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Latticework the new investing sites

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So think of it from the point of view of a company trying to get into the business. One is economies of scale. How big do you have to get? How big a market share do you have to capture in order to be viable as a competitor? So the first thing is economies of scale. Which is all about customer captivity in a contested environment where unique technology will help you with that and so on.

Do you look at those two elements explicitly? Li Lu: Scale is important in there, actually, there is a scale economies in those businesses, not everything actually has a scale. Sometimes that scale becomes a counterpoint , they could actually be more difficult to really manage. But in a scale economy, scale does really become a competitive advantage. Things do change. New product categories would come along, and brands get tired and old, and not refreshed.

All great business changes over time. But some of the businesses can really keep it for a very, very long time. Take example with Berkshire. It started out as a lousy business, losing business of textile in New England. But over time, some of those businesses began to lose its competitive advantage and then they took that capital and allocated to the ones that…so obviously the management capability of allocating capital also plays a very important role.

So in every specific businesses, what really make them successful are very, very different and they change over time. And so that is the most fascinating aspect of the competitive dynamics and those are the most fascinating aspect of being an investor as well. Bruce Greenwald: As of today, how do you view this differently, would you say from most other investors? Are there things that you look at specifically?

Are there ways that you approach companies? So in what other ways do you do things differently from most other value investors and investors? You invested with me or you begin to invest in me. So thank you for your continued trust and confidence. No, back then we were looking for smaller businesses because those are the businesses I feel I can understand them. And as we evolve, we began to look for big businesses that we can also understand. That bigger business does come with a whole set of advantages, that if they are right in a sense, they also come in with a whole bunch of problems.

There are big businesses that because of a certain dynamic, are still growing at a robust pace that are becoming even more entrenched as they become bigger. And they still have long runs of growth. So that just exist. You know, the most recent phenomenon of the technology platform, because of the network effect , some of the business are fitting that characteristics.

And so just the size itself is certainly not the most determining factor. Bruce Greenwald: But then what other dimensions do you do things differently today than other investors who are less successful? We spend most of our time studying industries, study specific companies. Try to answer what really make them successful.

Can that success be continued? We just continue to really study them and continue at it, until we have an answer. In other words, if we claim a circle of confidence, we have to understand the edge of the competence. You have to know what falls in and what falls out. You have to be very honest with yourself. At least I want to know, at worst case scenario, what the business would look like 10 years from now. And so we do have a long-term horizon in terms.

Sometimes we study for years and years before we see, ok, we really get it. And so that makes our selection very, very difficult. And so when we do select them, we tend to own them for a very, very long time because the businesses that are really good and we really fully understand are very rare. Inaudible So anything that we would buy a lot more as they go down.

Bruce Greenwald: Ok, so what about the market today? I mean, it seems highly valued. I mean, if you look at fixed income, it seems unprecedented. That said, does the market today remind you of any historical periods you lived through in good ways or bad? And this happens to be one of the more extreme periods of time. It is truly, in many ways, somewhere in unchartered territory. All of those are quite really remarkable in this period of time. So how do you really deal with them. And so every time is slightly different.

Instead of guessing the patterns of history and whether they would repeat, we focus on selecting companies that can really live through the thick and thin, whatever the environment, business will continue. Somebody will do well. So we just want to really be invested in those companies who are capable of dealing with those extraordinary set of uncertainties. Bruce Greenwald: And how much is management a part of that. And how do you look for managements that have that capability?

Li Lu: Well, in a lot of the companies, the management will make a big difference. The culture of the management will make a big difference. But in a small set of experiences, management really matters almost nothing. The strength of the business itself really has a dynamic of its own that really almost anybody can run it and run it well, relatively.

Now, those businesses are really rare, not that many. You can probably put them in one hand or two hands. And so…again, I come back to the situation, each time is different. You have to really look for each specific company in specific ways and ask all kinds of probing questions and study them over a long period of time in order to really honestly say that you actually understand them. Understand them enough that you could predict the outcome in 10 years, even given all the up and downs in the macro environment.

Are there specific things you learn about managements or companies that you look for in those crises? Li Lu: Yeah, well, so as you said, in my 24 years of managing Himalaya Capital, we have gone through several of those big crises. Each time when that happens, it was billed as once in a century crisis. It probably was, except it happens on the time frame of every 5 to 10 years. So a financial market boom and bust has been a constant phenomenon since the beginning of the financial market several hundred years ago.

And it was driven by human nature, as long human nature remains that way, it will never change. It will always be with us. As a product of evolution , we humans are basically run not necessarily in a very rational way. Particularly when it comes to money, humans are very funny. They tend to evoke a primal part of human nature. And so particularly as it relates to financial markets, a security market, money, that that human tendency of the extreme instincts become more amplified and more extreme.

And how do you deal with such an environment that will be constant? People will always be driven by fear, by euphoria, by this extreme kind of ups and downs. In a sense, have a certain characteristic of antifragile and so that up and down becomes somewhat friendly for us.

In the sense that when our favorite company is on sale discounted by 50, 60, 70 percent, if we have money, will buy more of it. And so to succeed in this game requires a certain temperament and a certain understanding of human nature.

Also a certain commonsensical approach. Knowing that your investment return eventually will mirror the actual business return by actual business. It took years for them to either go up or down. And so you should expect your investment result that come in slowly, gradually over a long period of time. So the short-term phenomena should not really impact you as much, either on the up or on the down. Market that is there to serve you, not instruct you. Except in the real game of investment, those phenomena, those on the up and down tend to be quite extreme and testing.

And so the other thing that will be very testing is that we really do need to understand the business itself. I sometimes almost feel that they exist to really catch human weakness. Bruce Greenwald: Can I actually talk a little bit about a specific example there and maybe get you to talk about an example? Because one of the things that you talked about was the stability of these companies and their managements in the face of a crisis.

So a crisis tells you a lot. And the one company that obviously recently has done extremely well and you could see it is John Deere. Bruce Greenwald: But could you share maybe a historical experience of that so that the students in the audience might have a sense of what to look for in looking for this stability? Once you achieve a certain notoriety in a certain field that people tend to really copy that.

Instead of giving people fish, it is much better to really teach people how to fish. Bruce Greenwald: Ok, so let me do one last question. Do you prefer to be a generalist or a specialist investor and would one work better in the Chinese market than another? But by the time you really get into the companies you really decided to invest, you really better become a true specialist. And to the point of really know, hopefully better than anybody in the world you can find, including the top management team.

And the top management team, because they manage the company, they tend to be deeply personally vested in their own biases and may not be able to look at the business as objectively, rationally as you do. So you want to be a true specialist in the company you chose to really invest. You want to be a generalist always of business in general, so that your core competence, your circle of competence is constantly evolving and enlarging over time. If I still really know what I knew when I started my first took your class or when you first invested with me, we would not have…anywhere near the results that we both enjoyed, so luckily we continue to expand and we continue to learn.

But on the other hand, it is fascinating to see that how business evolved over the last few decades will continue to evolve in the next few decades. And that really makes me feel that boy I am lucky to choose this field that I get paid to really satisfy my curiosity and to learn all those great people and great enterprises serving society.

So I feel happy every day doing what I do. Li Lu: Inaudible turned out exactly as we predicted, Asia indeed became a lot more important, in particularly China in it, has becomes even more important. As I look at in the next few decades, I would say that the Chinese market, and Asia in general, will become even more important. The set of dynamics that are already set in place, will continue to play out in a robust way, so the Chinese security market in general and Asia economy, that will become increasingly a very, very important, evermore important component of the global market.

I mean, the Chinese numbers are obviously very difficult to interpret, at least the official numbers. Over the last 8 to 10 years, China trade has grown by only about 2. What does that say about Chinese growth? Li Lu: It tells you about the characteristics of the Chinese economy has changed fundamentally. You know, up until 10 years ago, what really propels the Chinese growth…was international trade to a certain extent.

And the other thing that is happening is after the citizens become middle classes, their demand changes from basically just work, saving, into really work and saving and consumption. So roughly around 10 years ago, as you point out, the Chinese economy has slowly evolved into more of a consumer driven economy to the point that interestingly, last year was a watershed year in a sense that the retail sales, the total volume of retail sales for the first time overtaking the United States.

But basically the trend is there. China is emerging to become the most dynamic, fastest growing consumer market in the whole world, and that is likely to continue for many, many more decades to come. And so that really makes China even more attractive to the global economy in terms of people who want to sell to the consumers, to the middle class in China.

And the characteristic of the economy would change and would also really provide unique and interesting opportunities for global investors. Bruce Greenwald: Let me just talk a little bit about that. And as I say, the export data, you could understand that would slowdown, but the fact that the import data has slowed down just as much or more tells you something about the nature of domestic growth in China.

What about the challenges in the service sector in China? But if you look at the underlying dynamics of the various different businesses, different performance, both consumption, retailers and the services are basically the ones that are growing the fastest. And overall, trade internationally is still growing at a robust rate, but not nearly as much as the domestic side of the economy. So domestic consumption becomes far more important, both goods and the services, as you point out.

So that just tells you that a different stage of the economy where it is today. Bruce Greenwald: So where do you see the unique challenges and opportunities in sort of finding value investment opportunities in China? Li Lu: Well, China remains, I think, one of the best market, if you were a value investor.

In a sense, the market is still somewhat underdeveloped. The market today is not as representative as the real economy the way, for example, the United States is. And the trading and the investors are still not as mature. And also, as you said, in the service sector of the economy when it comes to financial services, is still yet to be developed.

And China was really right at this stage in the financial services industry, actually is about to take off in a big way for many reasons. And it just so happens that the Chinese government is quite keen in making macroeconomic policies quite conducive for the development of the financial services industry. So all those confluence of factors really make the market that much more attractive today than it was before. Bruce Greenwald: Yeah, can I say something about that?

Financial services is probably the fifth and sixth largest service sector. The biggest is housing by far. The second biggest is medical care. The third biggest is education. What about those sectors in China. Li Lu: Virtually every industry are going through robust growing stage, some more than the others. So different people tend to focus on different aspects of the industries and different aspects of the growth profile, some looking at value and high growth companies, some looking for values at moderate growth companies.

And so if you are a true good investor in that sense, you can find value everywhere. But you will probably be more capable of finding values in dynamically growing economies such as China. So that combination of those two really make it enticing. On top of that one, a whole series of government reform will make those inefficiencies gradually be more efficient.

And so that transition offers even more interesting opportunities. So this is a good time for global investors and certainly for U. Bruce Greenwald: Ok, in those terms that as Chinese financial markets are developing.

You sort of have a top development that you like to see happen in the China financial markets or even in the China economy? You have to go through…layers of approval process in order to be listed. And so the ones who are listed are the ones who really approved by government, for whatever reason, often not really market driven.

Compare with other markets such as the United States, that it is registration based. And so it is market driven. As a result…the security markets here are quite representative of the true economy. And as the Chinese economy moving from an export import driven economy into more of consumer demand economy, the entrepreneurial companies with market driven dynamics are increasingly playing a larger role.

And therefore the financial markets have to reflect the changing dynamics and the Chinese government is determined to reform this IPO process from one of approval process model into one that is much like the United States of registration-based model. And so we are probably still early in that process.

And the other big changes that is happening is that most of the financing are done through the banking sectors up to the point, 80 plus percent. And so we see the overall financing model, the Chinese economy, from one that is more indirect, into more direct. And so thus is the reason for opening up this financial service industry, both for domestic players and global players.

And the financial markets will become much, much bigger than what it is today. Bruce Greenwald: Now, let me ask another question in that connection. I mean, the thing about a service economy is that services are overwhelmingly locally produced and consumed.

There are very few global universities, for example, there are very few global high schools, very few global hospitals. That means that typically if you look at developed economies like the United States with big service sectors, the firms which tend to be local, the service firms that tend to be local, tend to be locally financed. So I assume you know that local banks in the United States are much more profitable than the big global banks. Do you see a comparable trend developing in China that you can take advantage of?

Li Lu: Yeah, well, they tend to really know their local area. But the Chinese regulation in banking is slightly different. So there are only roughly about 15 banks that really have the mandate of being able to take deposit on a national basis. And all the rest of the financial institutions are able to really take deposits in a very, very small, well-defined local region. And so it is a heavily, heavily regulated business.

And so that really gives them almost an oligopoly type of a status in terms of taking deposit, which is very important and of course, in terms of the source of capital. So that dynamic is a slightly different than the United States, for example. That the license ability to really be able to open a bank is much, much more relaxed in the United States than in China. As a result, basically the dynamics of the larger national versus local or regional banks and other financial institutions, are more driven by basically the business dynamics and market dynamics.

And this is very different than in China. It is driven first and foremost by the regulation regime. And so, that makes the comparison of the banks really quite different in China than the United States. Bruce Greenwald: So somebody investing in banks in China have to be an expert in Chinese regulation?

Li Lu: Yes. Inaudible if you invest anything, I recommend you better become the most knowledgeable specialist on the planet before you really invest and hold it through the ups and downs and the thick and thins. And if you do understand them and they are good, it is far more profitable to hold over the long period of time. So among them many popular and rising technological fields such as 5G, Bitcoin, AI, has any of that attracted your interest as a value investor and why?

The one big forces that are really quite prominent is the fast acceleration of technological changes. And of course, you need to be well aware of those mega technological trend. This current wave that started 40, 50 years since the invention of the semiconductor, particularly the integrated circuit, that really ultimately led to personal computer and computational proliferation, the computation power to ordinary citizens. From there, the mobile internet. So the intersections of computing as well as the omnipresent and instantaneous communication really led to this new phenomena of artificial intelligence and the data economy as a result of it.

And so this wave of technological change over the last 40 years has fundamentally altered the business landscape of all kinds, basically. And so whatever kind of investor you are, we do need to be aware of these huge changes. And how do you deal with that in a sense? Or in companies that are leading those changes or enabling changes so that those changes are really on your side. And so, now do you have to be a true expert to the point of an engineer?

So we are still really in the middle of that gigantic wave that started with the invention of the semiconductor. Li Lu: Yes, yes. And the current wave of neural network based artificial intelligence is just kind of the recent iteration. And the data economy that as a result of it is the newest adaptation by industries in response to that new technology. Bruce Greenwald: Do you see opportunities to invest in new technologies?

Do you have an example, maybe in your past where you did invest successfully in a new technology? Li Lu: We have, in a sense, back in the days I was trying to learn about businesses, I invested in a number of startups. And so I am fascinated about the technologies. And today we have somewhat smaller exposure to that. But it is fascinating. It does require a different aptitude, different domain expertise, etc. The other things is we chose to have other set of easier opportunities.

We just happened to be lucky. Bruce Greenwald: All right. A lot of smart people believe that renewable energy is the next big revolution. So is that something that you think about beyond batteries? Where is Tesla going? Li Lu: So the car industry is simultaneously kind of being impacted by you know, four or five big megatrends. Electrification, ride sharing, autonomous driving, and the intelligent design. All of those really going into the industry simultaneously. And so that really attracted more entrants and that really heated the competition.

Also, against the broad background of climate change, the carbon neutral revolution in the sense. So as a result of the industry that really has last for years is really being turned upside down. On the other side, it is a gigantic industry. So the prize is also in the end. In the process though, the competition is going to become very, very intense. Still it does still have that characteristic of being a scale economy, as we talked about it in the beginning of our dialogue.

So the survivors or the winners do need to have a certain scale in order to be able to win in the end. So it is still early to predict who will be the ultimate winner, but it is not early at all to predict those mega trends are here to stay. So five years there will be far more electric cars sold. We have seen the European countries began to declare a deadline to stop basically gasoline powered cars.

China is following that up, I think, in due course. And we are going to see those megatrends here to stay. And five years from now, that trend will become even more prominent than what it is today. But it is very difficult to predict the ultimate winner…and it continues to attract new entrants at this point.

But I do think that the ones that really possess unique technology, have the scale, and have the right strategic focus ultimately will do well. Li Lu: Well I bet once. So I let my money speaker for itself. It is a gigantic industry. Bruce Greenwald: Ok, so in terms of value investing education, you actually played a big role in promoting and advocating value investing from the books to actually you underwrote this class that we talked about where I went to Peking University and I think it still survives.

Li Lu: Well, first of all, thank you Bruce for coming to teach at the Peking University value investing classes that my colleague Jing Chang and I started six years ago. And you have played an important role to that. So in terms of the younger students when you start today. So I think a few things will be important. When I talk to young students and people who started out trying to get into the field, I say several things that are important. So any company, think starting point that way. And once you really kind of think you own percent of it, your mentality is totally different.

You have no idea how to run it. What do you do? You want to know everything, everything you can possibly get your hands on. You just know the facts. Now, if you adopt that mentality, study any businesses, you have really started the process of becoming a real value investor. The second thing is you really want to maintain intellectual honesty.

And that is very, very important. How do you know that? When I can do that, I would be entitled to have a view. That intellectual honesty is a good life philosophy to begin with. It is critical. It is vital when it comes to investment. Because, as I said, the security market almost exists to really find your weaknesses, your dishonesty, your pretension, your mushy knowledges.

It was almost designed that way to catch you. Bruce Greenwald: Can I say something about that? Because it is better than designed that way. And one of you is always wrong. Bruce Greenwald: Oh no! The average return to all investors in any asset class and therefore in all those asset classes is the average return to all those assets. Li Lu: Hey Bruce, I take a slightly different view. Li Lu: That is a fair point. Fair point. And another thing I want to say is that you want to really devote as much time as possible to study of the history of businesses and the history of great businessmen in the past.

And so I say all three things are important. And lastly, to be a very thorough student of the history of the businesses. All three things are really going to be very helpful if you are beginning to get into the field of investment or really want to improve your game.

Bruce Greenwald: Good advice. When you look back over your own career. Are there things that, whether at Columbia Business School or in your career since then, you would have done differently that would have helped you get to where you are today sort of more quickly and more easily?

The first time he came. I feel extraordinarily lucky that I got into the business and to strike a relationship with Charlie Munger. I feel extraordinarily fortunate to live in a period of time when both the United States and China are going through a fundamental economic growth and providing enormous amount of opportunity and that I happen to really know both markets well.

And so looking back at my career, nothing I regret. I feel nothing but really gratitude. But in terms on the transition from U. I think a lot of people, myself included, went through a period of time to really try to understand the nature of the Chinese economy and the nature of the Chinese market, the nature of the Chinese company…investment in Chinese companies. So one of the key learnings that I have, and it is not that obvious, is the role that the Chinese government played in that whole equation.

If you have been successful investor in the United States, for example, or in the developed market, you tend to come with a set of assumptions about the role of the government and the role of the market participants. And when you really look into the Chinese market, that assumptions, you will see a lot of challenges.

And so you might really, from time to time, arrive to views that are inconsistent with your own experiences, partially because historically the Chinese government and the U. Government, Western governments, perform very different roles. And so that is the education of most of the international investors, particularly when it comes to China that they have to go through.

And that is important. But bearing in mind the other aspect to understand to the Chinese economy is that the nature of the modern economy is its ability to generate sustained, compounded economic growth, something that is only recently emerged as the human phenomena. And this is where we talk about the zero-sum versus win-win type of mentality. Now for the longest period of time that almost all natural or human affairs are characterized by cycles in the sense that everything goes up cycles.

So entropy basically, is always increased. Energy goes from hot to cold things. From order to disorder. Great businesses eventually loses its edge. So that is the nature of things. And economy goes from boom and bust. But something unique happened over several hundred years ago with the beginning of the Industrial Revolution.

We began to see this phenomenon of continued, sustained, compounded economic growth. And that is really when value investing become very important. And so the fact that you were capable of generating that long term results is a reflection of a changing nature of the economy. What really drives that phenomenon is something that is utterly fascinating.

I literally spent 30, 40 years thinking about that. And combine that one with the invention of modern science and technology, a combination of those two produced a modern form of economy. So what has happened in China is that roughly around 40 years ago, China has really stumbled finally into that magic formula of free market economy. Now, with Chinese characteristic, of course, along with modern science and technology.

And any economy that has really strike that magic formula, begins to produce the phenomenon of compounding economic performance. Now that has to be combined with the stability of overall political environment to allow the market force that a new economy to really release that power. And that is when a sustained investment record can be possible in China. And often it was a zero sum. But I think from that period on, that a sustained win-win type of a compounded investment return becomes possible.

In fact, the political democracy happened later, almost as a result, but not because of it. Anyways, so that is another layer of understanding the phenomena of investment opportunities in China that could be interesting. And given the recent elevated attention on this community, what are you doing and planning to do or you think ought to be done for that community?

Li Lu: Well, I was really, like many people around the Asian-American community in America, just utterly dismayed, heartbroken over the last year and a half. Particularly since the later years of the Trump administration, it got worsened because of the pandemic, this new wave of anti-Asian hate crimes. And by all statistics that instance of racial discrimination against Asian-Americans has dramatically increased over the last year and a half. For a variety of different reasons.

The pandemic, the Trump policies, the U. Suffice to say that many people in Asian-American community are living in fears, literally physical fears today after being here for so many years, of being such an important part of the American experiment. Particularly to the Chinese American community. After years, it feels like the Chinese Exclusion Act has come back again. And so I have been thinking long and hard at what can we do to change the paradigm?

Now I had a different experiences when I came to America. I had a wonderful, wonderful experiences. America embraced me with open, warm heart. And I have gotten an enormous amount of opportunities like Columbia University and all the great people I met along the way. And the opportunity I was given to be successful way beyond my wildest dreams when I first came here as an immigrant. Not a penny and nobody to speak the language, to be where I am today.

And so one thing that I always believed about America is this. I think America is not defined by geography. It is not defined by race. It is not defined by a culture. Not defined by religion. America is defined by a set of ideas and ideals. Anyone, no matter your race, religion, culture, background, if you sign up to that set of ideas, ideals, can be America.

I was one of those who believe in those ideas and ideals that became a successful American. And I want that experiment to really continue. And obviously, when you look at history, it was never a perfect experiment. In that it was often marked by the inaudible , and sometimes actually outright cruel, malicious, if you think about it, experiences with the African Americans and all the other minorities.

But I think America remains the only country on Earth, so inspired and such constructed. And for that experiment to continue, it calls constantly to our better angels inside each one of us. And to really restrict the worst instincts of all of us. And throughout a different period of time, people need to rise up to counter those worst instinct and fight them and face them down.

And this is one of those periods again. So I think the entire community of Asian-Americans have to come together. The entire American community need to really come together to really fight this wave of Anti-Asian discrimination. So along with a number of wonderful colleagues, we are cofounding a new national organization whose mission is to serve Asian-Americans in their pursuit of belonging and prosperity.

Free from discrimination, slander or violence. And one of the things that our inaudible needs is, an enormous amount of funding. The statistics tell us that only 0. And we want to fundamentally change that. And hopefully with this new organization, new group of people, we really want to fundamentally change that picture.

And the other thing is that with the global economy, the center of the global economy shifting from the Atlantic Ocean to the Pacific Ocean, Asian American, 20 million strong are going to play an increasingly important role to position America as the new Pacific economic power. And that group of people more than other ones, if fully integrated as the very fabric of American society, could help lead America to better integrated with the better economic ties in Asia. Bruce Greenwald: Ok Li Lu.

Unfortunately, we have two minutes left. Thank you very much for this really encyclopedic and enlightening talk. I think I have to turn it back over, however, to the M. For the last two minutes. Li Lu: Ok. Once again, the wit and wisdom of Charlie Munger was on full display at the deceptively youthful age of 97! Throughout the transcript below, I have included clickable links to my notes and articles which you may find insightful.

In addition to the transcript, you may also watch the entire meeting on YouTube. Note: I frequently summarized the questions that were presented by the host Julia La Roche, but as for anything that Charlie or Gerry said, I translated them verbatim and as accurately as possible.

The questions have all been submitted by actual shareholders of the Daily Journal and Yahoo! Ladies and gentlemen, wherever you are, via Yahoo! The meeting will come to order. I would imagine that applies to the broad market too. What are the psychological implications of this type of market behavior? What could investors do to cope better with periodical frenziness?

Charlie: Well, these things do happen in a market economy, you get crazy booms. Remember the dotcom boom? When every little building in Silicon Valley rented at a huge price and a few months later about a third of them were vacant. Question 2: What are Mr. It seems to involve a lot of your standard causes of human misjudgment. And the frenzy is fed by people who are getting commissions and other revenues out of this new bunch of gamblers. And, of course, when things get extreme, you have things like that short squeeze.

And I have a very simple idea on this subject. I think you should try and make your money in this world by selling other people things that are good for them. Question 3: What do you hope the future of the Daily Journal Corporation looks like in a decade? Charlie: Well, I certainly hope that they succeed mightily in their software endeavor to automate all these courts for the modern world. Question 4: The highly configurable JTI product may help e-suites integrate deeply into new jurisdictions as agencies and citizens become familiar with the courthouse software.

Today, the majority of contractual revenue that can be identified is from implementations and licenses. What are the main sources of ancillary revenue expected once the products have gone live? And how meaningful will the products like E-file-it, E-pay-it, cloud hosting services and others become? We do know one thing, and that is the courts of the whole world are going to be taken into the modern age.

And this is a highly desirable thing. Or how much money is going to be made. We are in fact in a more difficult type of software business than Microsoft. Go ahead. Question 5: We had a couple of questions about J. Rick Guerin. If you all would share a few stories about him and your fondest memory. Charlie: Well, of course he was one of my closest friends for many decades and he was very good company and a splendid gentleman, and, of course, we accomplished quite a bit working together.

Rick was part of the group which consisted of Warren Buffett, Rick Guerin, and Charlie Munger that bought control of Blue Chip Stamps when it was widely distributed in an anti-trust settlement. And we were together in that for a long, long time. And then Rick and I did the Daily Journal together on another occasion. Rick was always humorous, always intelligent.

He was just so damn smart. And, of course, he was fun to be with because he was always jumping out of airplanes in parachutes and running marathons and so on, doing all kinds of things I would never consider doing. He was a lot of fun and he was a great kidder, he loved to kid people. And of course he was very courageous and generous in helping everybody around him all his life.

We miss Rick terribly. But he was 90 years of age, he had a long and wonderful run. Gerry: Always upbeat, yes. Always on point. Charlie: Well, it helps to be able to leave the IQ tests early with the highest score. Question 6: Now that we are cash flow positive, assuming the software business is investing organically as much as it can, what is the philosophical thinking with respect to capital allocation at the Daily Journal?

Are traditional dividends and share repurchases the likely end state, assuming our software business grows into a bona fide company, or will buying and holding securities from time to time be what the board is comfortable with? Charlie: Well, the business around here that has the most promise is our software business automating the courts. Our marketable securities are just a… we prefer owning common stocks to holding cash under current conditions.

Question 7: We had a couple of questions around succession planning. These actions have given some shareholders more visibility and comfort on their investment. Can you provide similar insight regarding the future at the Daily Journal? And would you consider implementing policies like those at Berkshire so shareholders can get to know the up and coming leaders in the organization? Charlie: Yeah, I would go further. Gerry: Charlie refers to the courts many times. The JTI software has been configured for other judicial and justice agencies, including district attorneys, prosecutors, public defenders, probation, etc.

So we have one basic system configured a number of different ways, including workers comp for a large state in the United States. It seems like everyone, including actors, athletes, singers and politicians, are getting into the business of promoting their own SPAC. What do you think of all these SPACs and the promoters pushing them?

I think this kind of crazy speculation, an enterprise is not even found or picked out yet, is a sign of an irritating bubble. Question Charlie last February, you spoke about the wretched excess in the financial system. Given the developments over the past year, could you give us an update on your assessment of wretched excess in the system?

Where does it appear most egregious? And I think all of this activity is regrettable. I think civilization would do better without it. It just created the most unholy mess. So human greed and the aggression of the brokerage community creates these bubbles from time to time.

And I think wise people just stay out of them. Can US Treasury bonds be such a case today? And what are the implications since Treasury assets underpin the value of every other asset? Thank you for all you do to educate us.

When interest rates are this low, I never buy any and neither does The Daily Journal. Have you considered amending this quote or lowering your standards? Charlie: Well, I think everybody is willing to hold stocks at higher price earnings multiples when interest rates as low as they are now.

I am more willing to hold stocks at high multiples than I would be if interest rates were a lot lower. Everybody is. Question Do you think value investing is still relevant in a GDP decreasing world? And what about passive investing? Charlie: Well, that is easy. Value investing, the way I regard it, will never go out of style because value investing, the way I conceive it, is always wanting to get more value than you pay for when you buy a stock.

And that approach will never go out of style. I think all good investing is value investing. But every value investor tries to get more value than he pays for. I regard this as insanity. Absolute insanity. We have different tax considerations. That was a big error in judgment. So you can understand why Warren got disenchanted with Wells Fargo.

I expect less out of bankers than he does. Question What is the wisdom behind holding bank stocks compared to other stocks? Are they more stable? Charlie: Well, I think all stocks can fluctuate. And I do think banking run intelligently is a very good business. And some bankers yield to the temptations. Question What is the biggest competitive threat to U.

Is it Bitcoin, decentralized finance or something else? I do think that a properly run bank is a great contributor to civilization and that the central banks of the world like controlling their own banking system and their own money supplies. Bitcoin reminds me of what Oscar Wilde said about fox hunting. He said it was the pursuit of the uneatable by the unspeakable. The stock has gained so much this year and last year, the stock appreciated probably way more than intrinsic value.

How do you decide to hold on to a stock or sell some? BYD stock did nothing for the first five years we held it and last year it quintupled. And what happened was, BYD is very well positioned for the transfer of Chinese automobile production from gasoline driven cars to electricity driven cars. And so the stock went way up.

Since we admire the company and like its position and we like its…We have a tendency to…and we pay huge taxes to a combination of the federal government and the state of California when we sell something. One of my smartest friends in venture capital is constantly getting huge clumps of stocks at nosebleed prices.

What he does is he sells about half of them always. That way, whatever happens, he feels smart. Question Do you believe the valuations for electric car manufacturers are in bubble territory? For example, Coca-Cola in the past. Question Why almost two years ago, did you believe that Costco was the only U. And why did you feel that Amazon had more to fear from Costco than Costco had to fear from Amazon? And if you believe Jeff Bezos is one of the best businessmen you have ever known, would you consider investing early in any of the new projects he will now inevitably focus his attention on now that he will not have to be as concerned about the day to day responsibilities of Amazon.

Costco, I do think, has as one thing that Amazon does not. Question How do you control your investments in a world where reasonable companies with a good image, like GE, sink rapidly into the bottom land of the stock market? Or is it impossible to realize a deterioration quickly enough to exit without a loss?

I do think the present CEO [Lawrence Gulp] is an extraordinarily able man and the directors made a very wise choice when they put him in charge. If anybody can fix it, he can. Question You famously run investments through your mental checklist.

Is there anything that you wish you had added to your checklist sooner? And I recommend that other people follow my example. Question You and Warren have been adept at quickly sizing people up business leaders and potential business partners. What do you look for in a leader? And do you and Warren have any tricks or shortcuts to size people up quickly and accurately? Charlie: Well, of course, if a person is a chronic drunk, we avoid him. Everybody has shortcuts to screen out certain hazards and we probably have more of those shortcuts than others.

One of the great advantages of the way Berkshire operates is that we associate with a lot of marvelous people , and if you stop to think about it, that is also true at the Daily Journal. And one of them is Gerry Salzman. And Gerry and I have been together how many years, Gerry? Charlie: Early 70s. I recognized early that Gerry could run anything he wanted to run and when the old CEO of the Daily Journal died, Gerry was managing the business affairs of the Munger Tolles law firm.

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