Mohnish Pabrai on Valuation

Page 6 are up 57-67% since April 2020 – almost keeping up with the Nasdaq even with no high-flyer tech names in the mix. Our long-term results didn’t look good in 2009 and the same is true of 2020. Given our current wide discount to underlying intrinsic value, it would not surprise me to see Pabrai Funds meaningfully outperform the indices over the next several years. Learnings from Nick Sleep I owe a great deal of the 2020 epiphanies to my good friend Nick Sleep. Nick went through his own evolution from Graham to Munger and the results speak for themselves. “Oh, and note, the truly brilliant investors weren’t investors; they were entrepreneurs that didn’t sell.” - Nick Sleep (in an email to me in August 2020) I have mentioned Nick’s modus operandi a few times in my sessions with students. I am not sure how thrilled Nick is about it, but the Financial Times recently published a link to the full set of his letters to partners: The complete letters of Nomad Investment Partnership | Financial Times (ft.com) I cannot recommend reading these letters strongly enough. They should be read and reread. Download them while they are still online. I have no idea if they’ll still be there in the future. I’d suggest reading them oldest to newest (versus the order in the PDF of newest to oldest). You’ll also enjoy this piece by John Garrett: Learning from Nicholas Sleep — Investment Masters Class (mastersinvest.com) The big evolution I had in 2020 was: 1. Go back to buy and hold. 2.

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 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.

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.

PABRAI INVESTMENT FUND 4 Performance Summary: DJIA NASDAQ S&P 500 PIF3 (net to investors) 10/1/03 – 12/31/03 +13.4% +12.3% +12.2% +8.4% Cumulative +13.4% +12.3% +12.2% +8.4% Note: Per AIMR guidelines, annualized performance numbers for periods totaling less than a year are not being provided. Such data can being misleading. Comparison in Changes in Value of PIF4 vs. the Indices. PIF4: $108,390; Best Index (Dow): $113,400 $90,000 $95,000 $100,000 $105,000 $110,000 $115,000 Oct-03 Nov-03 Dec-03 PIF4 S&P 500 DJIA NASDAQ General Comments PIF2 and PIF3 are up 104.2% and 96.5% respectively in 2003 (net to investors). The numbers are even more astounding before management fees. PIF2, for example, was up 136% before management fees and after expenses in 2003. While we’re all wealthier as a result and can bask in the sun in the wake of the good news, it should be very obvious that we’re very unlikely to ever see a year as good as 2003 again for Pabrai Funds. Three factors working in our favor concurrently helped make the year: 1. We were lucky to find a decent number of good investment ideas. 2. Convergence from 50% or more discount to intrinsic value to fully priced took place in an unusually short period of time for many of our holdings. 3. Mistakes of inclusion were virtually non-existent. Only one investment made in 2003 resulted in a realized loss of 0.5% of the investment amount. Page 4

Pabrai Funds to outperform the best of the three indices over the long haul. I have no idea by how much we will outperform, but am willing to wager that it will be substantially less than the last 4 years. Partners would be best off setting their expectations for The Pabrai Investment Funds to outperform the best of the three indices by a small margin over the long haul. Intrinsic Value and Investment Opportunities PIF2 and PIF3 are up 51% and 42% respectively this year. Some of our positions are approaching their intrinsic value and the market value versus intrinsic value gap has clearly narrowed for both funds. Overtime, these fully valued positions will be replaced again by discounted businesses. When these opportunities show up on the radar is, however, unpredictable. Hence I remain very bullish on the future of the funds. Investment opportunities continue to be very scarce. I have found just one new business to add to the portfolio this year – and over half the year is over. Our future does rest on my ability to find a few great investment ideas periodically. Alignment of Interests On June 30, since we were at a historic high and well above the 6% annualized since the last high, a management fee was paid to the investment manager, Dalal Street, Inc. (wholly owned by me) as follows: PIF3: $93,931.99 PIF2: $891,569.10 Since PIF3 is an offshore fund, I cannot invest in it and am required to take my fee out of the fund.

Page 3 of 8 PABRAI INVESTMENT FUND 3 Performance Summary: DJIA NASDAQ S&P 500 PIF3 (net to investors) 2/1/02 – 12/31/02 -13.4% -30.9% -21.1% -5.2% Annualized -14.5% -33.2% -22.8% -5.7% Cumulative -13.4% -30.9% -21.1% -5.2% Comparison of Changes in value of $100,000 invested in PIF3 vs. the Indices (Net to Investors) $0 $20,000 $40,000 $60,000 $80,000 $100,000 $120,000 Feb. 2002 Dec. 2002 PIF3 S&P 500 DJIA Nasdaq The Pabrai Funds are 3½ years old and the performance of the funds has been satisfactory – especially considering that the portfolios are being valued at a substantial discount to my estimate of their intrinsic value. PIFI, the oldest fund, has averaged an annualized rate of return of 21.5% while all the benchmark indices are down substantially. The last 3½ years have been difficult ones for most funds and investors and our vastly superior performance is fully attributable to following the core investing tenets prescribed by The Graham/Buffett/Munger school of investing. PIF2 has averaged an annualized return of 16.6% in the 2¼ years that it has been in existence and again is substantially better than all three indices and nearly all other equity funds. PIF3 is the youngest fund. It is just 11 months old and lost 5.2% of its value in 2002. While this is better than all the benchmark indices, nonetheless investors are in the red. I do believe that the results for all the funds will be very satisfactory over the long term (5-10 years).

Page 3 of 8 PABRAI INVESTMENT FUND I Performance Summary: (closed and merged with PIF2 on 12/31/02) DJIA NASDAQ S&P 500 PIFI (net to investors) 7/1/99 - 6/30/00 -3.3% +48.0% +7.2% +50.5% 7/1/00 – 6/30/01 +2.1% -45.4% -14.8% -8.3% 7/1/01 – 6/30/02 -10.3% -32.7% -18.0% +63.6% 7/1/02 – 12/31/02 -8.7% -10.3% -8.5% -12.6% Annualized -6.4% -18.1% -11.2% +21.5% Cumulative -20.7% -50.3% -34.0% +97.9% Comparison of Changes in Value of $100,000 invested in PIFI vs the Indices $0.00 $50,000.00 $100,000.00 $150,000.00 $200,000.00 $250,000.00 Jun-99 Oct-99 Feb-00 Jun-00 Oct-00 Feb-01 Jun-01 Oct-01 Feb-02 Jun-02 Oct-02 PIFI S&P 500 DJIA NASDAQ There is little I have in terms of comments on the aforementioned performance as it is only a month of new data. During the month PIF2 outperformed all three indices while PIF3 outperformed two of the three indices. All the funds have outperformed all the benchmark indices by wide margins since inception. Partners are best off focusing on long term performance results (3, 5, 10 years etc.) without trying to read too much into monthly or annual performance numbers. With the portfolio trading at a substantial discountto its intrinsic value, I remain very bullish on the funds. Thoughts on Macro Events Macro factors like the Iraq situation or terror alerts have substantial short-term market impacts (which we try to take advantage of), but have little to do with our long term results.

Comparison in Changes in Value of PIF4 vs. the Indices. PIF4: $102,300; Best Index (Nasdaq): $109,800 $94,000 $96,000 $98,000 $100,000 $102,000 $104,000 $106,000 $108,000 $110,000 $112,000 Oct-03 Nov-03 PIF4 S&P 500 DJIA NASDAQ General Comments PIF2 and PIF3 are up 86.9% and 75.8% respectively in value for the first 11 months of 2003. I’d like to again express that annualized gains of this magnitude are an anomaly and not to be expected going forward. Before fees, the PIF2 YTD returns are over 100% - and that is amazing to me. I do expect the Pabrai Funds to outperform the best of the three indices over the long haul. I have no idea by how much we will outperform, but am willing to wager that it will be substantially less than the last 4+ years. Partners would be best off setting their expectations for The Pabrai Investment Funds to outperform the best of the three indices by a small margin over the long haul. The Nasdaq was up an amazing 9.8% over the last two months – far outpacing the 2.3% that PIF4’s valued increased over the same period. Due to its newness, PIF4 has a large cash position. There just isn’t much on sale and I’m in no hurry. The money will be put to work as and when good opportunities present themselves. Over the long haul it should outperform the best of the three indices by a small margin after fees and expenses. I believe the market as a whole is overvalued. All markets do eventually get to trading around a fair valuation.

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.

do expect the Pabrai Funds to outperform the best of the three indices over the long haul. I have no idea by how much we will outperform, but am willing to wager that it will be substantially less than the last 4 years. Partners would be best off setting their expectations for The Pabrai Investment Funds to outperform the best of the three indices by a small margin over the long haul. Intrinsic Value and Investment Opportunities Even with the increase in NAV through 5/31/03, the Pabrai Funds continues to be valued at a big discount to my perception of their respective underlying intrinsic value. We own small parts of some very exceptional businesses and we bought our various stakes at great prices. Hence I remain very bullish on the future of the funds. Investment opportunities continue to be very scarce. I have found just one new business to add to the portfolio this year – and nearly half the year is over. Our future does rest on my ability to find a few great investment ideas periodically. If I can find 2-3 great investment ideas annually, our future is assured. However, that is a tall order – and I do hope partners recognize it as such. Alignment of Interests On May 31, since we were at a historic high and well above the 6% annualized since the last high, a management fee was paid to the investment manager, Dalal Street, Inc. (wholly owned by me) as follows: PIF3: $53,719.64 PIF2: $817,076.

PIF4, being mostly cash, is currently valued at a small discount to its intrinsic value. I expect that this discount will rise over the coming years, as I’m able to take advantage of a few good investment ideas annually.3

Page 4 of 8 The primary driver of our long term results will be how the underlying businesses perform. Macro events would need to be very ugly, broad-based and close to home to have long- term negative impacts on the revenue or cash flow generation engines of more than 20 or 30% of the portfolio. I can certainly envision macro events which would easily dwarf 9/11 and can destroy significant intrinsic value. However, if we had those type of extreme events take place, the health of our respective portfolios would not be high on our list of worries. Hence the peaceful sleep I enjoy everyday. 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 138,019.49 units of PIF2. Based on last published NAV, this stake is worth about $1.97 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. Talks at Harvard and MIT I recently gave 2 identical talks on February 4 and 5. Both were to the respective Investment Clubs at The Harvard Business School and MIT’s Sloan School of Management in Boston and Cambridge. I am giving below the link to the powerpoint presentation: The Latticework of Mental Models, Worldly Wisdom and Investment Success Most of the speech content and rich Q&A sessions are, unfortunately, not on the slides.

were a year ago, but both are presently valued at a 25% or higher discount to my conservative estimate of their respective intrinsic values. I believe the market as a whole is overvalued. It is very hard to find good investment ideas in these euphoric markets, but I’m in no particular hurry. All markets do eventually get to trading around a fair valuation. Whether this “correction” takes place over a day, a year or ten years is unpredictable. In the meanwhile, I love to crawl through the crevices of inefficiency that exist in all markets to find that rare fat pitch. Alignment of Interests On Sept. 30, since PIF2 and PIF3 were at historic highs, management fees were payable. PIF3 paid a management fee of $98,842.50 when it hit a historic high on 8/31/03 and $17,159.87 when it again hit a new high on 9/30/03. Since PIF3 is an offshore fund, I cannot invest in it and am required to take the fee out of the fund. A management fee of $171,708.34 was paid (wholly owned by me) by PIF2 on 10/1/03. As I have always done, this fee was reinvested in PIF2 on 10/1/03. Dalal Street has 228,935 units of PIF2. This stake was worth about $5 Million as of 10/1/03. 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. I am very bullish on the long-term future of The Pabrai Funds – as demonstrated by my being the single largest investor in the funds.

California Summer Reading The time I get to read books is inversely proportional to the level of the Dow Jones index. When we have times like 2003 when markets are very overvalued, I find myself with more time for general reading and if we were to witness markets like 1974 again, then general reading would go out the window. I’m periodically questioned on the contents of my bookshelf on the website and specifically where I would suggest getting started. It’s a difficult question to answer as it depends on one’s aptitudes and interests. However, I decided that I’d periodically discuss a few books read recently and in the not too distant past to help folks decide for themselves if they are likely to enjoy certain books over others. The best book on Warren Buffett (in my opinion) is The Making of an American Capitalist by Roger Lowenstein. It’s a good book to get started on Buffett. Following Lowenstein’s book, I’d recommend reading Buffett’s Letters to Shareholders from 1977 to 2002. You can also get a hard copy of the letters (3 bound books) by sending proof of shareholding or a check for $35 to Berkshire Hathaway, Inc. 3555 Farnam Street, Suite 1440, Omaha, NE 68131.5

PABRAI INVESTMENT FUND I (closed) Performance Summary: DJIA NASDAQ S&P 500 PIFI PIFI (before exp.) (after exp.) 7/1/99 - 6/30/00 -4.7% +47.3% +4.7% +62.5% +50.1% 7/1/00 – 6/30/01 +2.2% -45.5% -15.9% -7.7% -8.3% 7/1/01 – 8/31/01 -5.1% -16.5% -7.4% +14.0% +14.2% Annualized -3.6% -16.9% -9.3% +28.0% +23.3% Cumulative -7.6% -33.0% -18.5% +70.7% +57.3% Comparison of Changes in Value of $100,000 invested in PIFI vs the Indices $0.00 $50,000.00 $100,000.00 $150,000.00 $200,000.00 Jul-99 Oct-99 Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 PIFI S&P 500 DJIA NASDAQ The diligent reader will notice that PIF2 and PIF3 are at historical highs. We had a good couple of months and some holdings took off almost immediately after I bought them. Nonetheless, the portfolio continues to trade well below my estimation of its intrinsic value. Raising the Minimum Amount for new Partners There are now 70 limited partners between PIFI, PIF2 and managed accounts. We are limited to 100 US partners by law. As the available slots decrease, the minimum will increase. Going forward, the new minimum investment to join the funds as a new partner will be $300,000. This is effective at the next opening of 6/1/02. Existing partners can add anything over $25,000 at each opening. This does not apply to our offshore investors. PIF3 is setup an an offshore mutual fund limited to non-US accredited investors.

The diligent reader will notice that PIF2 is at a historical high. January 2002 was good month for PIF2 – considering that we had some further appreciation while all three benchmark indices lost value. Nonetheless, the portfolio continues to trade well below my estimation of its intrinsic value. Raising the Minimum Amount for new Partners There are now 66 limited partners between PIFI and PIF2 and we are limited to 100 by law. As the available slots decrease, the minimum will increase. Going forward, the new minimum investment to join the funds as a new partner will be $250,000. This is effective at the next opening of 4/1/02. Existing partners can add anything over $25,000 at each opening. Pabrai Investment Funds Assets Under Management (In Millions of $) 7/1/1999 7/1/2000 7/1/2001 2/1/2002 Assets Under Management Third-Party Administrator Status (TPA) For PIFI and PIF2 Based on the third amendment votes received todate, the partners appear to be overwhelmingly in favor of the addition on the TPA. I’ll have a final tally when the window closes on 2/1/02 and will move forward with having the TPA in place shortly thereafter. Thank you for your continued interest, support, confidence and referrals. Warm Regards, Mohnish Pabrai Page 3 of 5

Even the not so diligent reader will notice that PIF2 experienced a significant decline in July – over 14%. All the indices were down in July and the markets were quite volatile with fairly large swings in both directions almost daily. Since the funds typically have 10-15 holdings and do not engage in any sort of derivative hedging or taking short positions, the portfolio is likely to gyrate up and down with the market in the short run. As Ben Graham succinctly put it: “The s ock market is like a voting machine in the sho t run t r and like a weighing machine in the long run” Eventually the market price of a stock will tend to revolve around the intrinsic value of the underlying business. In the short-term however, we can easily see wide disparities between the stock price and intrinsic value. Occasionally, these gaps widen to allow fractions of businesses to be bought at big discounts to their underlying intrinsic value. That is the only time we’re interested in buying stakes in a select few of these businesses. Indices like the Dow have 30 stocks, the S&P 500 has 500 and the Nasdaq composite has thousands. With 10-12 holdings we are likely to experience higher volatility than the indices in the short term. In the long-run, however, the performance of the fund will gravitate towards the underlying intrinsic value of the holdings. The key to our success is to be right about the business. If we’re right about most of the businesses in the portfolio, we’ll do just fine.

The past performance numbers are not sustainable over the long haul. 2. I have mentioned earlier that the funds make two types of investments: 1. Buying pieces of exceptional businesses well below Intrinsic Value. 2. Special Situations (distressed securities, misunderstood businesses etc.)9

All the funds’ portfolio valuations are substantially under my estimation of their intrinsic value. I am very happy with the holdings and feel very good about the long term performance going forward. 4. I think the stats are along the lines that over 80% of market gains occur in under 10% of total invested time. That’s the principal reason that it is best to avoid trying to time the market. Nonetheless, it is my belief that, due to the drop in the market recently, August 1 looks like a good window to add funds.8

I believe that public equities as a group are overvalued today (and has been since the inception of the funds). The average US-based public company delivered an average annualized return of 12.45% during the 1954-94 period. One can expect a broad based index to deliver 10-13% over the long haul if stocks are fairly priced. With the overpriced market we find ourselves in, Warren Buffett expects stocks to deliver a 4-7% annualized return over the next 15 years. I fully agree with Buffett’s thesis. Thus it is clear that if we bought a basket of businesses at their intrinsic value, we’d expect the Pabrai Investment Funds to deliver a 10-13% annualized return before expenses – and lag the indices after expenses. If we bought this random basket at present prices, our returns would resemble Buffett’s 4-7% numbers over the next 10-15 years. But I’m not interested in the typical publicly traded company. I’m interested in the great ones. The problem is that the great ones are not a secret. Everyone knows they are great and their typical valuations are stratospheric. Indeed, bought at these valuations, these businesses would probably lag the 4-7% that the market is expected to deliver. 3. I have an internal threshold of making investments only where there is a big margin of safety and a very high probability of a 30% or higher annualized return.

The only exception to the 30% rule is “temporary placeholders” where the expected ROI is between 20-30%, but the margin of safety is even bigger (see point 6 below). How then can our 30% ROI threshold be met? How have we performed so well for the last few years? The answer lies in a few simple facts: Since public equities are overvalued as a group and great businesses are even worse investments at present prices, I’ve managed the funds since inception with a big focus on special situations. To give you some color, as I write this letter, PIF2 has 17 distinct businesses in the portfolio. About 88% of the portfolio is comprised of 10 businesses and the remaining 7 make up the remaining 12%. Our fate will be largely determined by the 10 companies that make up 88%. The only reason we have 17 vs. 10 is that assets have come into PIF2 at a very fast rate and positions that at one time represented 10% are now down to just 2-3%. We were unable to buy more as they had appreciated before new $$$ came in, but have not appreciated to the point of becoming candidates for sale. Of the 10 businesses, 3 are great businesses. However, all 10 were bought as special situations. The 3 great businesses had big clouds hanging over them when they were bought. However, applying Munger’s Latticework of Mental Models allowed me to see beyond the clouds. We’ve done very well on these three (two have appreciated over 80% in the last 8 months and one has appreciated about 25% in the last 4 months).

If the market were to drop 50+% in a course of 2 to 3 days and if it happened while we were fully leveraged, we’d have a problem. We’d be forced to sell positions at the exact opposite time that we’d like to sell. As an example, the Nasdaq has seen over 75% of its capitalization disappear over the last 2 years. There is nothing that prevents such drops from occurring over a matter of days versus a matter of years. While I don’t believe we will ever see the type of drops I’m alluding to, I would not want to bet on it – especially with your hard-earned money. If we are totally unleveraged and the market dropped 50%, there is no real problem. We can just wait out the storm and eventually the underlying businesses will get priced around their intrinsic value. Indeed, if we ever saw such big drops with no change in portfolio fundamentals, I’d be asking partners to add funds and we’d go shopping selectively. I started thinking hard about the leverage issue last year when Charlie Munger made the following comment at the 2001 Berkshire Hathaway meeting alluding to the “Monopoly” board game when speaking on the subject of use of leverage. “I don’t want to go back to Go! I’ve been a Go once and have no desire to see it again.” t I thought a lot about the appropriate percentage of leverage (while still being able to withstand a 1000 year flood) and concluded that it should be zero.

I have not talked to the legal/accounting folks yet, but 12/31 might be a good date to merge to minimize tax issues. PIF2 Performance Update The diligent PIF2 reader will notice that PIF2’s NAV declined from $17.43 (on June 1, 2002) to $15.89 on June 30, 2002. While this is not what folks who added funds on 6/1 like to see, it is basically “noise”. As Ben Graham succinctly put it says, “In the short run, the market is a voting machine and in the long run it is a weighing machine”. The broad market volatility in the last few weeks has “voted” us down temporarily. The portfolio’s market value was well below my estimation of its intrinsic value on June 1 and, as I write this, that gap has widened. 2002 Annual Meeting Reminder: The 2002 Annual Meeting will be held at 4:00 PM on the Saturday Sept. 14, 2002 at: Carlucci’s Restaurant 6111 North River Road Rosemont, Illinois 60018 Tel. +1847.518.8

Our current leverage is small and, over the next few weeks, I will be completely eliminating use of leverage in all the funds. We have a couple of appreciated positions that are near intrinsic value and would prefer to get long term capital gains treatment since we’re under 8 weeks away from it. The impact of being fully unleveraged is significant from a performance perspective.9

The remaining seven are boring, mediocre businesses – but with an overhang on the business that has depressed its valuation. Again, using Munger’s Latticework approach led me to the conclusion that these businesses were temporarily mispriced. The typical boring business was bought by us at fifty cents on the dollar with the expectation that it was highly likely to be recognized as a dollar bill within about 2-2½ years (thus yielding a 30% annualized return). What has actually happened is that many of these businesses have been recognized as being worth 70 or 80 cents within a few weeks of our purchase. If we buy something for 50 cents and eight weeks later, it’s selling for 75 cents, our portfolio looks like it’s on steroids! I am explaining all of this as a word of caution. Virtually none of our purchases are based on “catalysts” in place that will drive the stock price. I believe value is its own catalyst and eventually most of these businesses selling at 50 cents on the dollar do get recognized as dollar bills by the nearly fully efficient market. However, its is totally an anomaly to have this recognition take place in a matter of weeks rather than years. I do not expect our future special situation purchases to appreciate as quickly as the past purchases have done. The past is an anomaly. 4. Not only have the great ideas appreciated very rapidly, we have had far more than our share of great ideas.

Since inception, I have almost always had more investment ideas than available investment dollars. That is a great situation, but again another one that I don’t expect to always be the case. As an example, I have no new investment ideas at this time. I have not had a new investment idea for some time now and while I’m confident great ideas will pop up on the radar in the future, I expect them to be far fewer than the past. 5. As we grow assets our universe of opportunities will shrink. We have already had a couple of situations where I was unable to buy the full position I wanted to buy before the price moved up. At $28 Million, our assets under management is a very modest size. I don’t see size as a big problem at this time, but I’d like investors to recognize that size does impact performance negatively. 6. Occasionally, I have made investments where the perceived ROI was expected to be 20-29%, but there is was a massive margin of safety. An example is a REIT investment we made that has an exceptional management team, a relatively high current dividend yield (even compared to other REITs) and selling at about 2/3 of its fair value. In that instance, there was a huge margin of safety and an expected 20% ROI. I viewed that investment as a “temporary placeholder” – until a better idea came along. Temporary placeholders have added to our returns in the past and will probably continue to do so in the future. At this time I have no new temporary placeholder ideas. 7.

The objective of the Pabrai Funds is to, over the long haul, beat the three major indices. In doing so, I believe we’d be outperforming 90+% of funds and portfolio managers. To date, both funds have exceeded this objective by a wide margin. However, we have to remember the PIFI is just 2½ years old and PIF2 is even younger at just 14 months. All we can say at this juncture is that we’re off to a fine start. We need at least 5-10 years of performance history before meaningful conclusions can be drawn. 9/11 was a very tragic day for our country and in its aftermath, the stock markets got quite rattled. If I had just one wish, I’d wish that 9/11 was just another ordinary day in our lives with no terrorist activity. However, flush with cash on 10/1 and with the market inefficiency gap significantly widened after 9/11, I went hunting for value. We were quite lucky. Late September and early October was an especially fertile time and I was able to add some exceptional businesses and special situations to our portfolio at big discounts to their intrinsic value. Both funds have stronger portfolios with bigger discounts to intrinsic value than they did on 9/10/01. Over the last year, we’ve had more than our fair share of great ideas. If we have just 3 or 4 good ideas in a year, I think our results will be exceptional. Our approach is highly opportunistic. There is no way for me to know when we’ll have our next great idea.

The logic Charlie is applying is the following: If I were forced to trim a 15 stock portfolio to 4 stocks, chances are high that I’d pick 4 businesses that I would be far more knowledgeable about than even 15 businesses and its very likely that the 4 stock portfolio would outperform the 15 stock portfolio. The key words that Charlie is emphasizing are “well selected”. There is a fund manager friend of mine who runs a fund with just 3 stocks in it. I spent some time looking at his three holdings (two of them are represented in The Pabrai Funds) and the conclusion I came to was that the probabilities of his losing money on any of the three stocks was very very remote. On the other hand, it is pretty much guaranteed that his portfolio will blow away S&P 500 returns over the long haul. They represent three very well selected businesses with phenomenal business models, exceptional management and bought at dirt- cheap prices – dramatically below intrinsic value. I’d ideally like to hold positions in 10 securities in a given portfolio and, over time, will manage both PIFI and PIF2 towards fewer holdings than today. The small minority of fund managers who consistently beat the market, do it with relatively focused portfolios. The corollary is that there is an extremely high probability of under performing the market with portfolios where the top 20 holdings comprise less than 20% of the portfolio.3

Most mutual funds have over 100 stocks in a given fund. That would imply that the fund manager spends 500-700 hours a year just on the 400 earnings conference calls annually in the portfolio – without accounting for reading or researching stocks not yet in the portfolio. I have a hard enough time keeping up with the 15 businesses. I don’t know how anyone can be intimately familiar with all the nuances of 100+ diversified dynamic businesses and know them as well as the 3 stock fund manager. Both PIFI and PIF2 are fully invested as I write this letter. We own small pieces of some exceptional businesses. We now also have some Special Situation investments and bonds with low risk and terrific Yield to Maturity (YTM) in PIF2. Even after the reported PIF2 gains in July, both portfolios are, in my opinion, valued at substantial discounts to intrinsic value by the market. Annual Meeting Reminder: I’ve received most of the RSVPs. If you have not sent yours in, please do before 8/31 so we have an accurate count. From the list of attendees we have so far I know that we’ll have a fun meeting. The meeting is scheduled to be on Saturday, September 8, 2001 at 4:00 PM. The meeting location is: Carlucci’s Restaurant 6111 North River Road Rosemont, Illinois 60018 Tel. +1847.518.0990 Nearby Hotels – Marriott Suites O’Hare, The Westin O’Hare Next Investment Window The next date when funds will be added to PIF2 is October 1, 2001. I continue to have more opportunities than cash.

Companies whose prospects are impaired only in the short term, but have minimal impact long term (e.g. American Express). It’s clear that American Express’s near term earnings will take a hit as travel slows down. American Express earnings took a hit during the Gulf War as well. But what was the impact on American Express’s intrinsic value in 2001 related to the Korean War, Cuban Missile Crisis, the Kennedy assassination, the Vietnam War and the Gulf War? The answer is zero. I suspect that the impact on them 2-3 years from now will again be close to zero. I’m ploughing through companies in this category that are now “on clearance sale” to see if they fit our investment criteria.3

Over the December holidays, I wrote an article entitled “ The Intrinsic Value of Cisco, Intel and Microsoft”. I’m sending it as an attachment for those of you interested in reading it. It’ll give you a better sense of some of the tools I use in analyzing businesses for the portfolio. Its also being posted on the website. Your K-1s for 2000 Our auditors, Gleeson, Sklar, Sawyers and Cumpata, are in the midst of preparing all your K-1s for the 2000 tax year. They should be out to you by Feb. 15, 2001. Thank you for this opportunity to be of service to you. I appreciate your continued help, support and confidence. Warm Regards, Mohnish Pabrai Page 3

Another type of Special Situation arises when there is a cloud hanging over a company that leads to a mass exodus of investors. A recent example is Buffett’s $150 Million investment in US Gypsum (USG). USG was trading at a P/E ratio of about 3 when Buffett bought about 15% of the company’s stock on the open market. It has asbestos liabilities and lawsuits which have historically cost the company $50+/million annually in recent years. Clearly Buffett does not view USG and Coca Cola in the same light. USG is a special situation play for him. He understands asbestos related liabilities probably better than most of Wall Street due to his extensive 40+ years in Property/Casualty Insurance etc. He probably thinks that the street has thrown the baby out with the bath water. Thus he must believe that future worst case asbestos when fully factored point to a far higher valuation for USG. He will exit USG when he feels its stock price reflects its intrinsic value including asbestos liabilities. We invested in a special situation in Q42000 and just sold the last of our position in March 2001. Let me share it with you. Stewart Enterprises, Inc. (STEI) About five or six years ago, I recall reading an interesting article in the Chicago Tribune. The article talked about business failure rates in various industries. Of particular interest was a table that listed rates of business failure by SIC code.

Those that underwent a decline in their market caps and meet the Buffett description of a good business are of particular interest. Businesses in all four categories took a hit in their market caps as a result of Sept. 11. We had many holdings in categories 2,3 and 4 that took a hit as well. I fully expect them to get back on track. The good news is that there is a good amount of dry powder available to take advantage of these anomalies for all of our benefit. I am able to replace special situation investments with great GARP (growth at a reasonable price) businesses or even better special situations – which only improves upon our expected future results. To summarize, I’d like to say that in my judgment we have a portfolio with a higher intrinsic value today than we did on Sept. 10. While the NAV may be lower, the intrinsic value is higher. 2002 Annual Meeting: The 2002 Annual Meeting will be held at 4:00 PM on the Saturday following Labor Day (Sept.4

03.09.2000 To: Pabrai Investment Fund I Limited Partners From: Mohnish Pabrai, Managing Partner Date: 3/9/00 Re: Welcome New Limited Partners; PIFI Valuation Dear Partners: 1. Introducing the new and original Limited Partners Let me begin by welcoming all the new limited partners. Thank you for confidence and support. The new limited partners are: (Deleted for Confidentiality) I’d also like to introduce our new limited partners to the original limited partners: (Deleted for Confidentiality) 2. PIFI Cost/Share calculation for new funds. On February 28, 2000, we brought in $800,000 in new funds into PIFI. Prior to this injection of additional funds, PIFI had 100,000 shares outstanding issued on 7/1/1999 at $10.00/share. PIFI will publish audited results a few weeks after our year-end on 6/30/2000. I am presenting here unaudited results through 2/25/2000 so that a calculation can be done on the present cost/share of PIFI. As support for these numbers, I am attaching a portion of the first page of the PIFI Brokerage account statement as of 2/25/00. The total net assets in PIFI as of 2/25/2000 $1,607,551.68 The costs incurred from inception through 2/25/00 are: Legal: $10,230.45 Tax and Accounting: $1,675.00 TOTAL $11,905.45 Page 1

3. S&P 500: $95,800 4. DJIA: $88,500 Thus one would have lost money on the DJIA and the S&P 500 and had a very good return on the NASDAQ composite Index. PIFI is currently underperforming the NASDAQ and dramatically exceeding the S&P 500 and DJIA. Even after fees and expenses we’ve significantly outperformed the DJIA and S&P 500 index. With fees, we’ve significantly underperformed vs. the NASDAQ index. The returns that PIFI has delivered to date have significantly exceeded my expectations. Our holdings represent excellent companies with strong franchises bought at substantial discounts to intrinsic value. The manner in which they have appreciated in such a short time span has surprised me. Thus, I would not be surprised at all if our year-end results were less spectacular than now. We might well have an annual performance that is not as good as the first eight months. 4. The First PIFI Annual Meeting!! I hope all of you will attend the first PIFI annual meeting to be held on: Saturday, August 26, 2000 from 4:30-6:30 PM at Digital Disrupters, Inc. 1901 Butterfield Road, Suite 300 Downers Grove, Illinois 60515 Tel. +1630.493.6652 (my direct line) (I am the founder and CEO of Digital Disrupters. Check it out at www.disrupters.com) This will be followed by Cocktails and Dinner at 6:45 PM at Maggiano’s, Oak Brook Mall, Oak Brook, Illinois I’ll arrange for a private room. Spouses/significant others are welcome (and encouraged) to attend.

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 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.

regardless of the relationship between IV and Market Value believing that eventually Intrinsic Value and Market Value would be in sync. The flaw is that if we are holding a business that the market is valuing at a significant premium to Intrinsic Value, then we are almost sure to see a drop back to Intrinsic Value. So in Q32000, I changed my modus operandi and decided that I will not hold equities at significant premiums to Intrinsic Value. Its unfortunate. This change will lead to us selling what are still great businesses due to Mr. Market’s mood swings. In addition there were a couple of events that give me some thought for concern. They are not big issues, but they are at the back of my mind. • DTPI did not have a big dot com client base, but their traditional clients were through Q22000 spending a lot of $$$ with DTPI because of the “dot com scare”. The Fortune 2000 was scared. As Q32000 came around and dot coms started to fold, these traditional companies have seen the pressure ease off from their shareholders and boards and some may curtail digital strategy spending. I see this as an issue, but not a big issue. • DTPI announced a major European acquisition in Summer 2000. Having run a “people business” I’m very skeptical of acquisitions in the space. It seems like a good match, but most acquisitions don’t work. DTPI has very talented managers. They may pull it off. Again an issue, but not a major one.

I started to unload DTPI on 8/1/2000 and had completely exited on 10/16/2000. Our average sell price was $57/share ($85.60 pre-split). In Peter Lynch terms, this was almost a “four bagger” in less than 18 months. We sold well above Intrinsic Value. The stock is at about $39 as I write this. I still see DTPI as a good company, but my opinion is somewhat lower than 7/1/99. DTPI is not our best investment so far in the fund, but it is among one of the better ones. It is also a company I know far better than a few others in the portfolio. I do not personally know the managements of the majority of our investments at the time the investment is made. I hope this data is helpful to you in understanding how your funds are being invested by me. Annual Meeting: The Annual Meeting for The Pabrai Investment Funds is scheduled to be on Saturday, September 8, 2001 at 4:00 PM.8

There have been NO sell side transactions todate. There is a small amount of dividend income (yes, we do own atleast one dividend paying stock!) which will be reflected on your K1s. Here are some comparisons on PIFI performance vs. the major indices: No. of Shares Date PIFI NAV S&P S&P DJIA DJIA Nasdaq Nasdaq 100000 7/2/99 $10.00 $10.00 1,391.22 $10.00 11,139.24 $10.00 2,692.96 100000 12/8/99 $17.15 $10.09 1,403.88 $9.94 11,068.12 $13.32 3,586.08 To explain the above chart, in layman’s terms, if $100,000 each were invested on 7/2/99 in PIFI, the Dow Jones Industrial Average (DJIA), the S&P 500 and the NASDAQ Index, the results (before expenses and fees) would as of 12/8/99 be: 1. PIFI: $171,500 2. NASDAQ: $133,200 3. S&P 500: $100,900 4. DJIA: $99, 400 Thus one would have lost money on the DJIA and had a very good return on the NASDAQ Index. PIFI is over 100% better (todate) versus the best performing NASDAQ index. The returns that PIFI has delivered to date have significantly exceeded my expectations. Our holdings represent excellent companies with strong franchises bought at substantial discounts to intrinsic value. The manner in which they have appreciated has stunned me. Thus, I would not be surprised at all if our year- end results were less spectacular than now. We might well have an annual performance that is not as good as the first five odd months. We are fully invested on the $1,000,000 and about $254,000 in stock owned on margin.