Mohnish Pabrai on Long-Term Ownership

Page 7 the GP of Pabrai Funds. Over the years I have been approached to sell a minority stake. I have always brushed off these overtures without ever asking what the price or terms might be. For well over half of the 21 years, the GP has earned no fees and lost money. It is the exact opposite of a consistent performer. Nonetheless, I love it and have no plans to ever sell any part of it. I wish I had applied this enlightened view to our Ferrari stake. We received nearly 1.2 million shares of Ferrari as part of its spinoff from Fiat. We received $101 million in proceeds for our effective $23 million investment in Ferrari. Had we held on, our stake would be worth north of a quarter billion today. And we’d have paid zero capital gains taxes. Don’t even get me started on Moutai. Capitalism is creative destruction and brutal. Very few businesses will thrive and grow for decades on end. Most eventually go into secular decline. One needs to be good at separating the wheat from the chaff and distinguish between the ebbs and flows versus secular declines. This mindset shift changes the nature of businesses one should be interested in owning. They need to have strong moats, long runways and great management. At Pabrai Funds I am currently very pregnant with a few good but not great businesses. In due course as these get to intrinsic value, they’ll get replaced with more durable moats and runways. I intend to hold on to the Ferraris forever.

4 million back into Reysas Logistics shares and ended up getting about the same number of shares we would have had if we had been able to buy those shares in 2019. All this was only possible due to the hyperactive trading habits of the investors in Turkey. The bottom line is that we invested less than $7 million to get nearly 1/3 ownership of a business whose current market cap is $135 million. Coming back to Nick Sleep, my mindset on Reysas is that we are not an investor in the business. We are a passive owner. Our stake mirrors the stake of the founders. We are their silent partner cheering them on from the sidelines. As long as the moat stays intact and the valuation does not become egregious, we have no plans to sell a single Reysas share for decades. An egregious valuation for Reysas today would be multiple billions of dollars. Thank you Nick! Rain Industries I have written about Rain Industries in the past. You can find those previous thoughts in the ‘19 AR, the ‘18 AR, Jan ‘19 Letter, Oct ‘18 Letter, July ’18 Letter and Jan ’18 Letter. Rain was bought as a future P/E of 1. By 2018, Rain was already a ten bagger and it was dumb not to exit then. What kept me from selling is that I understood the business better and it wasn’t just a cheap business. Rain has an exceptional capital allocator and leader at its helm who is continually improving the business. It is a good but not great business.

It is unclear to me which fund does the best going forward. A Permanent Home with Temporary Capital Our ownership mindset is at odds with annual redemptions. I want to hold several of these bets for decades but the capital in the funds is temporary. One way to counter that is to have subscriptions exceed redemptions. I have hardly spent any time on raising assets for a long time. I will put more effort on that front to try to ensure effective permanence. We are currently loading up on four wonderful businesses and seriously short of cash. All four are wonderful compounding machines and deserve to be held for decades. There is not much we own that I would be excited to sell today. We thus need to bring in more cash. I would like to encourage you to add to your investment. And I welcome your referrals. All three funds are open and I think the best days for Pabrai Funds lie ahead. As an existing investor you can add as little as $25,000. The next opening is April 1, 2021. Here are the deposit slips for PIF2, PIF3 and PIF4. To add funds, please send me or Valerie Magursky a note at mp@pabraifunds.com or vm@pabraifunds.com. Pabrai Funds has a wonderful long-term investor base. I’d encourage you to think about your investment in Pabrai Funds as a permanent home. Let’s get you the full multi-decade benefits of holding a few compounders. Alignment of Interests My immediate family has a stake of 175,859 units of PIF2 and 433,197 units of PIF4.

Page 4 of 8 intrinsic value. For these reasons, I do believe that future long-term results will continue to be very satisfactory. I’m bullish on The Pabrai Funds. At the same time good investment ideas continue to be very scarce. I’m content to wait (indefinitely) for them to appear on the horizon. Merger of PIFI and PIF2 The PIFI and PIF2 merger was approved by partners and the funds were merged on12/31/02. The reduced expenses of having one (larger) pool of capital versus two will be better for all of us. PIF2 is the surviving partnership and all PIFI partners got 1.4 partnership units of PIF2 for each partnership unit of PIFI they had. Alignment of Interests To date, I have always reinvested all my fees back into the partnerships. Dalal Street, the investment manager that I own, has 137,979.27 units of PIF2. Based on last published NAV, this stake is worth about $1.95 Million. Thus I have a deep vested interest in the future performance of The Pabrai Funds. When you win, I win. Our interests are completely aligned. Articles and Talks I wrote two articles recently that you might find interesting reading. On Dec. 12, The Street.com ran The Danger in Buying the Biggest and on January 2, 2003, TheStreet.com ran What Warren Buffett can Teach Microsoft. If you are not a subscriber to TheStreet.com, you can read both of them on funds’ website.

I do most of my reading after the kids go to bed and it’s been very nice to have the doors open – letting in a gentle breeze off the Pacific while settling in with a good book. Some of the other good reads this summer included Investment Biker and Adventure Capitalist (both by Jim Rogers). Rogers went around the world on a motorcycle about a decade ago and then he did the same trip at the turn of the millennium in a car. He’s been a very successful investor (and a partner of George Soros) for decades and both books are worth reading for their uniqueness. You can’t find any other book that in one paragraph describes the beauty of the Victoria Falls and in the next goes into the diverse investing climate in the two countries on either side of the falls. While I don’t agree with some of Jim’s investing perspectives, he’s clearly a smart value guy and one can learn a lot from him about the world we live in. The only person who comes to mind as being more adventuresome and a better capitalist than Rogers is Richard Branson. His biography, Losing My Virginity, is another terrific read. I highly recommend Branson’s book for its candor and insights on starting and growing businesses. Branson reinforces Amar Bhide’s (author of The Origin and Evolution of New Businesses) thesis that most startups are low-risk ventures. My talk on Sept. 18 to TiE- Seattle focused on how entrepreneurship and investing are closely related with both being low-risk arbitrage oriented vocations.