During his recent interview with Equitymaster, Mohnish Pabrai provides one example of how he did very well using Ben Graham’s classic mathematical games. Here’s an excerpt from the interview:
Pabrai: 2004 I ran into the steel company called IPSCO, and IPSCO was trading at about $45 a share. They had $15 a share in cash, they had no debt, and these guys were building… the kind of steel they built was tubular steel.
Kind of like what goes into pipelines. So they had an order book that went out several years and they had very visible cash flows. They had publicly stated that the next two years cash flows were $15 a share each. And so the stock is at 45 there’s 15 of cash if you take the next two years cash flow you’re going to have 45 of cash.
And the plant and equipment and everything else is free. So it’s a very cyclical business, we don’t know what the cash flows are after two years but I said I just want to buy the stock and let’s see what happens after two years.
So a year later they announced okay one more year we will have $15 a share in cash flow and by now the stock is at like 70.
And then I was thinking okay this is cyclical, maybe we should let it go, we made our money and all that, and then it gradually drifted up to about 90 and I was getting ready to sell it.
It was a double in less than two years and I woke up one day there was an announcement there’s some Swedish company was buying it for 160.
And so the stock immediately goes like 155. I don’t even wait for the deal to close. We exit and move on.
And I don’t know why that Swedish company didn’t come in two years before that when it was that 45.
This is the way the world works. So it was things like that, it was like there was no one’s interested in the steel business and whatever else and so on, so it was just kind of classic Ben Graham mathematical games and you just go from there.
You can watch the entire discussion here:
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