Buffett and Pabrai Break Bread

An annual charity auction on eBay (NYSE: EBAY  ) , with a three-hour lunch with legendary investor Warren Buffett as its prize, got under way last week. Qualified bidders were vying for a chance to score a private meal with the Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) chairman, with all proceeds going to the wonderful Glide Foundation.

As I expected, this year's auction set yet another record, with the winning bidder coughing up a hefty $650,100 for the opportunity to chow down on some steak with the Oracle of Omaha. This year's auction champ was value superinvestor -- and friend -- Mohnish Pabrai, whom I consider today's greatest rising investor.

You might think it's crazy to pay that much for a three-hour lunch with anybody, even if it does involve Warren Buffett and a good cause. Yet like a classic Pabrai investment, I think our winner got a terrific value for his money. Here's why.

Spending $100 million a week
It's estimated that Berkshire Hathaway's insurance subsidiaries, GEICO and National Indemnity, siphon off about $100 million or so in float each week. Float is insurance lingo for the premiums that can be invested until the insurance company has to pay out claims. That fuel has made the 76-year-old Berkshire chairman worth nearly $50 billion. Let's assume, conservatively, that Buffett works 50-hour weeks. If so, each hour of his time is worth about $2 million. Pabrai gets three hours for about 10% of the value of Buffett's time. Sounds like a darn good deal to me!

I am a humble disciple
Pabrai, whose investment style is heavily influenced by Buffett's writings and investing philosophies, modestly refers to himself as a "humble disciple" and "shameless cloner" of the Oracle. The Pabrai Investment Funds, in fact, have an operating structure very similar to the Buffett Partnerships of the 1950s.

In describing the activities of his Partnership, Buffett told his partners that he would be participating in three types of investments -- generally undervalued securities, workouts, and control situations. During those Partnership years, he returned nearly 30% per year because he devoted significant amounts of capital to the latter two categories, or "special situation" investments.

In comparison, if you look at some of Pabrai's most successful investments, including Pinnacle Airlines (Nasdaq: PNCL  ) and Universal Stainless and Alloy Products (Nasdaq: USAP  ) , they, too, have been classic special-situation investments -- or what Pabrai, in his recent book The Dhando Investor, calls "low-risk, high uncertainty" businesses.

So what has cloning the world's greatest investor done for Pabrai? In 1999, he launched his first fund with $1 million under management. His assets under management now stand at around $500 million. He has compounded at roughly 28% per year since that first year -- a $100,000 investment in the Pabrai funds in 1999 is worth more than $700,000 today.

As Pabrai likes to quip, this is the return after his outrageous fees, which happen to be no fees at all, except for the necessary administrative costs of maintaining the fund. Asset-management fees are zero. Marketing fees are zero. Heck, he pulls money out of his own pocket each year for an annual dinner for his limited partners -- a group that now numbers several hundred.

If Buffett's activities have helped Pabrai compound hundreds of millions of dollars at nearly 30%, paying 650 grand -- a few basis points of his annual return -- for lunch with his mentor is not a bad capital-allocation decision at all.

Steak or stock tips?
Having had the rare and lucky opportunity to meet and eat with both Buffett and Pabrai, I can say that a meeting between these two minds was destined to happen. I have found both men to be witty, inspirational, and very focused at what they do. Above all, they are extremely generous with their time. Even with the demands they face in allocating large sums of money, they both find moments in their busy schedules to spend with enterprising students who someday hope to become one of the best.

Buffett's classmates used to say they could feel the energy between Buffett and Benjamin Graham during their dialogues. I predict the same level of energy between Pabrai and Buffett when they meet. My guess is that this will be a very carefree lunch filled with delicious food and a lot of pleasantries and humor. No stock tips will be offered -- these two superinvestors will respect each other too much to engage in such folly.

And while I know that Pabrai sincerely feels a strong sense of gratitude toward Buffett and is thrilled to finally have lunch with the man, I think Buffett is about to have one of the most profound lunching experiences in a long time.

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Fool contributor Sham Gad is currently launching Gad Investment Funds, a value-based investment partnership based on the works of Benjamin Graham and Warren Buffett. Sham owns none of the companies mentioned. You can reach him at shamMF@fool.com.


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