Institutional Investor's Alpha Magazine - October 2007 - (Page 72)

Mohnish Pabrai posted gains. They are Berkshire Hathaway (up 43 percent through September 2007), Fairfax Financial Holdings (up 51 percent), Harvest Natural Resources (up 12 percent), Star Gas Partners (up 63 percent) and Universal Stainless & Alloy Products (231 percent). A sixth stock, the steel company Ipsco, was acquired by Swedish steel company SSAB during the third quarter. (For a complete list of Pabrai’s holdings, see the table on this page.) Pabrai’s peripatetic childhood took him from Mumbai to New Delhi to Dubai, while his entrepreneurial father tried — and often failed at — endeavors that included selling high-end stereo speakers, magic kits by mail and real estate. “My father had a tremendous sense of adventure, but he and my mother were terrible ﬁnancial planners, living like kings until the money ran out,” he recalls. After graduating from Clemson in 1986, Pabrai joined Tellabs, a Naperville, Illinois–based telecommunications equipment maker, where he worked in research and development. Two years after he went to work for Tellabs, his father, Om Pabrai, paid him a visit. Frustrated at watching his son rise at 9:30 a.m. and go to work dressed in jeans, he urged him to move to Tellabs’ ﬂedgling international marketing department. In 1990 the 25-year-old Pabrai quit Tellabs and founded TransTech, a systems integration ﬁrm, using $30,000 from his 401(k) and $70,000 in credit card loans. By 1999, TransTech was generating $20 million in annual revenue and had 160 employees. Pabrai sold it to consulting firm Kurt Salmon Associates for an undisclosed sum in November 2000. In 1999, Pabrai started a second company, Digital Disrupters, a software company for electronic billing designed to take advantage of the Internet. Outside investors contributed $2.7 million to the start-up, and Pabrai added $1.8 million. The business failed 11 months later as dot-com euphoria vaporized. “Digital Disrupters was a very expensive way for me to get a basic investing education,” Pabrai said this July in an interview with GuruFocus, the online service that tracks the stock picks of leading investment managers. Pabrai’s education as a value investor began in 1994. While waiting in London’s Heathrow Airport for a ﬂight to the U.S., he bought Peter Lynch’s book One Up on Wall Street and read for the ﬁrst time about Warren Buffett. “I kept wondering, Who is this person Lynch writes so reverentially about?” recalls Pabrai. He read more books on the famed value investor and, on the advice of the members of his Young Presidents’ Organization, wrote Buffett to ask for a job. Buffett replied that he worked alone. Now eight years into his third career, as an investment manager, Pabrai wants to educate others in the ways of picking what he calls low-risk, high-uncertainty stocks. These are often companies that have been tarnished by the falling fortunes of their competitors. Pabrai says an insightful investor who digs deep enough will be able to discern which companies are likely to bounce back, and his second book, The Dhandho Investor, is a highly readable account of some of his successes doing just that. In June, Delta Financial looked like one of those lowrisk, high-uncertainty stocks to Pabrai. Wall Street had thrown the proverbial baby out with the bathwater, he told a TV interviewer. If Delta Financial survives the subprime meltdown, Pabrai will receive kudos for his investment acumen. If not, he can always tell his grandchildren that he had lunch with Warren Buffett. Picking Stocks the Pabrai Way Like his idol, Warren Buffett, Mohnish Pabrai doesn’t like to share details about his holdings. During the third quarter eight of the ﬁfteen positions in his portfolio went down. Among the few winners was Buffett’s Berkshire Hathaway. COMPANY ABX Air Berkshire Hathaway (A shares) Berkshire Hathaway (B shares) CompuCredit Corp. CryptoLogic Delta Financial Corp. Fairfax Financial Holdings Harvest Natural Resources Ipsco1 Lear Corp. MDC Holdings Pinnacle Airlines Corp. Star Gas Partners Ternium Universal Stainless & Alloy Products 1 Acquired by Swedish steel company SSAB in July 2007. 2 Adjusted closing price as of 9/28/07. BUSINESS Cargo airline Buffett holding company Buffett holding company Consumer ﬁnance Online casino software Subprime lending Financial services holding company Oil and gas company Steel company Auto interior and systems supply Homebuilding and ﬁnancial services Airline carrier Heating oil distributor Steel producer Steel producer STOCK PRICE2 $ 7.08 118,510.00 3,952.00 21.71 19.85 4.91 244.00 11.94 — 32.10 40.94 16.02 4.54 31.40 37.79 3RD QUARTER GAIN/LOSS –12.10% 8.25 9.62 –38.00 –17.55 –59.98 27.30 0.25 –1.00 –11.00 –14.88 –14.56 1.79 3.60 12.94 Sources: Securities and Exchange Commission ﬁlings; Yahoo! Finance. 72 • INSTITUTIONAL INVESTOR’S ALPHA • OCTOBER 2007

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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