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Collection: Mohnish Pabrai - #160 'Investing Tips in Indian Stock Market'



Thank you for speaking with us. When you think about investing in India, you usually – like you started talking to management. So how do you judge whether the management is good or whether they're gross or I mean incompetent?


Yeah, that’s a good question.

So historically I never met management, you know, for most of my career as an investor, probably out of the last – you know, if you take the last 24 years including the time when I was just managing my own money, probably at least 20 of those years – 21-22 of those years – I never met managements and things worked out fine.

I didn’t think I could do that in India because I think that one of things I can almost bet on is that the typical U.S. company I might look at, if I lost money it won’t be because of fraud. I can lose money because of my stupidity but not because of fraud. So the outright fraud cases in the U.S. in public market are few and far between.

And so they’re not at least in my almost quarter century of investing, I’ve never lost money I think anywhere because of fraud, I’ve lost money many times because of stupidity but not because of fraud.

So in India, I think there is a much higher risk of fraud than there is in the U.S, so I needed to be able to kick the tires. So far I don’t think we’ve invested in anything that is fraudulent, so I think so far the filter has worked but we will find out over time.

But I think generally speaking one is, you know, you can make plenty of judgments when you meet managements. I mean I have been in the room with frauds in India. That’s kind of fun. In fact, it’s – I think it’s been a lot of great learning to be in the room with frauds because you can do try to understand kind of how they work.

But the other thing is that you can follow the cash. So I think one of the best ways to avoid fraud, so there’s a great book which I think a new edition just came out called 'Financial Shenanigans.'

I think (Howard) Schilit is the guy’s name, I’ve been in touch with the author now, I’m supposed to have a call with him in the next few weeks so looking forward to that. I think Howard Schilit is his name but I’m not sure. But anyway that’s a great book I think it does a really good job of explaining how companies can mess with you with their accounting and financial statements.

And I think in India, one of the things I look for is just follow the cash. I think if you follow the cash, I mean if you look at even in the U.S., if you look at someone or something like MCI WorldCom which was a fraud.

It would have been easy to spot if your focus on the cash because basically they were converting expenses into CAPEX, you know, so they were what were ordinary expenses were being capitalized and thus profits were being increased. But if you look for the cash, you know, what is the business producing at the end of the year after all expenses, you would just see that it was a widely different number from net income for WorldCom, for example.

So I think the 'Financial Shenanigans' book the guy is really good and I think that you can tell a lot with just the numbers and whether the cash is there or not.

You know, in some cases we have fraud in India like I think Satyam is a good example, where the guy doctored the banks statements you know. So in that case I think Deloitte was the auditor, in that particular case you won’t have caught it because the cash was a fiction, you know, what they were showing as cash on the balance sheet didn’t exist. But that’s a very rare case you know.

And – but generally you’ll find that the fraudulent guy is basically one way or another playing with debt and you know, they’re kind of – you can get to it if you just sift through the financials.



[YAPSS Takeaway]

Read 'Financial Shenanigans' by Howard Schilit.

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