Mohnish Pabrai: Why Debt-Free Companies Are the Best Investment Choice

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During this presentation at The University of Nebraska, Mohnish Pabrai discusses his investment philosophy, emphasizing the importance of staying within one’s circle of competence. He mentions past investments in Maotai, Alibaba, and Tencent, noting their mixed results.

Pabrai advocates for businesses that operate with zero debt, citing Berkshire Hathaway as a gold standard due to its cash reserves and avoidance of leverage. He highlights the fragility of businesses and the importance of resilience to withstand economic challenges.

Pabrai believes in high returns on equity without using leverage and criticizes borrowing money for stock buybacks, emphasizing the need for prudent management.

Here’s an excerpt from the presentation:

Pabrai: Regarding China, most of it would be outside my circle of competence. I can’t do much about that. To the extent that things are within my circle of competence, I can look at them. I used to have an investment a few years back in Maotai, which I should never have sold, but that’s the way it is.

I also had investments in Alibaba and Tencent, which we don’t have anymore. They didn’t work for us at the time we invested. Most of China is outside of what I can do because of my range of understanding.

The best businesses are ones that have no debt. I think there’s a lot to be said for businesses that operate with zero debt. I’m not a proponent of a company borrowing money and doing buybacks.

Many companies do that, but the gold standard is Berkshire Hathaway. Warren and Charlie have said many times that they could have introduced modest leverage and increased their results even more, but they never went there. In fact, if you look at Berkshire, it’s overloaded with cash.

Businesses are very fragile. Very few businesses that are around today, even large dominant businesses, will be around 50 or 30 years from now. One reason that businesses don’t last is they lack the ability to withstand heavy storms.

All businesses will face headwinds.

The more you can do to build resilience, the better. Most management teams don’t fully think that way. If they studied Berkshire Hathaway and some truly great businesses, they’d see that a hallmark of a great business is high returns on equity with no use of leverage.

That’s a classic definition of a great business. I’m not a proponent of borrowing money to buy back shares.

You can watch the entire presentation here:

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