Mohnish Pabrai on Circle of Competence

Funds like to categorize themselves as “growth” or “value” or “small cap” etc. I find that with many stocks, “growth” and “value” are two sides of the same coin. They are not mutually exclusive. I get a lot of questions from investors regarding the inner-workings of this “black-box”. I’m including some very specific information on The Pabrai Investment Funds to shed some light in this matter. The investment style of the Pabrai Investment Funds is quite simple. The fund only takes long positions in public equities. There are no options or derivatives etc. that the fund delves into at all. Typically the funds assets are divided between under 15 securities with the typical allocation for a given security being 10% of assets in the fund. The fund is allowed to go up to 30% into margin. I look at 3000+ public companies a year. When I look at a given public company, I run them through a three-question filter. 95+% of companies do not make it through these filters and are discarded. The ones that make it through are then rigorously analyzed before anything becomes part of the portfolio. Inspite of my best efforts, I have made mistakes in the past and know that there will be more in the future. The goal is that we are right many more times than we are wrong. The three filters that a security has to go through is a positive answer to the questions: 1. Do I understand this business well? Is it well within my circle of competence?

we bought 5500 shares DTPI at a price of $23.75/share for a total investment of about $130,000 or 13% of PIFI assets. I arrived at 13% because we had $1,000,000, plus an ability to go upto $300,000 into margin yielding total buying power of $1.3 Million. If funds are available, I’m typically allocating 13% of assets in a given security. 1. Did I understand DTPI well? Is it well within my circle of competence? The answer is yes for the following reasons: • I was the founder and then CEO of TransTech, Inc. TransTech is an IT Consulting Services company. I had run TransTech for about 9 years and grown it from nothing to about 160 people. Over the years, I learnt a lot about the IT Services space and Consulting services. • With DTPI being based in Chicago, I was quite familiar with the company. Over the years I had met with Mel Bergstein (CEO, DTPI) and other senior executives of DTPI. I used to go to various IT Services investment banker conferences and DTPI was usually a presenter. I’d listen to Mel speak and then attend the Q&A thereafter. • I met a couple of times with Mel and senior management at DTPI in Q1999 to explore possible synergies between DTPI and TransTech. Specifically, DTPI did a lot of high- level work at the CXO (CEO, CIO, COO) level with Fortune 2000 companies that led to IT projects that DTPI usually referred to other firms. I was hoping to make TransTech one of those firms.

As it turned out, DTPI and TransTech never did work on a project together – so far - even though there were a few pre-sales efforts. Those meetings did help me get more familiar with DTPI. • During one of these meetings, Mel gave me a tour of DTPI Headquarters in the John Hancock building. I remember that Mel’s office was no bigger than most of his managers. Also, all corner offices were allocated to be temporary workspace for consultants in between projects or working out of HQ. In other words, unlike the typical business where the CEO has the best office, Mel had allocated the very best space to the folks who were in the trenches making the money for the company. I liked his employee-centric view. • Chunka Mui is one of the partners at Diamond. He is the author of “Unleashing the Killer App”. I had dinner with Mel and Chunka in Boston in Q199 when Chunka spoke at a gathering of CEOs. It was clear that DTPI clients saw tremendous value in Chunka and would willingly pay top dollar to a team he was part of. So, all in all, I did consider understanding DTPI well within my circle of competence. 2. Is Diamond Technology Partners a great and predictable business? The answer again came back as a resounding yes for the following reasons.5