Mohnish Pabrai on Quality Businesses

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.

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

If the answer is no, the business is simply skipped over. 2. Is this a great and predictable business? The definition of a great business would mean a business that has some of the following characteristics: • Recurring Revenue Streams (e.g. GEICO) • Ability to raise prices ahead of inflation (e.g. The Washington Post) • Some sort of Monopoly or Oligopy type market positioning (e.g. American Express) • Strong franchise/brand that gives it insulation from most competitors (e.g. Coca Cola) Most businesses do not have ANY of the above characteristics and some may just have one of the above. A business that has more than one of the above characteristics is, by definition, rare. If I find a great business then I ask the third, and more difficult, question: 3. Is it on sale at a price well below its Intrinsic Value(IV)?3

The combination of a great business and it being on sale is, by definition, an anomaly. I look for these anomalies. When they occur, after rigorous analysis, I’ll either take a pass or backup the truck. There are two types of great business that are of interest to the fund: 1. Great, compelling companies trading at very low valuations relative to their expected value in a private sale. These companies may have little to no annual growth, but tend to have a solid cash flow engines that are highly predictable and are trading at very low multiples to earnings, cash flow and/or other metrics of value. 2. Growth at Reasonable Price (GARP) Companies. These companies, in high- growth markets, have shown a history of growing fast and are expected to continue to do so. I usually prefer GARP companies to straight value companies. I think the best returns will come from great, high growth companies that are available well below IV. I believe most of Buffett’s success has come from GARP-type businesses (Coca Cola, American Express, GEICO, The Washington Post etc.) So value businesses remain in the portfolio till either: 1. They reach IV and are sold. 2. A better value business comes along. 3. A better GARP business comes along. GARP businesses remain in the portfolio till: 1. They go well beyond IV. I hate to sell a good GARP business unless its well beyond IV. 2. A better GARP business comes along.

• 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.