Charlie Munger on Shareholder Orientation

-1- 2016 Daily Journal Annual Meeting Transcript Recording and transcript by Whitney Tilson, Managing Partner, Kase Capital Management, WTilson@kasecapital.com Edited for clarity by Jesse Koltes, Editor, TheCharlieton.com, jesse@thecharlieton.com On February 11, 2016, Charlie Munger hosted the 2016 annual meeting of the Daily Journal Corporation (NASDAQ:DJCO) at the company’s headquarters in Los Angeles, California. [Beginning of recorded material] Charlie Munger (opening remarks): What’s interesting about this company, of course, is that it’s a newspaper, historically. Now it’s a newspaper that relies on a combination of public service advertising and circulation revenues, and for a long time it was the only efficient means of delivering decisions of appellate courts promptly, which gave us a monopoly. Every year we raised the price of subscriptions, and every year people had to pay it. A wonderful business. Of course, like other newspapers, technology changed, and the business went to hell as lawyers no longer needed it for information about the appellate decisions. The result was that our newspaper business shrunk. So we have this newspaper that formerly had monopolistic qualities and like many newspapers it was a fine business. It required some management even so, but it was foolproof. And, of course, the world changed, for us as for other newspapers, and a million dollars a year pre-tax is what we have left.

-15- one of his most well-known observations. And, of course, who is getting the undeserved money in America now? Good question. It is not Bill Gates, it is not the people who create the new companies and have an idea. But a lot of the financiers who [were talking about] have a lot of undeserved wealth that provokes a lot of envy. And to some extent – well I think envy is always a bad idea. I don’t think we want a lot of undeserved wealth in the financial class, in many cases for doing nothing, or acting counter-productively. So I think that fixing the obviously undeserved wealth for a lot of people would be a constructive thing. You take the ordinary investment partnership. Not only do they get capital gains on what for anybody else would be ordinary income, they don’t pay any income tax at all on enormous accretions of wealth, because this unrealized appreciation has gradually shifted to the general partner, who takes securities out and leaves the business without recognizing the gain. We have enormous liquid fortunes being made with no taxes at all. And it’s not very complicated to understand. And, so, I think by and large you’re going be unhappy with inequality, but I think inequality is a natural outcome of a successful civilization that is improving for everybody, and all this stuff about the wealth of the top one percent or one-tenth of one percent: what the hell can the guy do at the top one thousandth of one percent?

Munger returned at the 2015 meeting to his critique of activist investors, sharpening the point with the Icahn reference. He opened by conceding that he had never liked the pomposity of the old system, in which the board of directors was absolutely permanent and did as it pleased. But what usually happened to him, he said, was that he liked the new system even less. The civilization in which the people getting richest are a bunch of folks who buy a block of shares and howl for change that helps the shareholders no matter what, he said, could not be a great way to run a civilization. He again granted that Carl Icahn is a very able man. He repeated it for emphasis. And then he delivered the conclusion flatly: he should not be running the world. The audience laughed, but Munger meant the point structurally. An economy that channels its best returns to short-horizon pressure tactics rather than to long-horizon stewardship ends up with a system that misallocates capital. The price signal gets hijacked by the people whose business model depends on forcing near-term payouts. The Daily Journal shareholders, he implied, were getting the opposite of the Icahn model. They were getting a 91-year-old chairman with a one-arm-one-leg pivot, no fees, no expenses, no howling. That was the Berkshire-style governance template applied to a small publisher: smart, rich, long-horizon capitalists who think like owners rather than advisers. He was telling the room that governance, not strategy, is the first decision a company gets right.

Munger used the 2014 DJCO meeting to revisit his long-running critique of activist investors and the Carl Icahn style of corporate pressure. He conceded that he had never liked the pomposity of the old system, in which a board of directors was effectively permanent and did as it pleased with shareholders' capital. But, he added, what usually happens to him is that the replacement turns out to be even less to his taste. The new system, in which the people getting richest are the ones who buy a block of shares and howl for change that helps the shareholders no matter what, was not, in his view, a great way to run a civilization. He granted that Carl Icahn is a very able man. He repeated the concession to keep the argument honest. But he was firm on the conclusion: able or not, Icahn should not be running the world. Munger's reasoning was that an economy that rewards short-horizon pressure tactics over long-horizon ownership and stewardship ends up with capital markets that misallocate. The price signal gets hijacked by the people whose business model depends on forcing near-term payouts. The takeaway for Daily Journal shareholders, and for anyone thinking about Berkshire-style long-term ownership, was that corporate governance is not just a matter of structure. It is a matter of who the people at the top actually are, what they actually believe, and how long they actually intend to hold the place. Munger favored boards of smart, rich, long-horizon capitalists who think like owners over boards of professionals who think like advisers, and he favored them loudly when activists showed up demanding a quick unlock.

Shortly after its acquisition by Wesco, CORT started up a nation-wide apartment locator service, originally intended mainly to supplement CORT’s furniture rental business by providing apartment locator and ancillary services to relocating individuals. Paul Arnold, long CORT’s able CEO, and his management team, have devoted much effort in recent years, expanding CORT’s rental relocation services, and redirecting them toward the needs of businesses and government agencies who require a skilled and able partner to provide comprehensive and seamless relocation services for the temporary relocation of employees worldwide. These efforts had not yet gained traction when recession hit. CORT is now focusing its efforts more on cost containment than on expansion of services. Under Wesco’s ownership, CORT has continuously undertaken to improve its compet- itive position. With several websites, principally, www.cort.com and www.apartment- search.com, professionals in more than 80 domestic metropolitan markets, affiliates servicing more than 50 countries, almost twenty-one thousand apartment communities referring their tenants to CORT, many ancillary services, and its entrée to the business community as a Berkshire Hathaway company, CORT is better positioned than previously to benefit from an economic turnaround if it occurs in due course. Near term, we expect more of the difficult business conditions of the recent past, but we do not expect another operating loss at CORT in 2010.

Paul Arnold, long CORT’s star CEO, and his management team, have devoted much effort over the past two years, expanding and redirecting CORT’s rental relocation services toward the needs of businesses and government agencies who require a skilled and able partner to provide comprehensive and seamless relocation services for the temporary relocation of employees worldwide. CORT’s operating results are subject to economic cycles. When we purchased CORT, its furniture rental business was rapidly growing, reflecting the strong U.S. economy, phenomenal business expansion and explosive growth of IPOs and the high-tech sector. Shortly thereafter, with the burst of the dot-com bubble, followed by the events of September 11 and a protracted slowdown in new business formation, CORT’s operations were hammered, reflecting generally bad results in the “rent-to-rent” segment of the furniture rental business. There followed a far-too-short period of improving business conditions which have more recently given way to increasingly difficult recessionary conditions, perhaps the beginning of the worst economic recession in decades. Under Wesco’s ownership, CORT has continuously undertaken to improve its com- petitive position. With several websites, principally, www.cort.com and www.apartment- search.

marketing toward the needs of businesses and governmental agencies who require a skilled and able partner to provide comprehensive and seamless relocation services for the temporary relocation of employees, worldwide. With several websites, principally www.cort.com, www.relocationcentral.com and www.apartmentsearch.com, profession- als in more than 80 domestic metropolitan markets, affiliates in more than 50 countries, almost twenty thousand apartment communities referring their tenants to CORT, many ancillary services, and its entrée to the business community as a Berkshire Hathaway company, CORT’s rental relocation operations may now be moving in the right direction. In January 2008, CORT expanded its operations to the United Kingdom through the purchase of Roomservice Group, a small regional provider of furniture rental and relo- cation services. CORT’s operations are subject to economic cycles. We are pleased with CORT’s progress in the past few years; however, we believe that it will likely suffer its share of the downturn as we enter a period of economic contraction. CORT is now a stronger company than it was when acquired by Wesco, helped by several “tuck-in” acquisitions, and poised towards long-term growth despite periodic bumps to be encountered along the way. More details with respect to CORT are contained throughout this annual report, to which your careful attention is directed. Precision Steel Warehouse, Inc.

With the burst of the dot-com bubble, the events of September 11, and a protracted slowdown in new business formation, CORT's operations were hammered, reÖecting generally bad results in the ""rent-to-rent'' segment of the furniture rental business. Obviously, when we purchased CORT we were poor predictors of near-term industry-wide prospects of the ""rent-to-rent'' sector of the furniture business. CORT started up a new service during 2001. Originally a subsidiary named Relocation Central, and now its CORTline division, it was conceived mainly to supplement CORT's furniture rental business by providing apartment locator and ancillary services to relocating individuals. Long CORT's star CEO, Paul Arnold is in process of expanding CORTline's operations and redirecting its marketing, with the expectation that it will become a Ñnancial success. CORTline, originally conceived to assist relocating individuals, has recently expanded its services and capabilities and has begun to market itself toward the needs of businesses and governmental agencies who require a skilled and able partner to provide the full gamut of seamless relocation services for the temporary relocation of employees. With several websites, principally, www.cortline.com, www.relocationcentral.com and www.apartmentsearch.

7 million in 2000, but include Relocation Central's after-tax losses, less minority interest, of $9.0 million for 2003, $8.3 million for 2002 and $7.0 million for 2001. Excluding the operating losses of Relocation Central, CORT, at the parent company level, contributed $2.7 million to Wesco's consolidated after-tax operating earnings for 2003, versus $10.7 million for 2002 and $20.1 million for 2001. When we purchased CORT early in 2000, its furniture rental business was rapidly growing, reÖecting the strong U.S. economy, phenomenal business expansion and explosive growth of IPOs and the high-tech sector. Beginning late in 2000, however, new business coming into CORT began to decline. With the burst of the dot-com bubble, the events of September 11, and continued weakness of job growth in the economy, CORT's operations have been hammered. Obviously, when we purchased CORT we were poor predictors of near-term industry-wide prospects of the ""rent-to- rent'' sector of the furniture business. Moreover, CORT started up a new subsidiary during 2001, Relocation Central Corporation, which has developed a virtual call center and carries out an Internet- based furniture and apartment-leads operation (www.relocationcentral.com), and it markets CORT's furniture rental services to real estate investment trusts, owners of many major apartment communities.