Mohnish Pabrai on Cash Reserves

We will make many mistakes (of inclusion and omission). It will usually take much longer to get convergence and good investment ideas appear to be a rarity these days. Thus our returns will be noticeably lower going forward. We’re very unlikely to see such a convergence of these factors again. I do expect the Pabrai Funds to outperform the best of the three indices over the long haul. I have no idea by how much we will outperform, but am willing to wager that it will be substantially less than the last 4½ years. Partners would be best off setting their expectations for The Pabrai Investment Funds to outperform the best of the three indices by a small margin over the long haul. PIF4 is thus far underperforming the indices. Three main factors: 1. Due to its newness and paucity of good investment ideas, PIF4 has a good sized cash position. 2. During periods of rapidly rising index values, we’re likely to underperform. All three indices were up over 12% in 3 months – that many times the expected annualized long term return from public equity investments. 3. No attempt is being made to outperform the indices over short-term comparative periods. The focus is on superior long-term performance. Alignment of Interests Since all three funds were at historic highs on December 31, management fees were payable. A management fee of $1,783,287.79 was paid by PIF2 on 12/31/03. As I have always done, this fee was reinvested back in PIF2. A management fee of $310,042.

Comparison in Changes in Value of PIF4 vs. the Indices. PIF4: $102,300; Best Index (Nasdaq): $109,800 $94,000 $96,000 $98,000 $100,000 $102,000 $104,000 $106,000 $108,000 $110,000 $112,000 Oct-03 Nov-03 PIF4 S&P 500 DJIA NASDAQ General Comments PIF2 and PIF3 are up 86.9% and 75.8% respectively in value for the first 11 months of 2003. I’d like to again express that annualized gains of this magnitude are an anomaly and not to be expected going forward. Before fees, the PIF2 YTD returns are over 100% - and that is amazing to me. I do expect the Pabrai Funds to outperform the best of the three indices over the long haul. I have no idea by how much we will outperform, but am willing to wager that it will be substantially less than the last 4+ years. Partners would be best off setting their expectations for The Pabrai Investment Funds to outperform the best of the three indices by a small margin over the long haul. The Nasdaq was up an amazing 9.8% over the last two months – far outpacing the 2.3% that PIF4’s valued increased over the same period. Due to its newness, PIF4 has a large cash position. There just isn’t much on sale and I’m in no hurry. The money will be put to work as and when good opportunities present themselves. Over the long haul it should outperform the best of the three indices by a small margin after fees and expenses. I believe the market as a whole is overvalued. All markets do eventually get to trading around a fair valuation.