Institutional Investor's Alpha Magazine - October 2007 - (Page 70)

Mohnish Pabrai Then there is his unorthodox workday. Each afternoon, he naps in a small, windowless room, adorned with a map of India on the wall and furnished with a twin bed, nightstand and lamp, all supplied by the Westin hotel chain. He says he adopted the custom as a teenager in Dubai. Not surprisingly, most of the 400 investors in Pabrai’s three funds are friends, relatives and business associates. Ajay Desai, a Bakersﬁeld, California–based radiation oncologist, has known Pabrai since the early 1980s, when he shared an apartment with him and Pabrai’s older brother, Ali, while all three attended Clemson University in South Carolina. Desai began investing with him in 2002, and Pabrai routinely calls him and other investors who are experts in their ﬁelds as part of his research. “He’s very bright, but he can be very blunt,” says Desai, who remembers failing to persuade Pabrai to buy drugmaker ImClone Systems shares after negative publicity involving a 2002 investigation into Martha Stewart’s allegedly improper trading of ImClone shares pushed the stock to new lows, even though Desai thought highly of the company’s cancerﬁghting drugs. Pabrai rejected the suggestion, missing a 700 percent rise in ImClone shares over the following two years. “It was outside my circle of competence,” explains Pabrai, who, like Buffett, professes to invest only in companies whose businesses he can easily understand. Robert Miles, a Tampa, Florida–based investment adviser and the organizer of a value investing conference at which Pabrai spoke last spring, credits him with having an independent streak and with finding stocks “outside the clique of value investors.” But Miles is reluctant to declare as victor any value investor who has been in the business fewer than 20 years. “It’s easy to say, ‘I invest like It’s a Date: How Pabrai Won Lunch with Buffett I “The lunch itself is icing on the cake,” Pabrai nvestment manager Mohnish Pabrai had failed four times since 2003 to outbid rivals for the says. “The main driver for me is to repay the tuchance to eat lunch with his hero, Warren Buf- ition bill. I’ve learned so much from Mr. Buffett.” The five-day online auction began on Sunfett. So in June, Pabrai and his co-bidder and friend, Guy Spier, who runs hedge fund firm day, June 24, at 7:00 p.m., Pacific time. All bidAquamarine Capital Management in New York, ders, including Pabrai, had to be prequaliﬁed by made a pact to go as high as $2 million for the Kompolt, the San Luis Obispo, California–based annual charity lunch, which was being auctioned agency that runs eBay’s charity auctions. The on eBay. As it turned out, they didn’t need to. minimum opening bid was $25,000. Pabrai’s ﬁrst bid was $77,000. The amount, he says, was choTheir winning bid was $650,100. Pabrai is footing two thirds of the bill, with sen to honor Buffett, who turned 77 this year. Of Spier picking up the rest. The contribution is tax-deductible; the proceeds beneﬁt the Warren Buffett: Glide Foundation, a San Francisco charity Bringing value supported by Buffett. Manhattan steak to charity. house Smith & Wollensky will contribute $10,000 to the charity and pick up the tab for the June 2008 lunch. Given that both Pabrai and Spier are value investors — bargain hunters who try to buy an asset worth $1 for 50 cents — the lunch doesn’t appear to meet their investment guidelines. Moreover, it’s unlikely to include any investment insights, as the Sage of Omaha is famously unwilling to discuss his holdings. Spier’s reasons for wanting to attend the lunch are personal. He believes that preparing to spend time with Buffett will improve him as an investor. “It’s like playing up when your tennis opponent is better than you,” he explains. Pabrai wants to thank Buffett and, indirectly, Buffett’s partner, Charles Munger, for illuminating the principles of value investing, first handed down by Benjamin Graham, through annual meetings and letters to shareholders of their holding company, Berkshire Hathaway. course, other participants had no way of knowing his maximum bid, because the way eBay works, the amount that is shown online is the lowest bid needed to beat everyone else. “If someone puts in a $30,000 bid, then the only price it shows is $30,100 from me, automatically,” Pabrai explains. “So, until the bidding crossed $77,000 from another bidder, I was in the lead.” By Monday morning the price had soared past Pabrai’s offer. At 9:45, he put in his next one — $184,000, because, he says, “Mr. Munger turns 84 in January.” On Tuesday, Pabrai bid $194,801. “The reason for that number is, 1948 is the year Israel got created — I was being secular and a citizen of the world and all that,” Pabrai says of his logic. “And I added $1 because whenever Hindus give a monetary gift, they always want to end it with the number one.” Another bidder quickly passed him, so Pabrai followed with an offer of $401,948, combining 1948 and 400,000. The latter, he says, represents the $4 billion that Berkshire paid last year for Israeli company Iscar Cutting Tools. On Friday evening, with just 20 minutes left in the auction, a rival trumped Pabrai with a bid of $426,000. Five minutes later Pabrai upped his maximum to $1,000,001. But he was worried that someone using automated software would come in at the last second to top him, so he decided to go for broke with a $2 million bid. According to Pabrai, the eBay system would not accept it, even though he’d been preapproved. “With the auction ending in three minutes, I was frantically e-mailing my contacts at Glide and Kompolt,” recounts Pabrai. “When I ﬁnally got someone on the phone, there were 20 seconds left. The other guy had put in a bid of $650,000, and mine showed up as $650,100. As I was trying to explain the problem, the auction ended. So here was no need to use most of the dry powder.” — J.S. 70 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2007 BEN BAKER/REDUX

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2007

Institutional Investor's Alpha Magazine - October 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Applied Knowledge The Good Guys: Autism Advocate Interview: Nerves of Steel Cover Story: Ivy League Education Alpha Awards: Top Service Providers: Trying Times Strategies: Passage to India Profile: The Oracle of Irvine Alpha Bytes: Futurama Research Center: Funds of Funds 50 Unhedged: Commentary: Crisis? What Crisis?

Institutional Investor's Alpha Magazine - October 2007

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