Daily Journal Tells SEC Munger Knows Best, Buying Stocks

Charles Munger’s Daily Journal Corp. told regulators that selling Treasuries and jumping into stocks was the safe move for the publisher in the financial crisis.

“The board recognized that this decision would be contrary to the conventional (but questionable) notion that the least risky way to preserve corporate capital for the long-term benefit of stockholders is to invest it in government bonds at interest rates approximating zero,” an attorney for Los Angeles-based Daily Journal wrote in a March 18 letter made public today.

The U.S. Securities and Exchange Commission in February questioned why the publisher shouldn’t be considered an investment company given the “high percentage” of total assets that were in marketable securities. Such a designation could subject the publisher of California Lawyer magazine and 10 newspapers to some of the regulations imposed on mutual funds.

Munger, 89, best known as Warren Buffett’s longtime business partner, helped triple Daily Journal’s value since 2008 by reallocating the company’s investments. The publisher initially benefited from the housing slump and deepest U.S. recession since the 1930s because it earned revenue from publishing foreclosure notices, the company said in its letter.

Still, the board recognized that Daily Journal needed a long-term plan to protect the company from deterioration in its newspaper publishing business, provide an asset base for future takeovers and build a net worth that would allow its software unit to bid on government contracts, according to the letter.

The publisher said it shouldn’t qualify as an in investment company, in part because none of its officers spend time overseeing the portfolio.

‘Little Time’

“Two of the company’s directors, Charles Munger and J.P. Guerin, selected the securities which, given their experience and knowledge of investing, required very little time,” Daily Journal said in the letter. “Also, there have been only purchases and no sales, so no time has been spent trading or ‘managing’ these marketable securities.” Guerin is the company’s vice chairman, and Munger is chairman.

Daily Journal also said it presents itself to investors as an operating company with publishing and legal case-management software businesses. Most of the income is from those units, rather than investments.

The SEC said in a July letter that it had completed its review of Daily Journal, and that its comments don’t limit future action. Such correspondence is typically released after the exchange is finished.

‘Most Dangerous’

Daily Journal’s stock bets have soared in recent years and accounted for about 70 percent of the publisher’s $173.8 million of assets at the end of June. Much of that gain can probably be traced to bets on Wells Fargo & Co., according to investors who attended the publisher’s annual meetings. The largest U.S. home lender has climbed more than five-fold since its 2009 low and is the top holding at Buffett’s Berkshire Hathaway Inc.

Buffett, 82, has shunned bonds in recent years and said his preference is to buy stocks and whole companies. In February 2012, he told Berkshire investors that Treasuries were among the “most dangerous” of assets because low interest rates don’t compensate investors for the risk of inflation.

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