Institutional Investor's Alpha Magazine - October 2007 - (Page 71)

Warren,’ but show me how you did in the down years,” says Miles, who has written several books on Buffett. Like many investors, Pabrai suffered as a result of the subprime meltdown this year. “We will be down during the third quarter, but it won’t be a meaningful event for Pabrai Funds,” he says. One of his biggest gambles right now is Delta Financial Corp., a Woodbury, New York–based subprime mortgage lending company. Pabrai loaded up on its stock over the past year, paying roughly $9 a share. By June he had more than 4.6 million shares, allotting about 10 percent of his assets to the position. Delta Financial’s stock traded at an alltime high of $13.60 a share in May but began slipping early this summer as the number of foreclosures shot up. The situation worsened dramatically for the company in early August, when it filed its quarterly earnings report a week late because, it explained, the company was negotiating for an emergency cash infusion to meet “substantial margin calls” from banks that had loaned it money, which it in turn had loaned to homeowners. Pabrai Investment Management was one of two ﬁrms that agreed to bail out Delta Financial. Angelo, Gordon & Co., a New York–based hedge fund, provided $60 million in exchange for warrants that allow it to buy 10 million common shares at $5 a share. Pabrai supplied $10 million in exchange for notes that can be converted into 2 million shares at $5 a share for up to one year. Pabrai receives 6 percent interest on the notes for the first 90 days, and 12 percent for the remaining period. “Delta is one of the best companies and management teams in this space,” Pabrai said in a mid-August press release. “I look for them to emerge from the current market disruption and be well-positioned to take advantage of a less populated competitive landscape.” The day after missing its filing deadline, Delta Financial saw its stock tumble 30 percent, to below $4 a share. Since then, the company has shed 20 percent of its workforce, or some 300 employees, and suspended its third-quarter dividend. Its shares were recently trading at about $5 apiece. Lending money to Delta Financial would seem to violate Pabrai’s rule against activiststyle investing. Pabrai says the mortgage lender reached out to his ﬁrm. “We have a passive position,” he explains. “We would never, ever, suggest to Delta Financial how it should run its affairs.” But with Delta Financial’s shares now worth half what he paid for them, Pabrai is faced with the inexorable math of investing: When a stock loses 50 percent of its value, it has to bounce back by 100 percent just for investors to break even. Pabrai says he often invests in a company “after a bad event has led the stock market to extrapolate to inﬁnity,” and that his stocks often trade at less than 50 percent of his purchase price for months after he has bought them. To ward off buyer’s remorse, Pabrai says he tries to hold on to positions for at least two years. Ideally, he likes to allocate 10 percent of his assets to ten positions, but he will own no more than 15 stocks. Quarterly filings with the SEC show that all five of the stocks Pabrai still owns from his June 2005 portfolio have http://www.ogier.com http://www.ogier.com

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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