Cigar Butt Investing
Definition & Origin
Picking up cigarette butts to invest is a classic value investment method of Benjamin Graham - like picking up cigarette butts discarded by others on the ground. Although there is only the last puff left, that puff is free. Buffett used this method extensively in his early partnership days, but gradually turned to Wonderful Company at Fair Price under the influence of Charlie Munger.
Key Points
- Extremely Undervalued: Buy at a price well below net assets
- Short-term profit: Do not pursue long-term holding, sell as soon as the price recovers
- Large volume diversification: A large number of positions are needed to diversify individual stock risks
Case Studies
- Berkshire Hathaway: Ironically, Berkshire itself is Buffett’s biggest “cigarette butt stock” mistake - a declining textile company.
- Dempster Mill Manufacturing: Controlled cigarette butt stock investments during partnership period
- Dexter Shoe: The purchase of cigarette butt stocks with Berkshire stock was called the biggest mistake by Buffett
Quotes from Buffett
“Unless you’re a liquidation expert, that’s a foolish approach to buying into a business like this.” - 1989 Shareholder Letter
Related Concepts
- Wonderful Company at Fair Price — A new way to invest instead of cigarette butts
- Generals — Cigarette butt stock class during partnership period
- Benjamin Graham — Founder of Cigarette Butt Investment
Letters Mentioned
Mainly seen in retrospective discussions, Buffett explicitly announced his farewell to this approach in 1989.