Total No-Brainers (Anomaly Hunting)
Auction-driven markets accentuate mispricing — wait for the weird thing that makes no sense, then bet big.
Unlike a house (whose appraised value barely moves), auction-driven stock and bond markets swing prices far wider than intrinsic value, producing extreme over- and under-valuation. The job is to scan thousands of securities for anomalies — "weird things that make no sense" — and act only on total no-brainers. You need only one or two such ideas every few years; the rest of the time you do nothing.
- Auction markets accentuate price moves far beyond a private-market appraisal.
- Look for anomalies in both directions — extreme over- and under-valuation.
- You only need one no-brainer every 2-3 years; stop yourself from doing too much.
- Most of the job is reading and waiting, not transacting.
Level 3 overbuilt fiber; the data never came and its bonds collapsed to 18c on the dollar with a 6% coupon — a 33% running yield. Pabrai read the balance sheet, saw 4-5 years of cash to service the debt, and reasoned he'd recover his money in 3 years and still hold a $1 par claim. He put 10% of the fund in. Buffett made the same bet at the same time for the same reasons.
Level 3 Communications bonds trading at 18 cents on the dollar with a 6% coupon (a 33% running yield) and 4-5 years of cash to service debt — Pabrai put 10% of the fund in; Buffett independently made the identical bet at the same time.