Australian iron ore producer Fortescue (FMG AU) is a great example of how value investing often works in practice. In 2018 the stock was trading for A$4. It was cheap at spot iron ore - a mid single digit FCF multiple, even w historically high discounts on low-grade 58pc Fe (1/n)
The reason it was cheap was investors believed the increased 58pc discount was structural not cyclical, and benchmark iron ore prices of US$60-70/MT were not sustainable - Chinese demand would surely falter, and send prices down to US$40-50/MT (2/n).
I basically agreed with the market. That was also my expectation. But I decided to buy some anyway because I recognized I could be wrong, and if either iron ore prices stayed at US$60/MT or rose; OR 58pc discounts narrowed to historical levels, the stock would prove very cheap.
Meanwhile, the stock was fairly priced on the base case market expectation (mirroring my own), at perhaps a HSD FCF yield. Not many investors make an investment on the basis that they might be wrong, but I did due to (1) the asymmetry; and (2) the future being hard to predict.
So what happened? Unexpectedly, there was a Vale dam failure in Brazil, taking out several 10ms MT of supply. Chinese demand remained strong. 58pc discounts narrowed, and covid further interrupted Brazilian supply, while Chinese have stimulated infra to offset covid headwinds.