Cigar Butt Investing

Cigar Butt Investing is a term used by Warren Buffett to describe a deep-value investment strategy popularized by his mentor, Ben Graham.

🚬 The Metaphor

The strategy involves looking for a "cigar butt" on the street—it's soggy, short, and generally unappealing, but it has "one free puff" left in it. Because you found it for free (or extremely cheap), that one puff is all profit.

📈 The Strategy

• Asset focus: Look for companies trading below their Net-Net value (cash and liquid assets minus all liabilities).
• The "Hiccup": Even a terrible business usually has an occasional pulse or event (like a liquidation or a small earnings beat) that allows the investor to exit at a small profit.
• Short-term: This is generally a transactional approach, not a long-term partnership.

📉 The "Cockroaches" Problem

In the 1989 Letter, Buffett explains why he abandoned this approach:

1. Never Just One: "In a difficult business, no sooner is one problem solved than another surfaces—never is there just one cockroach in the kitchen."
2. Time as the Enemy: If the business is mediocre, its low returns will quickly erode any initial "bargain" price advantage. As Buffett famously put it:

   "Time is the friend of the wonderful business, the enemy of the mediocre."

3. The Quick-Sand Effect: Excellent managers cannot save a business with terrible economics. "Good jockeys will do well on good horses, but not on broken-down nags."

🧱 The Transition

Under the influence of Charlie Munger, Buffett shifted toward a new mantra:

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

🔗 Connections

• Source: 1989 Letter
• Concept: Net-Net
• Entity: Ben Graham
• Entity: Berkshire Hathaway (The Original Mistake)