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sarutobi could tell he had malice and ambition but he ignored it because oro showed so much promise and talent and he couldn't afford to let that go during war times and hoped he would change so he could be hokage after sarutobi retired/died (whichever came first)
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another reason his twised idealogy.Sarutobi could tell he still wanted to be hokage for all the wrong reasons, to gain power not to protect anyone but himself.
Even when oro was with the sannin fighting in the war and the 3 rain orphans came up to them requesting help his first respone was suggesting to kill them because it sucks to be an orphan, does that sound like something a hokage would say lol?
so yeah he saw oro was mentally not suited for hokage even as a little boy.