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Mohnish Pabrai: You Should AVOID These Stocks | Collection: Mohnish Pabrai #176


[Transcript]

AUDIENCE MEMBER

I found that China has many small companies listed in Hong Kong in stock market – H shares. And many of them have management issues or management problems. So my question is how do you make sure that your company and their management act to maximize the shareholders' value?


MOHNISH PABRAI

One of the things about capitalism is that many many small companies will never become big companies. They will always stay small, okay. A very small number of companies actually have something unusual that will allow them to grow because capitalism is very brutal.



Okay so like you said in Hong Kong these companies have issues, the moment they have issues we are moving on. So if the issue is with the people, I’m definitely not interested. So if you notice the Sunteck and Rain Industries, the people are very high quality. Okay, I don't have governance issues or anything with the people. They are very high-quality people.


The businesses are, you know, it is possible – now like I’ll give you the example of Sunteck, the guy who is the promoter of Sunteck he owns 68% of the company, so if it has a 1 billion dollar value, his family has 680 million in wealth in the company. So one of the question I have is he’s in India, 680 million that's a lot of money in India right?


So one of my questions is, is this guy going to still keep working hard? Right? Because it’s a lot of money, right? And I have to make the assessment and my assessment with him was yeah because I talked to him, I said listen your company is a billion dollar, do you have aspirations for it to be 10 billion? He said yes. I said what are you going to do with the money? He said I have not thought about that.


You know but he wants to drive, right? He wants to drive. Now doesn’t mean he will get there, but at least he needs to have some ambitious to go there.


The same thing with Rain I am convinced that he has zero interest in money, I think Rain the family owns 40% of about 500 million so the family has about 200 odd million today. But they don't care about that, they just want to keep going.


So yeah so I think it is true that a lot of small companies will never become big companies. It is true that if you have governance issue with the people, I think you should just take a pass because I think that then you're playing uphill battle and such. But as long as you can find the business economics are good and the people are good and the value is low then we can make something happened.


And the good thing with investing is there are so many stocks that one of my commandments was to be unreasonable. Okay there’s so many other stocks that if it’s everything is not perfect, just say no. Toss it, go to the next one, again say no, toss it... So keep tossing, be a harsh grader. And that’ll definitely work out well.


 

[YAPSS Takeaway]

Invest in companies with high quality people with proven result. Be a harsh grader.



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