.

Tobias Carlisle:
Of course he was going to duck it.

Bill Brewster:
I know.

Tobias Carlisle:
Just put the gloves up and lean back on the on the ropes and just let you have your go and then he came alive.

Bill Brewster:
It’s upsetting.

Jake Taylor:
So another couple quotes, maybe you guys want to riff on these. If you’re uneasy, welcome to the club.

Bill Brewster:
I’m very easy.

Jake Taylor:
Most are disappearing rapidly.

Tobias Carlisle:
That’s is an interesting one.

Jake Taylor:
Yeah.

Tobias Carlisle:
I disagree with that for the reasons that we’ve just discussed. I just think that’s same as it ever was. It’s always somebody’s castles is falling into the ocean and somebody else’s building, a new one that’s not going to be breached for a decade or two decades, or a generation.

Bill Brewster:
I was talking with somebody who I would name, but I’m not sure he wants to have this attributed to him. But he said that moats are in his view, people say moat way too often, and it’s really just operational excellence and execution. And I think that’s probably right. There aren’t that many businesses that are endowed with winning. The inevitable so to speak.

Tobias Carlisle:
That’s what Buffet calls them franchises to distinguish them from just wonderful companies. There are some that do have that whatever it is, genetic protection and there are other… Most of them don’t.

Bill Brewster:
Yeah, I think that’s right.

Jake Taylor:
Other other takeaways for me, look for a game where you’re wise and they’re stupid.

Tobias Carlisle:
That’s hard.

Jake Taylor:
That’s really, really hard. I don’t know what you in them on these days.

Tobias Carlisle:
I think I’m doing that but that’s just not working. So I’ve got to go back to the drawing board on that one.

Jake Taylor:
Yeah. What’s your game Bill?

Bill Brewster:
I don’t know. I do know. I try to be patient. I look for certain situations and I try not to bet frequently. And as I have gotten better at doing this, my turnover has lowered and I began to think more like truly long term and I am hoping that the church that I prayed to is the right one because that’s what I have bet on.

Jake Taylor:
I also think you do a lot more work than a lot of folks.

Bill Brewster:
Yeah. I don’t know. I don’t look at nearly as many names as most people do. I think I look more deeply-

Tobias Carlisle:
I think you are deeply. I think you look more deeply. Yeah. That’s what I think.

Bill Brewster:
We’ll see. Those guys, the thing that is tough about their strategy is when you wait and you wait and you wait and you wait, then you really got to bet big and like even Buffett sort of blew his wallet a little bit too quickly in ’08 ’09. It’s very, very hard once they get to their size, especially to deal with the cash drag on the way up and then be like, “No, I’m the one that at the bottom is going to deploy everything.” And I think the opportunity costs of patients in a holding cash portfolio I’m not sure it makes sense to me. At least with myself, I’m not trying to come at them. I pray to their church.

Tobias Carlisle:
The hardest thing about timing is that the market has got more expensive over time or however you cut it. So for example, price sales today, it’s the highest price to sales we’ve ever seen in the market. There’s a Bloomberg article by John [Authurs 00:26:53] he says, “the reason is that margins are very high and we haven’t had a draw down for a very long time.” But that’s been true. So if you use Cape, whatever you want to use and you can get data going back to… You can get DJA. That’s Dow Jones like the reconstruction of the Jones Industrial Average. Pre the Dow Jones industrial average going back to like 1880 or 1860 or something like that. And you can run it forward using Cape to see where would you be invested, where would you not be invested?

Tobias Carlisle:
And then you can put… So here’s the median, here’s one standard deviation, here is two standard deviations. Basically it’s just got wider and wider as you’ve gone along. So it’s been harder and harder to time because it gets more expensive each cycle. Now I don’t know if that’s like the same observation that 700 years of-

Jake Taylor:
Interest rates.

Tobias Carlisle:
… of interest rates going to zero or if it’s just, that’s acyclic al top. I don’t know the answer to any of those things. I’m just telling you what I can see in the data. Like today’s the most expensive that it’s ever been.

Jake Taylor:
And then down at least last time around wasn’t down as far as other down times either. We came back down to sort of like average and then went back up from there.

Tobias Carlisle:
Like a golf ball with a concrete path.

Jake Taylor:
It was-

Tobias Carlisle:
It was rapid.

Bill Brewster:
Did it feel that way though? To the young ones listening. It was brutal.

Tobias Carlisle:
Like those two last quarters before it bounced like each, like down 13% but that’s almost vertical free fall. It’s that hard to get investment-

Jake Taylor:
And the caps too, like when you come off of the numbers get big also. Like it’s not just the amount of wealth that is repriced is a very large number at that point. You know one thing that’s interesting you were talking about Buffet and timing and I find it interesting where he came into the capital structure on a lot of those deals, like he came in with preferred a lot more than-

Tobias Carlisle:
Convertible…

Jake Taylor:
Yeah, that was a little bit not quite.

Tobias Carlisle:
Showing his hand a little bit. Yeah. I agree.

Bill Brewster:
Yeah. Even like traditional franchise, which I know it’s eroded over the last decade, but like Harley Davidson, he didn’t even take the equity and he took debt which if you’re going to bet on a brand, he’s a traditional brand guy. I could see how he would or how someone would think he would take the equity, but he just wasn’t having it. Which I also, it’s a freaking discretionary toy. So in the middle of the depression, how people really going to be buying motorcycles probably not, but-

Jake Taylor:
But space trips for sure.

Bill Brewster:
Oh yeah.

Tobias Carlisle:
This might be the only place can go to get away.

Jake Taylor:
I’m ready to see what’s on the dark side of the moon.

Tobias Carlisle:
No one’s good.

Bill Brewster:
To the duration comment earlier. I remember having conversations with people back then who oh I didn’t need the money when I invested and everything looked good and now I might actually need the money because I’m losing my job and what should I do with the money in the market. That is not the time to have that conversation with yourself. Like that’s a good way to lose money for a long period of time.

Tobias Carlisle:
I was buying nets because I thought if everything goes to zero when we liquidate at least you get some money back with these guys.

Bill Brewster:
There you go.

Tobias Carlisle:
And other people were saying you should buy better businesses when it’s like this it’s like ah, you don’t know if this is business is still going to be operating. It felt pretty real at the time. It felt like this could like is this going to be a 29 stock crash. Like this is a credit crisis. This is not your average draw down. The market is going down but industry is seizing up. Credit is seizing up. Banks are failing, like this could be a real thing.

Bill Brewster:
Buffet said it was financial Pearl Harbor. I don’t think he used that term lightly. I think back then I was into Ron Paul. I think if I had gotten my way, I’d be living in a very different world right now and I’m not sure I’d like it.

Tobias Carlisle:
You’d have earned a lot of gold.

Bill Brewster:
That’s right. Yeah. Some big guy that lived on my block would end up holding the gold. That’s right. But I would have made the right decision.

Tobias Carlisle:
Any more anymore gold from the DJ committee?

Jake Taylor:
He said that a couple of his tricks were one to take the high road and you have a moral duty to become more rational.

Tobias Carlisle:
How do you take the high road? What’s that mean?

Jake Taylor:
I think maybe it’s-

Bill Brewster:
They go low we go high. That’s what the Obama’s would say, sorry to all the Republicans I just triggered… No, I don’t know but this is what I was sort of ranting about last week. Like it’s not genius to tell people to act like good humans and like the parenting comment be a good example. Yeah, no shit. Like that was my high school. That was our theme.

Tobias Carlisle:
Valedictorian speech?

Bill Brewster:
It wasn’t even that. Lead by example was what the saying of the high school was. He’s not like some sage in that way. And also, and Charlie, if you’re listening, I’m sorry.

Tobias Carlisle:
Charlie listens.

Bill Brewster:
Am sure he does.

Tobias Carlisle:
Bill and Charlie and Warren, we’ll get together with Orson.

Bill Brewster:
Dude, they just did talk about how great we are. They’re three of the 10. And he has said, my kids think that I’m a book with two legs. Like I don’t want that to be my legacy for my kids. And-

Tobias Carlisle:
I think you are a cell phone with T.

Jake Taylor:
Oh yeah.

Bill Brewster:
That’s right. And that’s a real problem. So maybe that’s the lesson to take out of that is-

Jake Taylor:
You’re a Robin Hood account with two legs.

Bill Brewster:
I’m a Twitter Twitter fiend.

Jake Taylor:
Yeah.

Bill Brewster:
Speaking of fiends, my kid got a chocolate milkshake yesterday at Epic Burger. The look on his face, I swear he was a drug, like he was like cracked out-

Tobias Carlisle:
That’s a first time.

Bill Brewster:
The chocolate shake. I was like, this is messed up. I’ve got no worry.

Tobias Carlisle:
It is kind of fun when you give them a first big, like my daughter got her first juice box, I remember that distinctly, which you like at a birthday party at three or something like that. And it was just, she just stopped and drained it to the bottom just the whole-

DJCO – The Transition From Publishing To SaaS

Bill Brewster:
More down. I’m going to piggyback Daily Journal real quick and, and sort of make this a long segment and co-opted is my own. I want to believe those guys are going to win. And I love all of them but you’ve got Munger up there talking about how he doesn’t even know how to use the Google machine. And if you’re recruiting talent, they say that there’s… He goes, “I wish we could say we’re swimming in talent, but we don’t have enough.” It’s like, “Yeah, dude, you’re running sort of a tech company. The CEO is 80. You don’t know how to use Google. I just don’t know how that entity attracts talent.”

Tobias Carlisle:
Gets cheap. Some deep value guy gets in there and takes it over and transforms it.

Bill Brewster:
Maybe.

Tobias Carlisle:
It’s got to get cheap first though.

Bill Brewster:
It’s arguably not that expensive. I was watching somebody did a manual of ideas presentation on it in 2019. It might be on YouTube now, but look, the scuttlebutt the guy did was really good. They do have some positive free cashflow finally the revenues are ramping from the subscriptions and then the other revenues, which is like payment, velocity stuff that comes through, they get a skim on that. So good things are starting to happen. But I just…

Tobias Carlisle:
Its software is a service.

Jake Taylor:
It’s kind of pretty full price though for that SaaS business it’s tucked in there.

Bill Brewster:
It seems like it. You can’t look at the rest of SaaS and be like, “Oh, it’s 15 times.” That stuff’s growing like a weed. Daily Journal now whatever they create is going to be sticky. So that’s worth a lot but the growth-

Jake Taylor:
What do you think about the idea that they’re kind of pursuing there of going into places that are hard to get into as its own kind of moat working with governments specifically?

Bill Brewster:
Yeah, I like it. I pulled up there is a contract if you just like Google Cook County Journal Technologies and I was going through that and just sort of seeing what the implementation looked like. It’s not easy. It appears very tough. I didn’t get the billing structure and all that, which is what I really would’ve liked. I’m sure you can find it though because it’s all….When you’re dealing with governments it’s all… if I cared I would do it. I’m not sure I care.

Tobias Carlisle:
I have a confession that I bought Daily Journal co in about 2000 and maybe it was eight or nine not knowing that Charlie Munger was involved.

Bill Brewster:
Yeah. There you go.

Tobias Carlisle:
Because…

Jake Taylor:
Yeah you got that security’s per portfolio for less than the price of the stock at that point.

Tobias Carlisle:
And then I sold it for like 100% PO thinking that that was all the money you could make of it.

Jake Taylor:
Thinking you’re a genius.

Tobias Carlisle:
Yeah, then found out, “Oh, Charlie is in there oops.”

Bill Brewster:
Somewhat related because the securities portfolio to the people that think that I dunk on them for graph tech and parye following, watching Buffet sell lows is not put a great feeling in my stomach. He is rarely wrong on financials.

Jake Taylor:
But Daily Journal’s not unloading.

Bill Brewster:
That’s true. The Daily Journal is not where the real money is.

Jake Taylor:
Yeah.

Tobias Carlisle:
Do you guys want to decide?

Bill Brewster:
They’re off a lot. I think they had like this is off memory, but directionally it’s right. I think they’re down from 430 million shares to like 360 ish in Wells.

Tobias Carlisle:
I’ve got some mailbag questions. Should we? We’ve got a big Mail bag.

Bill Brewster:
I got a mail bag too, so let’s do it.

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