IT OFTEN SEEMS

like every hedge-fund manager is reading from the same playbook about how to look, work and behave. Neatly pressed khakis; thumbs glued to a BlackBerry; slick digs in Greenwich or Manhattan staffed by number-crunching research drones. But apparently, Mohnish Pabrai never got his copy. He wears shorts to his Southern California office, keeps e-mail to a minimum and almost never misses his 4 p.m. nap. And forget goosing returns with fancy computer models or using complex derivatives: Pabrai doesn't even sell stocks short.

About the only thing slick about this 43-year-old investor is his market-trouncing track record annualized returns of nearly 25% since he set up shop in 1999, enough to earn him a growing cult following. His "secret"? Probably the most documented investment strategy around a bare-bones, Warren Buffett style of stock picking. While that description may inspire yawns sometimes it seems like everybody claims to be a Buffett disciple Pabrai takes it to an extreme. His office houses an impressive Buffett mini-museum: a wall covered with photos and articles he's amassed over the years. He recently dropped a stunning $650,100 at a charity auction for the privilege of just one lunch with the Berkshire Hathaway guru. Even his minimalist approach to e-mail mirrors the Buffett philosophy of avoiding distractions. And his track record is more than Warren-worthy: A $100,000 investment in his flagship Pabrai Investment Fund 2 in June 2001 would have been worth $465,200 at the end of 2007; the same amount invested in the Dow, only $145,500. (The minimum investment today: $2.5 million.)

The most obvious question, of course, is how well Pabrai will fare in choppy waters. The results so far are mixed. In the second half of 2007, PIF2 lost 17% of its value, mainly due to a single bad bet. But in the last sustained market downturn, after the tech bubble, Pabrai thrived. In the down years of 2001 and 2002, he beat the S&P 500 by 50 and 19 percentage points, respectively. And in 2003, when stocks rebounded, Pabrai's picks went through the roof, returning 105%. The bottom line: In tough markets like today's, when many nervous investors are bailing out of stocks, bargain hunters like Pabrai calmly look through the rubble for good buys that could take off when conditions improve. He recently bought troubled retailer Sears, for example.

Investing, remarkably, is Pabrai's second career: A native of Mumbai, India, he earned a computer engineering degree in the U.S. and caught the Buffett bug while he was running an IT consultancy. He became a Berkshire Hathaway shareholder and made friends (some of whom became his investors) among fellow disciples at the annual meetings. "I thought I could run an experiment," says Pabrai. "'Can someone just apply Buffett's approach and actually beat the professionals?'" Starting with $1 million of his own money, Pabrai proved that the answer was yes; he now manages about $600 million.

Pabrai values companies based on hard assets and cash flow, and he buys the stocks only when they're trading at half that value or less, as what are known as 50-cent dollars. All Buffett acolytes try to do that, but Pabrai has out-Buffetted many. "He keeps it simple," says Whitney Tilson, comanager of the Tilson Focus fund. Instead of short selling or using complex trades, he just buys his best ideas typically owning only a dozen companies. He also keeps to himself, declining to talk about specific stocks even with buddies. To Pabrai such dialogue is a psychological trap that could distort his analysis. "I don't know anyone who is as independent in his thinking," Tilson says.

No strategy is perfect, obviously. Pabrai started buying mortgage lender Delta Financial in 2006, but it went bust last year, costing his funds $55 million. Pabrai admits that he failed to anticipate the ripple effects of the subprime meltdown; in fact he bought more of the stock when Delta started struggling. Such a misstep might send the average manager into an identity crisis. But Pabrai, who somehow comes across as easygoing and disciplined at the same time, is sticking to his process. We sat down with him on a sunny day this winter to talk about Delta, the virtue of patience and why he (gasp!) sold Berkshire Hathaway shares.

SmartMoney: You're the ultimate do-it-yourself investor, but you're beating the market and your peers. How?

MP: Lots of other investment managers have large teams; they have a lot more brainpower, they've got a lot more resources. The only advantage Pabrai funds have, which is why we have done better than the market, is attitude my ability to be patient and not be swayed psychologically.

SM: What about the hard-core financial analysis? Isn't the number crunching the missing piece here?

MP: I don't think so. Most people, if they really think about it, have a business or an industry or two that they understand very well. If you work in a bank, you might know about banking. People get into trouble when they work in a bank and they want to invest in Google. They are stepping outside their circle of competence. If people are patient waiting for the right price and invest only in areas that they understand, there won't be too many numbers to crunch.

SM: What are some other mistakes investors make?

MP: Using the market to tell you what a business is worth. If a stock goes from $10 to $3, most people freak out and sell out. You have to have your own internal yardstick. Sell to the market when the price is higher than what you think the business is worth, and buy when the price is lower. Another problem is that our brains are very poorly evolved to deal with the stock market.

SM: How so?

MP: Our brains are in sync with the speed at which the market is moving and totally out of sync with the speed at which a business is moving. It seems obvious: The market is repricing a company's stock very quickly. I can process very quickly; therefore, I make decisions based on that. You have to learn to dramatically slow your brain, which is very hard for most people. The reality is that you should make decisions based on how that business is changing, and that's a very slow process.

SM: How do you deal with a Delta Financial, professionally and personally?

MP: Investing is a game of probability. Sometimes when you make favorable bets, you still lose them. Even a blue chip could go to zero tomorrow. With Delta Financial, the company didn't have enough financial strength that was probably a mistake on my part. I think of it as a favorable starting blackjack hand where unfavorable cards showed up afterward.SM: If you could do it over, would you have done the same thing?

MP: The bet was good.

SM: You sold nearly all of your Berkshire Hathaway shares. Why?

MP: Sometimes we don't have a 50-cent dollar to buy. So I put the money in Berkshire Hathaway because it's better than a money market. I still think Berkshire is a great position to own long-term. In two years it will be worth $200,000. It's at $130,000 now.

SM: There is a lot of gloom and doom in the market. Are you bullish?

MP: In the Pabrai funds portfolio, there is a huge discount between what the businesses are worth and where they are trading. That's my estimate, which can be way off. But in the past when we have seen wide gaps, as in the fall of 2002, it's been a good omen. If we have a deep recession, high unemployment, things could change. But stocks start doing well even before a recession ends, so when I look at the Dow, I see a lot of value.

SM: What stocks do you like now?

MP: Pinnacle Airlines. Depending on how things work out, it's anywhere from a double to five or six times return in the next two or three years.

SM: An airline?

MP: It's a regional jet company. The large airlines, like Northwest and Delta, outsource the small planes to Pinnacle. Many of the reasons why airlines are so terrible load factors, price wars don't matter. The revenue is the same whether there is one passenger or the plane is full and whether Northwest charges $200 or $2,000 round-trip. The contracts are long-term, usually 10 years, and will hold up in the event of a merger. So you can estimate what their cash flows will be many years into the future.

SM: What's the investment case?

MP: Pinnacle has more than $10 a share in cash on the balance sheet. In the next few years, free cash flow will be $3 to $6 a share, depending on how much more business they get. With a simple 10 or 15 multiple on those numbers, you end up with $30.

SM: Why are the shares so cheap?

MP: One overhang is that they have a past-due contract with pilots. But not a lot of Wall Street analysts follow Pinnacle, and the business itself is changing. The evolution away from hub-and-spoke and toward more nonstop flights is driving demand for their services. When you connect one small city to another directly, you aren't going to run a jumbo or a 737.

SM: Pabrai is a hedge fund, but you don't short. How come?

MP: Because it's a stupid bet. The maximum you can make is double, if the stock goes to zero. The maximum you can lose is infinite. Let's say a stock is at $10, and you short it and it goes to $100. You are down about 1,000%. The extent to which the stock can go up is unlimited.

SM: As a value investor, how do you rationalize paying $650,100 for lunch with Warren Buffett?

MP: It's not an investment. It's a debt I owe Mr. Buffett. The best way to thank him for all I have learned was to support a cause he cares about. The lunch is a bonus.

SM: Any investing questions you plan to ask?

MP: Can he give me a stock tip? No, that's the only question that is out of bounds.