2000

David Swensen's Pioneering Portfolio Management, first published in 2000, lays out the investment philosophy he developed while running Yale's endowment from 1985 onward. The book argues that institutional investors with long horizons and the ability to absorb illiquidity should construct portfolios around equity-like risk premiums rather than the conventional 60/40 equity-bond split that dominated institutional practice at the time. Swensen's central claim is that the conventional allocation over-weights nominal bonds, which expose the institution to inflation risk and offer poor long-run real returns relative to the risk borne. The book's framework is organized around three core principles: equity orientation, diversification, and a heavy allocation to alternative asset classes - private equity, venture capital, real assets, and absolute-return strategies. Swensen argued that long-horizon institutions have a structural advantage over short-horizon investors in alternative assets, because the illiquidity premium accrues to whoever can hold through the cycles. By committing capital to private market partnerships, endowments effectively become the counterparty to investors who must mark to market quarterly and are forced to sell into illiquid markets. Pioneering Portfolio Management is now treated as the foundational text of the 'endowment model' of investing. Its influence has extended well beyond university endowments - sovereign wealth funds, pension plans, and family offices have all adopted elements of the framework. The book is also notable for the discipline of its argument: Swensen was clear that the model only works for institutions with the right combination of long horizon, large asset base, sophisticated staff, and the governance to commit capital through multiple cycles. He explicitly warned that the model is poorly suited to small institutions or those that lack the staff to evaluate private market partnerships.

Launched in late 1871 by Pennsylvania Railroad president Tom Scott, the South Improvement Company was a secret pact between the trunk railroads and a select group of large refiners, aimed at ending what the carriers called destructive price-cutting. Under the agreement the railroads would publicly raise freight rates but quietly pay rebates back to Rockefeller and the other participating refiners, and—more aggressively—levy 'drawbacks' on shipments by non-member refiners, who would end up paying far more for the same barrels. When news of the deal leaked into Pennsylvania's Oil Region, the independents were stunned, boycotted the SIC shippers, and marched under banners reading 'Down with the conspirators.' The episode became known as the Oil War. Rockefeller had accepted membership in the company, a decision he later defended as protective but never fully lived down in public memory. In April 1872 the Pennsylvania legislature repealed the South Improvement Company's charter before it executed a single shipment—the first major public defeat of Rockefeller's career.

The Amazon listing for Pioneering Portfolio Management, the 2000 volume in which David Swensen set out the philosophy of the Yale Investments Office, presents the book as the canonical statement of the model that bears the university's name. The publisher's note describes the volume as the work in which Yale's chief investment officer shares the university's successful endowment strategy through insights on asset allocation and portfolio construction, and frames it as the document that turned the office's internal practice into a transferable template. The listing is one of the most widely consulted references for readers looking for the basic facts of the book, and it is regularly updated as new editions and reviews are published. The article is regularly updated as new information becomes available and is one of the most frequently consulted references on the subject for general-audience readers and for institutional practitioners. The listing notes that the book covers the office's investment philosophy, the structure of the endowment's portfolio, and the operational architecture by which the office pursued its mandate. The publisher's description stresses the central tenets of the model, including the equity bias, the diversification across asset classes that offer low correlation to the public market, the allocation to private assets with long lock-up periods, and the insistence on active management only in asset classes where the case for it could be sustained. The listing also notes that the volume is paired in the Swensen bibliography with Unconventional Success, the volume he wrote for the individual investor, and with the longer-form interviews he gave to the Yale School of Management and the broader financial press. The piece is widely cited in the secondary literature on the topic and is regularly consulted by readers looking for a single-page introduction to the argument. The listing closes with a section on the reception of the book, noting that it has been adopted as a teaching text in business-school courses on endowment management, that it is regularly cited in the institutional investment literature as the foundational statement of the Yale model, and that the network of Swensen's protégés has been a major channel by which the model has been propagated. The Amazon listing is paired in the Swensen bibliography with the original publisher's page and with the longer-form reviews that have appeared in the financial press. The listing remains a reference for general-audience readers looking for a single-document introduction to the office's philosophy and the book that articulated it for the broader institutional investment industry and the academic community. The article is paired in the broader citation ecosystem with the original source documents and with the longer-form interviews the subject has given to the financial press over the years.

Buffett wrote that the dot-com collapse had exposed how much of the reported profitability of the late 1990s had been an artifact of accounting and stock-based compensation rather than genuine cash generation. He argued that stock options, treated as free under accounting rules of the period, were a real economic cost to owners, and that any analysis of a business that ignored option dilution was describing a fictional company.

On the gap between reported and economic earnings after the bubble.

WESCO FINANCIAL CORPORATION LETTER TO SHAREHOLDERS To Our Shareholders: Consolidated net ""operating'' income (i.e., before realized securities gains shown in the table below) for the calendar year 2000 increased to $70,087,000 ($9.84 per share) from $46,872,000 ($6.58 per share) in the previous year. Consolidated net income increased to $922,470,000 ($129.56 per share) from $54,143,000 ($7.60 per share) in the previous year. Wesco has four major subsidiaries: (1) Wesco-Financial Insurance Company (""Wes-FIC''), headquartered in Omaha and engaged principally in the reinsurance business, (2) The Kansas Bankers Surety Company (""KBS''), owned by Wes-FIC and specializing in insurance products tailored to midwestern banks, (3) CORT Business Services Corporation (""CORT''), headquartered in Fairfax, Virginia, pur- chased in February 2000 and engaged principally in the furniture rental business, and (4) Precision Steel Warehouse, Inc. (""Precision Steel''), headquartered in Chicago and engaged in the steel warehousing and specialty metal products businesses. Consolidated net income for the two years just ended breaks down as follows (in 000s except for per-share amounts)(1) : Year Ended December 31, 2000 December 31, 1999 Per Per Wesco Wesco Amount Share(2) Amount Share(2) Operating earnings: Wes-FIC and KBS insurance businesses ÏÏÏÏÏÏÏÏÏÏ $ 45,518 $ 6.39 $44,392 $6.23 CORT furniture rental businessÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,988 4.

Page 1 00.02.2000 Partnership Amendment Suggestions To: Pabrai Investment Fund Limited Partners New Limited Partners intending to become investors in PIFI From: Mohnish Pabrai, Managing Partner Date: 2/2/00 Re: Problem with the setup of the Pabrai Investment Fund I Dear Partners/Prospective Partners: I have recently discovered a problem with the Pabrai Investment Fund rules and bylaws that make very little logical sense and need some fixing immediately. I cannot bring in additional funds into PIFI until the problem is resolved. I have shared this problem with a few investors already and I believe that they agree with my proposed solution. Let me give you some hypothetical examples of scenarios that depict the problems: Case 1: Assume that PIFI starts on 7/1/99 with $1,000,000 from 8 investors. 100,000 shares are issued to investors at $10.00 each. Assume that PIFI has a 100% return on invested capital through 1/31/00 and brings in $800,000 in new funds from new and existing investors. Assume legal and accounting fees through 1/31/00 are $15,000. Bringing in new investors under current rules requires a calculation of Net Asset Value (NAV) per share as of 1/31/00 after management fees and expenses. Thus, investors get the (7/12) of 6% of $1,000,000 as the guarantee or $35,000. Then the $15,000 expenses are paid. Then the balance ($950,000) gain is split: Dalal Street: $237,500 PIFI Investors: $712,500 Thus the total PIFI investor gain is $747,500.

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

2.5 7/3/00 – PIFI Reports First Year Unaudited Results To: Pabrai Investment Fund I Limited Partners From: Mohnish Pabrai, Managing Partner Date: July 3, 2000 Re: PIFI Finishes its First Full Year – Unofficial, Unaudited Results PIFI Beats all the Major Indices and over 99% of Mutual Funds and Professional Fund Managers. Up over 62.5% for the year (before fees and expenses) Dear Partners: June 30, 2000 was an important day for me. Not only was it my mother’s 58th birthday, but it also represented the day on which we finished our first year as partners in The Pabrai Investment Fund I. PIFI is very dear to me and close to my heart. I’ve really enjoyed serving all of my partners last year and look forward to many many prosperous years together. Our auditors, Gleeson, Sklar, Sawyers and Cumpata, LLP (GSSC), will be beginning their audit on PIFI’s first year etc. almost immediately and I hope to have their audit report to share with all of you within the next few weeks. In the meanwhile, I would like to share the unofficial, unaudited PIFI results with all of you. PLEASE NOTE THAT I DO EXPECT SOME VARIANCE BETWEEN MY NUMBERS AND THE AUDITED NUMBERS, PARTICULARLY AS THEY RELATE TO EXPENSES AND FEES. However, these differences should be miniscule in the broad scheme of things. For example, the auditors may look at cash vs. accrued expenses differently than the way I’m doing them. The total net assets in PIFI as of 6/30/00 (as reflected in the Brokerage Statement) are $2,504,802.

2.6 8/18/00 – PIFI Reports Audited Results for year ended 6/30/00 To: All Limited Partners of The Pabrai Investment Fund I From: Mohnish Pabrai, Managing Partner Date: August 18, 2000 Re: Annual Audit Results for PIFI for the Year ended 6/30/00 Dear Partners: Gleeson, Sklar, Sawyers and Cumpata, LLP. has completed its annual audit of The Pabrai Investment Fund I. I am enclosing their report for your perusal. If you recall, I had estimated $5000 in accrued expenses in my memo to you dated July 3, 2000. Gleeson has estimated accrued expenses at $6125. In addition they have assumed a deferred tax liability of $8152. This relates to the 1.5% Illinois Use Tax on gains. We have unrealized gains that net this tax, if realized. Thus their expense accruals are $9,277 higher than mine. This reduces the NAV to $2,476,277 vs. my number of $2,485,498. The number of shares outstanding on 6/30/00 was 164453.16 leading to a NAV of $15.05/share. My fee is $13,951 or 926.98 shares. The individual audited shareholding as of 6/30/00 is as follows: NAME Shares Held Value of Holdings (Rounded) as of 6/30/00 (rounded) CONFIDENTIAL INFORMATION TOTAL 165,380.14 $2,490,228 PIFI’s Audited Performance AFTER fees and expenses vs. the Indices. Page 1

To: All Limited Partners of The Pabrai Investment Fund 2, L. P. From: Mohnish Pabrai, Managing Partner Date: October 6, 2000 Re: …and we’re up and running … Dear Partners: The Pabrai Investment Fund 2, L. P. was successfully launched on 10/1/00. I had a minimum asset goal of $1,000,000 to launch the fund. We started the fund with $1,100,000 in assets and 9 Limited Partners. In the memos of the first partnership, I published names and amounts of Limited Partners, but received some objections from a few partners concerning the visibility of some of their personal financials to strangers. It’s a very valid objection. Thus, going forward, limited partner identities and amounts invested are not being shared - even with other limited partners. Identities will be visible via name tags at the Annual Meeting to other Partners and attendees. The diversity of investors is expanding and am proud to be associated with this august group. We now have the following states represented between the first and second partnership: California, Florida, Illinois, Minnesota, New Jersey, Ohio, Vermont (7 down, 43 to go; There is atleast one European who’s planning to invest at the next opening, so that’ll make us International.)

Pabrai Investment Funds Memo To: All Limited Partners of The Pabrai Investment Fund 2, L. P. From: Mohnish Pabrai, Managing Partner Date: December 4, 2000 Re: Welcome New Limited Partners; Performance Data Dear Partners: As you know, The Pabrai Investment Fund 2 (PIF2) was launched on 10/1/00 with $1.1 Million in assets and 9 limited partners, including myself. On December 1, 2000, we added an additional $600,000 in assets and 8 new limited partners. Between the two funds we’ve brought in $4.5 Million in assets under management since inception and have 30 limited partners. The diversity of investors is expanding and am proud to be associated with this august group. We now have the following states represented between the first and second partnership: California, Colorado, Florida, Illinois, Minnesota, New Jersey, Ohio, Vermont, Washington. (9 down, 41 to go). We are now international with one limited partner based in Italy. Whenever we add assets to the funds, I have to release performance to date to assign the correct Net Asset Value to the new funds. The details of the Asset Value Calculations are in the attached Appendix A. PABRAI INVESTMENT FUND 2 Performance Summary: DJIA NASDAQ S&P 500 PIF2 PIF2 (before exp.) (after exp.) 10/1/00 – 11/24/00 -1.7% -21.0% -6.6% -3.5% -4.0% For completeness of the track record, I am also giving all the published performance data on the first fund, PIFI. The NAV before expenses is $9.65/unit and after expenses is $9.60/unit.

Page 2 The NAV is $17.475 as of 1/31/00 If $800,000 in new funds come in on 2/1/00, 45,780 new PIFI shares are issued at a value of $17.475/share. Dalal Street’s shares rise from 10,000 to 23,590.84 TOTAL PIFI shares outstanding as of 2/1/00 are 159,371 at a value of $17.745 for a total NAV of $2,785,008. Lets, assume that as of 6/30/00, NAV is $2,600,000 or $16.31 Since this is the anniversary, we need to calculate gains, fees, NAV again per current rules. Investors are guaranteed (5/12) of 6% of 2,785,008 or $69,625.20 Thus the minimum NAV should be $2,854,633. Dalal Street needs to add $254,633 to the PIFI account to make the investors whole. Thus Dalal Street’s net fees for the first year is ($17,133) for the year. In other words, PIFI delivered a return to full-year investors of 63.1% and still ended up not making any kind of a fee and ended up writing checks to the investors. There is a problem here. Case 2 Same assumptions as Case 1 except PIFI does not add “mid-year funds”. Thus no new funds or investors are added throughout the year and PIFI has a gain of 63.1% after expenses, but before management fees. In this scenario, Dalal Street ends up with a fee of about $157,750. This makes more sense and is closer to the intent. As you can see, with identical year-end results in one case Dalal Street gets hosed inspite of stellar performance.in:

PABRAI INVESTMENT FUND I Performance Summary: DJIA NASDAQ S&P 500 PIFI PIFI (before exp.) (after exp.) 7/1/99 - 6/30/00 -6.2% +47.3% +4.7% +62.5% +50.05% 7/1/00 – 8/30/00 +7.14% +1.9% +3.4% +14.09% +11.08% Cumulative +0.5% +50.1% +8.3% +85.4% +66.8% (7/1/99 – 8/30/00) The objective of The Pabrai Investment Funds is to, over the long haul, beat all three major indices – Nasdaq Composite, DJIA and the S&P 500. As you can see for the above data, PIF2 has fallen short of this yardstick so far. A few comments on this front: • The results for PIF2 during this short a window are for the most part meaningless. One will be able to get a good idea of PIF2 performance in a 3 to 5 year timeframe. My perspective is that the minimum length of time that one needs performance data to evaluate a given fund is three years and an ideal timeframe is five years. For what its worth, PIF2 was fully invested in the various equities on 11/24/00 with an outstanding margin balance. We were about 80% invested in the various equities on 10/31/00. • The benchmarks we have set to beat are high benchmarks. Historically any fund that has, over the long term, beaten these three indices, has been in the top 3-5% of mutual or hedge funds in performance. • If we, over the long haul, do not beat the indices, then there would have been no point to having the fund. You’d be better off picking one or more of the indices.

07 Ì Ì Precision Steel businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,281 .18 2,532 .35 Goodwill amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,867) (.82) (782) (.11) Other(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 167 .02 730 .11 70,087 9.84 46,872 6.58 Realized net securities gains ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 852,383 119.72 7,271 1.02 Wesco consolidated net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $922,470 $129.56 $54,143 $7.60 (1) All Ñgures are net of income taxes. (2) Per-share data is based on 7,119,807 shares outstanding. Wesco has had no dilutive capital stock equivalents. (3) After deduction of interest and other corporate expenses, and costs and expenses associated with foreclosed real estate previously charged against Wesco's former Mutual Savings and Loan Association subsidiary. Income was from ownership of the Wesco headquarters oÇce building, primarily leased to outside tenants, and interest and dividend income from cash equivalents and marketable securities owned outside the insurance subsidiaries. The 1999 Ñgure also includes net gains on sales of foreclosed real estate and a beneÑt from the reduction of loss reserves provided in prior years against possible losses on sales of loans and foreclosed real estate. This supplementary breakdown of earnings diÅers somewhat from that used in audited Ñnancial statements which follow standard accounting convention. The supplementary breakdown is furnished because it is considered useful to shareholders.

While the South Improvement Company was still dominating the headlines, Rockefeller had already moved past his own defeat. Between February and March 1872, in a campaign later called the Cleveland Massacre, he used the threat of the new rail-refiner alliance plus a sophisticated mix of cash offers, stock swaps, and explicit warnings that holdouts would be run into bankruptcy to acquire twenty-two of Cleveland's twenty-six competing refiners in less than six weeks. He later framed the South Improvement Company as someone else's idea that he had joined only to stay close to the action, telling interviewers that when the scheme collapsed the Standard Oil people were positioned to say, 'Now, try our plan.' Biographer Ron Chernow called the Cleveland Massacre the first great step in Rockefeller's march to industrial supremacy: with Cleveland consolidated, he repeated the pattern in Pittsburgh, Philadelphia, Baltimore, and New York.

Pioneering Portfolio Management devotes significant attention to the role of private equity and venture capital in a long-horizon institutional portfolio. Swensen's argument is that the illiquidity and complexity of these asset classes produce a return premium - the 'illiquidity premium' - that accrues only to investors who can both hold positions through their J-curves and evaluate the quality of the underlying general partners. The book argues that the Yale endowment's access to top-quartile private equity and venture capital partnerships is itself a structural advantage, because top-quartile managers persistently outperform median managers and access to those partnerships is rationed. Swensen was also explicit about the agency problems in private equity. The standard 2-and-20 fee structure means that limited partners bear the cost of management errors while general partners capture most of the upside. Pioneering Portfolio Management argues that institutions can only justify an allocation to private equity if they have the staff to negotiate terms, evaluate the underlying partnerships, and discipline managers who underperform. The book was an early articulation of the now-standard critique that median private equity returns net of fees are not attractive, and that the case for the asset class rests entirely on access to top-tier managers. The book's treatment of venture capital is similarly disciplined. Swensen argued that venture returns are extraordinarily skewed - a small number of partnerships produce the bulk of the asset class's aggregate return - and that the institutional decision to allocate to venture must be made with the explicit understanding that mediocre access will produce mediocre returns. The Yale endowment's access to firms like Kleiner Perkins and Sequoia, which Swensen cultivated over years of relationship building, was the structural advantage that made the asset class work. The book closes the chapter on alternatives with the warning that institutions without the resources to evaluate and access top-tier partnerships should not allocate to the asset class at all.

We also have a diversity of backgrounds represented ranging from a trader on the Chicago Board of Options Exchange, a Court Reporter in Minnesota, an Attorney, a Silicon Valley venture capitalist, an operator of an aircraft parts mail-order house, retirees in Florida and Vermont, IT consultants, several entrepreneurs, CEO/COOs of companies, folks in the printing business, software business, a commercial real- estate developer, an ethnic food wholesaler etc. Several partners are also Berkshire Hathaway shareholders. I was surprised to learn that some sold Class A Berkshire shares to invest in The Pabrai Investment Fund. I’m not sure of everyone’s age, but have virtually every age group from 20-something to 70-something represented. We now have 22 Limited Partners between the two funds – up from 8 when we started 15 months ago. I’m already looking forward to next year’s annual meeting. We’ll need a bigger room!

Due to the variance in expenses, the performance after Fees and expenses are slightly different than the unaudited version reported in July. The audited numbers are: 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 2692.96 100000 12/8/99 $17.15 $10.09 1,403.88 $9.94 11,068.12 $13.32 3586.08 100000 2/25/00 $14.57 $9.58 1,333.36 $8.85 9,862.12 $17.05 4590.50 164453 6/30/00 $15.05 $10.47 1,456.60 $9.38 10,447.89 $14.73 3966.11 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 6/30/00 be: 1. PIFI: $150,500 2. NASDAQ: $147,300 3. S&P 500: $104,700 4. DJIA: $93,800 Thus one would have lost money on the DJIA, had a less than 5% return on S&P 500 and had a very good return on the NASDAQ composite Index. PIFI out performed all the three market indices. It beat the DJIA by 57.2%, the S&P 500 by 45.7% and the Nasdaq Composite by 3.7% AFTER all fees and expenses. Reminder on the Annual Meeting: All your RSVPs are in. Thank you. This is just a reminder. If any of you need directions, please email or call me. Remember that we meet at 4:30 at Digital Disrupters and head to Maggiano’s at 6:30. Saturday, August 26, 2000 from 4:30-6:30 PM at Digital Disrupters, Inc. 1901 Butterfield Road, Suite 300 Downers Grove, Illinois 60515 Tel. +1630.493.2

7/1/99 – 6/30/00 If you refer to my memo dated 3/4/00, you’ll see that we had expenses totaling $11,905.45 through 2/28/00. In addition, we paid GSSC $1450 towards preparation of tax return in April and had a final invoice of $325 for tax preparation from GSSC that we paid in June, but the check will most likely clear in July. Thus, PIFI’s NAV before expenses as of 6/30/00 would have been $2,518,157.89 The total shares in PIFI currently are 164453.16. Of these, 9535.82 were given to Dalal Street, Inc. on 2/28/00 as its fee through that day. If we exclude the fee, shares outstanding as of 6/30/00 would be 154917.34, giving a value per share of $16.2548 or a gain of 62.55% for the year before fees and expenses! 2. PIFI Performance AFTER Fees and Expenses for the period 7/1/99 – 6/30/00 The total net assets in PIFI as of 6/30/00 (as reflected in the Brokerage Statement) are $2,504,802.44. The $325 uncashed check to GSSC needs to be subtracted as does GSSC’s audit fees. I’ll put in a budgetary number of $5000 for accrued expenses that have not yet been paid (e.g the audit fee). Thus PIFI assets after all expenses, but before Dalal Street’s fee are estimated at $2,499,477.44. PIFI had 164453.16 shares outstanding as of 2/28/00 at $14.57/share and a total NAV of $2,395,646. The total gain before fees but after expenses is $103,831.44. Since this gain is over a 4-month period (3/1/00-6/30/00), the minimum guaranteed returns are 2% of $2,395,646 or $47,912.92.

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.

Decision — Launched Scion Capital after the MSN column / Silicon Investor era. Context: Value strategy documented from inception; early-thinking record recovers via archives. Outcome (known): Fund ran 2000–2008; documented in letters and Wayback captures.

Wesco-Financial Insurance Company (""Wes-FIC'') Consolidated operating earnings of Wes-FIC and KBS represent the combination of the results of their insurance underwriting with their net investment income. Following is a summary of these Ñgures as they pertain to Wes-FIC, excluding its subsidiary, KBS. The operating earnings of Wes-FIC's KBS subsidiary are discussed in the section, ""The Kansas Bankers Surety Company,'' below. Pre-Tax After-Tax Operating Earnings Operating Earnings 2000 1999 2000 1999 Underwriting gain (loss) ÏÏÏÏÏÏÏÏÏ $ (616,000) $ 4,359,000 $ (400,000) $ 2,833,000 Net investment incomeÏÏÏÏÏÏÏÏÏÏÏ 53,412,000 44,129,000 38,958,000 34,362,000 Wes-FIC parent company operating income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $52,796,000 $48,488,000 $38,558,000 $37,195,000 As shown above, Wes-FIC's consolidated operating earnings include signiÑcant net investment income, representing dividends and interest earned on its portfolio of marketable securities. Wes-FIC's consolidated operating earnings exclude its realized net securities gains, net of income taxes, of $853.1 million in 2000 versus $7.3 million in 1999. Our discussion will concentrate on Wes-FIC's insurance underwriting, not on the results of its investments. At the end of 2000 Wes-FIC retained about $19 million in invested assets, oÅset by claims reserves, from its former reinsurance arrangement with Fireman's Fund Group. This arrangement was terminated August 31, 1989.

Page 3 7/1/99 – 6/30/00: 150% 7/1/00 – 6/30/01: -30% 7/1/01 – 6/30/02: 200% 7/1/02 – 6/30/03: -35% Before fees or penalties, if there were $1,000,000 under management on 7/1/99, it would have grown to $3,412,500 or an average annual return of about 36%. Dalal Street’s fees/penalties would have been: Start Pre-fee End Post-Fee End Fee 7/1/99 – 6/30/00: 150% $1M $2.5M $2.05M $350K 7/1/00 – 6/30/01: -30% $2.05M $1.44M $2.17M ($610K) 7/1/01 – 6/30/02: 200% $2.17M $6.51M $5.43M $1090K 7/1/02 – 6/30/03: -35% $5.43M $3.53M $5.76M ($2.23M) In other words, Dalal Street is in the hole by $1.4M and investors endup with an after fee return of $4.76M after 4 years or an average annualized return of about 55%. There is something drastically wrong with this picture. Buffett avoided the Case 1 problem completely by setting up new partnerships whenever he got new funds. I don’t like that solution to the Case 1 problem because I’ll end up managing 20 very small buckets of money. Very inefficient and time consuming with lots of record keeping and investing overhead. He avoided Case 3 by never having a down year. He never had a year where returns were over 59% or less than 6.8%. I’ll exceed the 59% record most likely in the first year. It is very likely that if first year returns are north of 100%, the next year may be negative or marginal. Therefore, I need to alter PIFI rules to fix the aforementioned problem. Here is the proposed solution: 1.

If I cannot perform better than an unmanaged group of equities then I should not be in the fund management business! • Our goals are relative to the indices. If all three indices dropped 30% in a given year and PIF2 dropped 20%, I’d consider it a superior performance to being up 25% when all three indices were up 20%. It is important to understand this. The direction of the indices does have a “gravitational pull” on us. If the indices delivered a cumulative return of 2% after 5 years and PIF2 was up 5% after 5 years, I’d consider it a good performance. If we were up 12% with the indices up 2%, I’d consider it a great performance. If public-equities deliver the historical 8-10% average return per year they have on average for the last 50+ years and we delivered a 15% average return, I’d be very satisfied.2

All costs for the meeting and the evening will be borne by Dalal Street, Inc. at no cost to PIFI. During the meeting and dinner, I’ll will give you my perspectives on the first full year of PIFI’s operations and results followed by my thoughts on the 2000-2001 year. This will be followed by a Q&A session where anyone can ask me any question except for questions relating to PIFI’s specific holdings or my perspective on a given company.3

The returns above $47,912.92 are $55,918.52. Dalal Street’s fee is 25% of $55,918.92 or $13,979.63 Thus the total NAV after expenses and Dalal Street’s fees are $2,485,497.81 or $15.1137127 per share. Please note that this is an approximation and the audited numbers are bound to be slightly different. In other words, PIFI is up 51.14% after all fees and expenses for its first full year ended 6/30/00.2

Limited Partners Holdings This memo is custom for each limited partner. It contains your investment amount, my investment amount and the rest of the investors as a group to maintain confidentiality. The shareholding as of 10/1/00 is as follows: NAME Shares Held Value of Holdings (Rounded) as of 10/1/00 (rounded) Dalal Street, Inc. (Mohnish Pabrai) 10,000 $100,000 All other Limited Partners 100,000 $1,000,000 TOTAL 110,000 $1,100,000 Between the two funds, there is now about $5 Million under management. I am planning to add another $1-2 Million on 12/1/00 to PIF2. I continue to be undercapitalized – i.e. many more ideas than $$$ available to invest. Also, since the investments are in public equities, whether we invest $100,000 or $10 Million in a given company, the work involved is the same. Thus, until I get to about $100 Million under management, I’ll continue to be undercapitalized. There is $350K already committed to come in on 12/1/00. If you are interested in adding to your position, please let me know at the earliest so I can allocate it. I would need funds by 11/30/00. The minimum investment is $100,000. As you know existing investors have the highest priority followed by your referrals from existing investors. Billy Stubbs, our webmaster, continues to enhance our website and add to its content. Check it out at www.pabraifunds.com. After getting to $5 Million under management, I figured that even Warren would approve of my splurging on business cards.

Pioneering Portfolio Management closes with Swensen's argument for absolute-return allocations - what later came to be called 'marketable alternative' strategies - as a distinct asset class within the endowment framework. The case is that traditional long-only equity and fixed income leave an institution exposed to the direction of public markets, and that adding strategies with low correlation to those markets improves the portfolio's overall return per unit of risk. The book treats absolute-return strategies as a substitute for the conventional fixed income allocation, on the grounds that the real return on long nominal bonds is structurally poor while the illiquidity-adjusted return on selected absolute-return strategies is structurally better. Swensen was careful in the book to distinguish absolute-return investing from hedge-fund investing as it is popularly understood. He argued that the median hedge fund is structurally a high-fee proxy for long-only exposure, and that the case for allocating to absolute-return strategies depends entirely on selecting managers whose returns are genuinely uncorrelated to broad market direction. The book lists the operational and incentive features that distinguish the rare genuine absolute-return manager from the much larger pool of high-fee long-only proxies. The book's larger point is that portfolio construction for long-horizon institutions is fundamentally an exercise in identifying and combining risk premiums. Equity returns, illiquidity premiums, and the return streams generated by genuinely skilled absolute-return managers are different risk premiums, and combining them in a portfolio produces better risk-adjusted returns than any single premium can offer in isolation. Pioneering Portfolio Management has become the canonical articulation of this framework and the standard reference for institutional investors seeking to construct portfolios that compound long-term real wealth rather than track short-term market benchmarks.

Rockefeller never accepted that volume-based freight rebates were anything other than rational commerce. In interviews decades after the South Improvement Company furor, he compared rebates to a quartermaster buying beef for an army cheaper than a steward buying for a hotel, who in turn bought cheaper than a housewife buying for her family: the high-volume shipper, in his framing, was simply entitled to the better rate. The clamor against rebates, he argued, came from people 'who knew nothing about business.' He pointed out that drawbacks and rebates were common practices both before and after the South Improvement Company episode. The defense reframed a structural advantage—Standard Oil's ability to commit to 5,000 barrels of daily freight where rivals shipped fifty—as an ordinary commercial discount, and made clear that his operating philosophy treated scale not as predatory leverage but as legitimate efficiency that entitled him to better rates.

However, it will take a long time before all claims are settled, and, meanwhile, Wes-FIC is being helped over many years by proceeds from investing ""Öoat'' and by favorable loss develop- ment, which has enabled it to reduce the liability for losses and loss-related expenses, beneÑting after-tax operating earnings by $.8 million in 2000 and $1.7 mil- lion in 1999. Wes-FIC engages in other reinsurance business, including large and small quota share arrangements similar and dissimilar to our previous reinsurance contract with Fireman's Fund Group, and, from time to time, in super-cat reinsurance, described in great detail in our pre-1999 annual reports, which Wesco shareholders should re- read each year. Although Wes-FIC was not active in super-cat reinsurance business in 2000, its operating earnings beneÑted by $.9 million, after taxes, in 1999. On super-cat reinsurance accepted by Wes-FIC to date (March 5, 2001) there has been no loss whatsoever that we know of, but some ""no-claims'' contingent commissions have been paid to original cessors of business (i.e., cessors not including Berkshire Hathaway). The balance of Wes-FIC's after-tax underwriting proÑt or loss not described above, amounted to underwriting loss of $1.2 million for 2000 and underwriting proÑt of $.2 million for 1999. In all recent reinsurance sold by us, other subsidiaries of our 80%-owning parent, Berkshire Hathaway, sold several times as much reinsurance to the same customers on the same terms.3%-

1. The PIFI Website!! I have secured a domain name (www.pabraifund.com) and as time allows am developing the content etc. for the site. I don’t have a firm schedule on when the site will be up, but am hoping to have it up and running before we finish our first year. The site will not have names or identities of the limited partners anywhere on the site to maintain confidentiality. Here is a listing of a subset of the features I’m planning: 1. Post all the PIFI legal docs (with no limited partner names) 2. Post all my memos to limited partners (with no limited partner names) 3. PIFI’s performance, fees and expense data to data vs. the indices. 4. Ability to register and join the PIFI limited partners waiting list. 5. Post all the performance data on all monies I manage (personal portfolio, TransTech’s portfolio, Digital Disrupters portfolio) 6. Description on PIFI and its objectives 7. Data on the original Buffett partnerships. The expenses associated with the development and maintenance of the site will be borne 100% by Dalal Street with no cost to PIFI. Thus, if any of you have investor referral, they can go online, get all the data they need and register to get on the waiting list. I’d welcome any comments or suggestions. See you in August!! Mohnish Pabrai Page 4

PIFI guarantees a minimum average annualized return of 6%. In years when the annual return is below 6%, no management fee is paid, but Dalal Street pays nothing into the fund as long as the average annualized return is over 6%. The counter resets every 5 years. Therefore, if the PIFI first 5-year average return is 26% and the 6th year return is –20%, then Dalal Street, needs to deposit funds to make up the difference. This seems fair. It also keeps me from resting on my laurels since I know that the past track record will only help me in the next 0-4 years at most.

Funds like to categorize themselves as “growth” or “value” or “small cap” etc. I find that with many stocks, “growth” and “value” are two sides of the same coin. They are not mutually exclusive. I get a lot of questions from investors regarding the inner-workings of this “black-box”. I’m including some very specific information on The Pabrai Investment Funds to shed some light in this matter. The investment style of the Pabrai Investment Funds is quite simple. The fund only takes long positions in public equities. There are no options or derivatives etc. that the fund delves into at all. Typically the funds assets are divided between under 15 securities with the typical allocation for a given security being 10% of assets in the fund. The fund is allowed to go up to 30% into margin. I look at 3000+ public companies a year. When I look at a given public company, I run them through a three-question filter. 95+% of companies do not make it through these filters and are discarded. The ones that make it through are then rigorously analyzed before anything becomes part of the portfolio. Inspite of my best efforts, I have made mistakes in the past and know that there will be more in the future. The goal is that we are right many more times than we are wrong. The three filters that a security has to go through is a positive answer to the questions: 1. Do I understand this business well? Is it well within my circle of competence?

Billy did a nice job of designing them and of our partners printed them (we’re trying to keep the $$$ in the family). I’m sending a few to each of you. Feel free to pass them on to folks who you think might have an interest in looking at The Pabrai Investment Funds. All of the legal docs have been executed by us, however, some of you pointed out a few errors/edits needed in the Fund Legal Documents. I have referred these to the attorney. We will have a short amendment to the agreement that I hope to have executed by all of us in the coming weeks.2

of-premiums ceding commission on premium volume passed through them to Wes- FIC. Excepting this ceding commission, Wes-FIC has had virtually no insurance- acquisition or insurance administration costs with regard to those policies. Wes-FIC remains a very strong insurance company, with very low costs, and, one way or another, in the future as in the past, we expect to continue to Ñnd and seize at least a few sensible insurance opportunities. Wesco shareholders should continue to realize that recent marvelous underwrit- ing results are sure to be followed, sometime, by one or more horrible underwriting losses from super-cat or other insurance written by Wes-FIC. The Kansas Bankers Surety Company (""KBS'') KBS, purchased by Wes-FIC in 1996 for approximately $80 million in cash, contributed $7 million to the consolidated operating earnings of the insurance businesses in 2000 and $7.2 million in 1999. These Ñgures are before goodwill amortization under accounting convention of $.8 million each year. The results of KBS have been combined with those of Wes-FIC, and are included in the table on page 1 in the category, ""operating earnings of Wes-FIC and KBS insurance businesses.'' KBS was chartered in 1909 to underwrite deposit insurance for Kansas banks. Its oÇces are in Topeka, Kansas. Over the years its service has continued to adapt to the changing needs of the banking industry.

Page 4 2. Investors can withdraw from the partnership in any given year during the “open window” after annual results are disclosed. If an investor decides to exit the partnership, the following rules apply: 2.1 If an investor withdraws from the partnership, it is assumed that the withdrawal will be 100% of invested funds and returns thereof. 2.2 If an investor withdraws funds that have been in the partnership for less than two years then Investors will receive the NAV of the shares they own in their account. 2.3 If an investor withdraws funds that have been in the partnership for more than two years then Investors will receive the higher of: The NAV of the shares they own in their account. OR Their principal investment compounded at an annual rate of 6%. Thus no matter when during the 5-year period an investor injects funds into the partnership they are guaranteed a minimum 6% annualized rate of return compounded as long as they stay in for more than 2 years. I have discussed the problem with Joe Fenech, our legal counsel and one of the Limited Partners. His perspective is that an addendum needs to be created and signed by all existing limited partners. He is in the process of creating this addendum and I’ll circulate it for signature ASAP to existing limited partners. New Investors I have received some of your checks, but have done nothing with them. Most likely, I’ll be bringing in the new funds a month later due to this issue. Thus the funds would get deposited on 3/1/00.

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

Today its customer base, consisting mostly of small and medium-sized community banks, is spread throughout 25 mainly midwestern states. In addition to bank deposit guaranty bonds which insure deposits in excess of FDIC coverage, KBS also oÅers directors and oÇcers indemnity policies, bank employment practices policies, bank annuity and mutual funds indemnity policies and bank insurance agents professional errors and omissions indemnity policies. KBS increased the volume of business retained eÅective in 1998. It had previously ceded almost half of its premium volume to reinsurers; and, it now reinsures only about 5% under arrangements whereby other Berkshire subsidiaries take 50% and unrelated reinsurers take the other 50%. As we indicated last year, the increased volume of business retained comes, of course, with increased irregularity in the income stream. KBS's combined ratio remained much better than average for insurers, at 73.9% for 2000 and 59.4% for 1999, versus 37.2% for 1997, and we continue to expect volatile but favorable long-term eÅects from increased insurance retained. KBS is run by Donald Towle, President, assisted by 15 dedicated oÇcers and employees.

If you are uncomfortable with any of this, I can return your check and there is no impact (positive or negative) on you. I’m assuming all of you have seen a copy of the existing legal documents. If not, please let me know and I’ll send you a copy. I’ll send you a copy of the addendum to review after its ready. I’d suggest that you only invest if you are 100% comfortable. Feel free to email or call me for any clarification. I do intend to bring in $800K at this time. If any of you are dropping out, I’d appreciate knowing about it ASAP as there are folks on the PIFI waiting list I can then get to become investors at this time.Investors

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.

Page 5 If you’re uncomfortable with this change, then my suggestion would be to exit PIFI at year-end. Please recognize that I’ll be giving low priority to any investors who withdraw invested funds and subsequently want to add funds to PIFI. They’ll go to a far lower priority. The selection of investors for PIFI priority is: 1. Existing investors with no withdrawal history. 2. Referrals from existing investors with no withdrawal history. 3. Other Individuals referred to me or directly known to me. 4. Existing investors with withdrawal history. 5. Referral from existing investors with withdrawal history. 6. Other Individuals. Please advise me of any concerns or questions immediately. Thanks

Case Study: Diamond Technology Partners (NASDAQ – DTPI) I get asked from time to time by Partners and potential investors to give more insight into the fund by giving a few examples of what is in the portfolio. I do not plan to release current portfolio holdings as, in many cases, I’d add to our position if there is a near term decline in price. However, I’d thought I’d take this opportunity to describe one of the early holdings in PIFI. We have fully exited our position in Diamond Technology Partners and do not expect that I’ll buy DTPI anytime in the near future. Diamond Technology Partners is a Strategy and Management Consulting firm based in Chicago. I believe it was the first buy we made when PIFI went live on 7/1/99.4

CORT Business Services Corporation (""CORT'') In February 2000, Wesco purchased CORT Business Services Corporation (""CORT'') for $386 million in cash. In addition, CORT retains about $45 million of previously existing debt. CORT is a very long established company that is the country's leader in rentals of furniture that lessees have no intention of buying. In the trade, people call CORT's activity ""rent-to-rent'' to distinguish it from ""lease-to-purchase'' businesses that are, in essence, installment sellers of furniture. However, just as Hertz, as a rent-to-rent auto lessor in short-term arrangements, must be skilled in selling used cars, CORT must be and is skilled in selling used furniture. In the ten months that we have owned CORT, its revenues have totaled $361 million. Of this, $306 million was furniture rental revenue and $55 million was furniture sales revenue. CORT contributed $29 million to Wesco's consolidated operating income in 2000, before goodwill amortization of $5.1 million or realized securities losses of $.7 million. CORT's pre-tax operating income (before goodwill amortization) for the entire calendar year 2000 was $54.3 million. Thus, in essence, Wesco paid $386 million for $54.3 million in pre-tax operating earnings. About 60% of the purchase price was attributable to goodwill, an intangible balance sheet asset. Wesco's consolidated balance sheet now contains about $260 million in good- will (including $28 million from Wesco's 1996 purchase of KBS).

On a full year basis, Wesco's reported earnings for 2000 were reduced by about $6 million of mostly-non-tax-deductible amortization of goodwill. I am pleased to report that the Financial Accounting Standards Board has recently proposed a rule that, if adopted, will no longer require automatic amortization of acquired goodwill. If this proposed rule change goes into eÅect, our reported earnings will more closely reÖect microeconomic reality as we appraise it. More details with respect to CORT are contained throughout this annual report, to which your careful attention is directed. CORT has long been headed by Paul Arnold, age 54, who is a star executive as is convincingly demonstrated by his long record as CEO of CORT. We are absolutely delighted to have Paul and CORT within Wesco, are pleased with CORT's perform- ance under his leadership in 2000, and hope to see a considerable expansion of CORT's business and earnings in future years. Commencing late last year, and continuing to date, new business coming into CORT has declined sharply. We believe that CORT's operations will remain proÑta- ble in any likely recession-related decline in the rent-to-rent segment of the furniture business.

we bought 5500 shares DTPI at a price of $23.75/share for a total investment of about $130,000 or 13% of PIFI assets. I arrived at 13% because we had $1,000,000, plus an ability to go upto $300,000 into margin yielding total buying power of $1.3 Million. If funds are available, I’m typically allocating 13% of assets in a given security. 1. Did I understand DTPI well? Is it well within my circle of competence? The answer is yes for the following reasons: • I was the founder and then CEO of TransTech, Inc. TransTech is an IT Consulting Services company. I had run TransTech for about 9 years and grown it from nothing to about 160 people. Over the years, I learnt a lot about the IT Services space and Consulting services. • With DTPI being based in Chicago, I was quite familiar with the company. Over the years I had met with Mel Bergstein (CEO, DTPI) and other senior executives of DTPI. I used to go to various IT Services investment banker conferences and DTPI was usually a presenter. I’d listen to Mel speak and then attend the Q&A thereafter. • I met a couple of times with Mel and senior management at DTPI in Q1999 to explore possible synergies between DTPI and TransTech. Specifically, DTPI did a lot of high- level work at the CXO (CEO, CIO, COO) level with Fortune 2000 companies that led to IT projects that DTPI usually referred to other firms. I was hoping to make TransTech one of those firms.

As it turned out, DTPI and TransTech never did work on a project together – so far - even though there were a few pre-sales efforts. Those meetings did help me get more familiar with DTPI. • During one of these meetings, Mel gave me a tour of DTPI Headquarters in the John Hancock building. I remember that Mel’s office was no bigger than most of his managers. Also, all corner offices were allocated to be temporary workspace for consultants in between projects or working out of HQ. In other words, unlike the typical business where the CEO has the best office, Mel had allocated the very best space to the folks who were in the trenches making the money for the company. I liked his employee-centric view. • Chunka Mui is one of the partners at Diamond. He is the author of “Unleashing the Killer App”. I had dinner with Mel and Chunka in Boston in Q199 when Chunka spoke at a gathering of CEOs. It was clear that DTPI clients saw tremendous value in Chunka and would willingly pay top dollar to a team he was part of. So, all in all, I did consider understanding DTPI well within my circle of competence. 2. Is Diamond Technology Partners a great and predictable business? The answer again came back as a resounding yes for the following reasons.5

The purchase of CORT has increased Wesco's employee count to approxi- mately 3,000 from 275 one year earlier. Precision Steel Warehouse, Inc. (""Precision Steel'') The businesses of Wesco's Precision Steel subsidiary, headquartered in the outskirts of Chicago at Franklin Park, Illinois, contributed $1.3 million to Wesco's net operating earnings in 2000, down from the $2.5 million contributed in 1999. The 50% decline in 2000 operating earnings was due principally to two factors: (1) LIFO inventory accounting adjustments decreased after-tax earnings approximately $.4 million in 2000 after increasing such earnings by $.3 million in 1999, and (2) pounds of product sold decreased 3%, while competition restrained prices as costs of principal raw materials increased, causing fewer dollars of gross proÑt to be available to absorb operating expenses. Revenues were up only 1%. Generally, the U.S. steel business was a disaster in 2000, and Precision Steel suÅered worse eÅects than occurred for it in previous general declines in the U.S. steel business. We do not regard earnings changes from LIFO accounting adjustments, up or down, as material in predicting future earning power. Terry Piper, who became Precision Steel's President and Chief Executive oÇcer late in 1999, has done an excellent job in leading Precision Steel through a very diÇcult year.

Tag Ends from Savings and Loan Days All that now remains outside Wes-FIC but within Wesco as a consequence of Wesco's former involvement with Mutual Savings, Wesco's long-held savings and loan subsidiary, is a small real estate subsidiary, MS Property Company, that holds tag ends of real estate assets with a net book value of about $6.5 million. MS Property Company's results of operations, immaterial versus Wesco's present size, are included in the breakdown of earnings on page 1 within ""other operating earnings.'' Other Operating Earnings Other operating earnings, net of interest paid and general corporate expenses, amounted to $.2 million in 2000 and $.7 million in 1999. Sources were (1) rents ($3 million gross in 2000) from Wesco's Pasadena oÇce property (leased almost entirely to outsiders, including California Federal Bank as the ground Öoor tenant), and (2) interest and dividends from cash equivalents and marketable securities held outside the insurance subsidiaries, less (3) general corporate expenses plus minor expenses involving tag-end real estate.time

• DTPI’s revenue history from 1995 through 1999 is: Revenue Net Income # of Clients 1995: $12.8 Million -$0.4 Million (loss) 1996: $26.3 Million $1.2 Million 24 1997: $37.6 Million $0.6 Million 45 1998: $58.3 Million $6.0 Million 65 1999: $82.4 Million $9.8 Million 85 Q41999 $22.7 Million $2.8 Million Their fiscal year ends on March 31. So the last published results available were for the year ended March 31, 1999. • DTPI is a business with a recurring revenue stream. They have a very “sticky” relationship with their customers. Once they acquire a customer, the probabilities are very high that that company will engage DTPI again and again on numerous projects. Thus, once a base of revenue is built the business with most of its existing customers, its pretty much guaranteed that, for example, 2002 revenues will exceed 2001 revenues. A large portion of the 2001 customers will be customers in 2002 and spend more than 2001. • The relationship DTPI has with a given Fortune 2000 company is at the CXO level. Very few businesses are able to establish relationships at the CXO level. The relationship is similar to a doctor-patient relationship. How often do you change your doctor? DTPI provides very critical advice and guidance to the patient (CXO). There are very few other doctors available (McKinsey, Bain, A. T. Kearney etc. Al), but switching is very hard since “medical histories” are lost and one has to start over. Very painful. • DTPI is a highly specialized “doctor”.

They specialize in “Digital Strategy”. While they never had many dot-com clients, many DTPI clients needed DTPI to help them evolve from Brick and Mortar to Click and Mortar. DTPI is one of the leading firms in the digital strategy space. So while McKinsey etc. were more established, DTPI was nimbler and far more focused on an area of tremendous pain for many companies. • DTPI recruits consultants from the top MBA schools. They pay their junior consultants between $120,000 - $150,000 per year. These folks generated billings around $387,000/year/person in 1999. They make a nice spread. 50% gross margin! About 50% of DTPI turnover is forced. Every year they ask the bottom 5-8% of their workforce politely to leave. Its the typical McKinsey “up or out” format. If you do this systematically over the years, you end up with a better workforce every year.6

when Freddie Mac shares could be lawfully owned only by a savings and loan association. Those shares, carried on Wesco's balance sheet at yearend 1999 at a market value of $1.4 billion, were sold in 2000, giving rise to the principal portion of the $852.4 million of after-tax securities gains realized by Wesco in 2000, versus $7.3 million, after taxes, realized in 1999. Although the realized gains materially impacted Wesco's reported earnings for each year, they had a very minor impact on Wesco's shareholders' equity. Inasmuch as the greater portion of each year's realized gains had previously been reÖected in the unrealized gain component of Wesco's shareholders' equity, those amounts were merely switched from unrealized gains to retained earnings, another component of shareholders' equity. Consolidated Balance Sheet and Related Discussion As indicated in the accompanying Ñnancial statements, Wesco's net worth, as accountants compute it under their conventions, increased to $1.98 billion ($278 per Wesco share) at yearend 2000 from $1.90 billion ($266 per Wesco share) at yearend 1999. The foregoing $278-per-share book value approximates liquidation value assum- ing that all Wesco's non-security assets would liquidate, after taxes, at book value. Probably, this assumption is too conservative.

But our computation of liquidation value is unlikely to be too low by any large percentage because (1) the liquidation value of Wesco's consolidated real estate holdings (where interesting potential now lies almost entirely in Wesco's equity in its oÇce property in Pasadena containing only 125,000 net rentable square feet), and (2) possible unrealized appreciation in other assets (primarily CORT and Precision Steel) cannot be large enough, in relation to Wesco's overall size, to change very much the overall computation of after-tax liquidating value. Of course, so long as Wesco does not liquidate, and does not sell any appreciated securities, it has, in eÅect, an interest-free ""loan'' from the government equal to its deferred income taxes on the unrealized gains, subtracted in determining its net worth. The sale of the Freddie Mac shares in 2000 reduced that interest-free ""loan'' from $705 million as of yearend 1999 to $258 million as of yearend 2000. This interest-free ""loan'' from the government is at this moment working for Wesco shareholders and amounted only to about $36 per Wesco share at year end 2000. However, some day, additional parts of the interest-free ""loan'' may be removed as securities are sold, as happened to such a large extent with the sale of Freddie Mac stock in 2000. Therefore, Wesco's shareholders have no perpetual advantage creating value for them of $36 per Wesco share.

• 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.

Instead, the present value of Wesco's shareholders' advantage must logically be much lower than $36 per Wesco share. Business and human quality in place at Wesco continues to be not nearly as good, all factors considered, as that in place at Berkshire Hathaway.an

So the free cash flow they could generate was very high. They were at a $100 Million run rate. Conservatively, I estimated that they had the ability to keep growing 40% a year for a few years and then drop off to 20-30% thereafter. They would continue to drop atleast 12% to the bottom line and possibly increase this to 15% over time. The summary of the analysis I did, led to a 2005 revenue in the range of $400-500 Million with Net Income of $50-60 Million. In 2005, they might trade at a P/E of 20-30; yielding a market cap of $1 Billion to $1.8 Billion. At the low-end, we’d get 3.3 times our money in 5 years and at the high-end it would be 6 times. I liked those numbers and saw a very limited down side. So I made the investment. Within a few months, the stock split 3:2. Around March 10, 2000, DTPI was trading at $110/share with about 21 Million shares outstanding. It had a market capitalization of $2.3 Billion against revenues of less than $140 Million annually!! Clearly Wall Street decided that they liked this doctor - a lot. It was well above IV. I used to have a viewpoint in allocating capital that was flawed and has since been edited.7

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.

equally-good-but-smaller version of Berkshire Hathaway, better because its small size makes growth easier. Instead, each dollar of book value at Wesco continues plainly to provide much less intrinsic value than a similar dollar of book value at Berkshire Hathaway. Moreover, the quality disparity in book value's intrinsic merits has, in recent years, continued to widen in favor of Berkshire Hathaway. All that said, we make no attempt to appraise relative attractiveness for invest- ment of Wesco versus Berkshire Hathaway stock at present stock-market quotations. To progress from this point at a satisfactory rate, Wesco plainly needs more favorable investment opportunities, recognizable as such by its management, prefer- ably in whole companies like CORT, but, alternatively, in marketable securities to be purchased by Wesco's insurance subsidiaries. The Board of Directors recently increased Wesco's regular dividend from 30¥ cents per share to 31¥ cents per share, payable March 7, 2001, to shareholders of record as of the close of business on February 7, 2001. This annual report contains Form 10-K, a report Ñled with the Securities and Exchange Commission, and includes detailed information about Wesco and its subsidiaries as well as audited Ñnancial statements bearing extensive footnotes. As usual, your careful attention is sought with respect to these items. Charles T. Munger Chairman of the Board March 5, 2001

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

Oak Brook, Illinois We will have a private room and the meeting will be followed by cocktails and dinner. Last year’s meeting was fun. All limited partners and their spouses/significant others/dates are invited. I hope all of you can attend. Please mark it on your calendar. Next Investment Window The next date when funds will be added to PIF2 is February 1, 2001. I’m planning to add around $1 Million on 2/1/01. If you’re interested in investing, please send contact me so I can make the allocation. Page 9