Mohnish Pabrai on Economic Moats

Have the same long-term ownership mindset of the families and CEOs that founded and ran these businesses. 3. Fixate on discounted growing pies, vs. 30-50 cent dollar bills. Emphasize nimble compounders whose DNA is to relentlessly incubate and spawn new businesses with long runways. 4. If the business is getting better over time and the moat is widening, don’t fixate on the valuation. There is no need to sell such a business simply because it appears to be optically overvalued. All bets are off if valuation goes to egregious extremes. I told Charlie Munger recently that I feel really dumb. It took me 26 years to figure out something so simple. Charlie always excels at making me feel great. He said, “Don’t feel so bad Mohnish. It also took Warren and me 25 years to figure that out.” The business I have held for the longest duration in my life is the 100% General Partner (GP) interest in Pabrai Funds. 21 years and counting.of

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.

Page 10 Here Comes the Sun A few years ago, a German company inquired with Reysas about leasing their warehouse rooftops. The Germans intended to put solar panels on their rooftops to take advantage of Turkey’s new net metering laws. These laws required the power company to pay the same price per unit for rooftop solar power as it charged for electric service. The Dovens studied the economics and realized that if there ever was a no-brainer, this was it. It is not intuitive, but industrial scale rooftop solar installations are less expensive to deploy and maintain than ground mount systems. Reysas has a real durable competitive advantage here. They are aggressively putting solar panels on all their warehouse rooftops themselves. I’m estimating that they’ll have 50 MW of installed capacity in a few years and likely be generating $5-10 million a year in after tax earnings. This is new cash flow that I hadn’t even known about when we invested in this $19 million market cap company. Reysas is the gift that keeps on giving. There are risks. Turkey could change the net metering laws anytime. Nevada did just that a few years ago. In Turkey this is unlikely. The country has virtually no oil reserves and imports half the coal it uses. Energy imports make up 20% of Turkey’s total imports and 75% of its current account deficit. Maximizing solar energy production is a no-brainer for Turkey.

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.

Page 12 what to do with it sometime between 2025 and 2035. Seritage is in the funeral and recycling business. I wrote in my first book Mosaic why funeral businesses are such awesome assets to own. Micron is in an industry with rapid change but it is also in a stable oligopoly with a solid moat. The business has gotten a lot better since we invested in 2018. I continue to watch it carefully. Mumbai real-estate has finally woken up from its long slumber and Sunteck has many tail winds. The plan is to hold it for a while. The beauty of this ownership mindset is that it can tolerate a healthy error rate. We do not need to be right on all five bets. We may end up with great results even if just one or two of these bets work out as long as the others are flat. The odds of permanent loss of capital are very muted in all five bets and we could be very right on at least three out of five of them. I am always reticent about discussing current portfolio positions. It causes commitment and consistency biases which can hurt us. There are no guaranteed winners. Not even Reysas. I am hopeful that the portfolio continues to be managed objectively and rationally without bias. All three funds have similar, but not identical holdings. Most of our Reysas shares are owned by PIF3. Reysas makes up about 8% and 2% of PIF2 and PIF4 assets respectively. PIF2 and PIF4 have some great holdings that aren’t present or meaningful in the PIF3 portfolio.

• The clients form a wonderful franchise with a large moat of water around it. They used to recruit at 3-4 schools a few years ago. Now it’s over a dozen of the best business schools. The recruiting engine is also a nice franchise. You send alums back to recruit and that another moat of water. • Raising Prices Ahead of Inflation. DTPI is run by a team that monitors key metrics very closely. They have healthy price increases to their clients every year – well ahead of inflation. Their clients know that rates will rise every year and DTPI has demonstrated strong pricing power in its model. I guess when you’re sick, you go to the best doctor and don’t try to haggle with them. DTPI clients recognize the value they bring and thus this business has a strong ability to raise prices ahead of inflation. • The business is in its infancy. It had a long ways to go before reaching anywhere close to saturation. 2. Was DTPI on sale at a price well below its Intrinsic Value(IV)? What was the Intrinsic Valueof DTPI on July 1, 1999? We know that the market value of DTPI on 7/1/99 was about $315 Million. I had extrapolated that if DTPI went into zero growth mode, they would drop 20-30% of revenue to the bottom line versus the 10-12% they were dropping today. They operate in a 50% gross margin environment and with a total squeeze, they could get upto 25-30% dropping to the bottom line. However, it was much better for shareholders to grow the business.