Mohnish Pabrai on Insurance Economics

Page 11 $1.2 billion. The REIT stock alone inside Reysas Logistics had a market value of $26 million. In addition Reysas Logistics owned various other rail, trucking, forklift leasing and the vehicle inspections business. “The stock market is designed to transfer money from the active to the patient.” - Warren Buffett Both businesses were ridiculously undervalued. I obviously preferred buying Logistics. But given the tiny market caps, I didn’t think we could get much stock before the price moved. So, I decided to buy as much as possible of both businesses. Turkey is a dream market for long term value investors to practice their art. Let’s consider the example of Reysas Logistics. There are 119 million shares outstanding. We now own over 39 million shares of Reysas Logistics. The founders and other long- term holders own another 44 million shares. Thus free float is 36 million shares. The daily volume is typically 2-7 million shares. The holding period of the free float shares is just a few days. I suspect most of them are held for just a few hours. When we bought our stake in Reysas Logistics and Reysas REIT in 2019, we ended up with 13.4 million shares of Logistics and 27.1 million shares of the REIT. When the price moved up dramatically in Q1 2020, we exited our Reysas REIT position and held on to the Logistics shares. We received $22.4 million in USD for our REIT shares. Later in the year, as Covid spread across the globe, we reinvested the $22.

As you are aware, the funds are allowed to employ leverage. PIFI can leverage upto 30% and the other funds can go upto 50%. When Buffett ran his partnerships in the 1950s and 60s, he almost always had more ideas than money and the funds were nearly fully leveraged (50%) during most of the period. Buffett’s use of leverage was focused on workout and special situation investments. Today Buffett’s vehicle for leverage is insurance float – which is simply brilliant since that float is subdivided into a myriad of risk classes being covered that are very very unlikely to have any sort of aggregation ever. As an example, after 9/11, some of Berkshire’s Insurance units saw big claims, but its GEICO auto insurance unit with about 15% of the float was untouched by the events of 9/11. Many partners and potential partners have voiced concerns about the use of leverage in the funds to me from time to time. I have always been very careful with leverage – only using it for special situations. However, after a great deal of reflection, I have come to the conclusion that there are really no limits to the short-term irrationality of markets. I don’t believe 1929 represents the extreme to which markets can go. If fact, until 1987 common wisdom was that big market drops were a thing of the past. So while we are probably protected against a 50 or 100 year flood, I don’t think we’re protected against a 1000 year flood.

In this market, one is not looking for the cheapest solution, but the most respectable and dignified one. So they appeared to have some pricing power – which was great. I backed up the proverbial truck. In August I bought as much as I could for my personal account and PIFI. The other problem with Stewart was the lack of float. It was a $2/share, but very little volume. It took days to fill my limit orders, but I’m a patient man. In December, I got a bonus, Stewart dipped to $1.75 (the December effect) and I added a bunch more PIF2 in December. The average buy price for PIF2’s Stewart stake was $1.99/share, including trading commissions. In the last conference call on March 15, Stewart announced that they were close to a few deals for the International Properties and expected to have firm announcements within 90 days. They had also paid down $50+ Million of debt and cash flow remains strong. In March, Stewart stock price was around $3.50-4.00/share and Reuters did a positive story on how the industry was intensely focused on deleveraging their balance sheets and this was a non-cyclical highly predictable business. I started exiting Stewart at about $3.75/share and sold everything at $4/share. We were in and out in less than six months with a 150+% annualized rate of return. Thank you Stewart. You can rest assured that we’ll be back in the straddle with Stewart if nothing changes and the stock goes back to $1.75.7