# Buffett on "Cigar-Butt" Investing



## namelessone (Sep 28, 2012)

Buffett on "Cigar-Butt" Investing
By Reyer Barel, Tuesday, December 9, 2008, 1:15 PM | cigar butt investing, The Essays of Warren Buffett | 1 comments »

In the Essays of Warren Buffett, Warren describes some of his past investing mistakes. He notes that his first mistake was buying control of Berkshire, which at the time was involved primarily in the difficult textile manufacturing business. Warren admits that he bought the company simply because it looked cheap which was a mistake.

Buffett describes the cigar-butt style of investing as buying a company at a sufficiently low price and then waiting for a favorable "hiccup" in the companies fortunes that creates an opportunity to sell the stock at a profit. The comparison to a cigar-butt is made because the company in question usually has "one puff of smoke left". Buffett writes that "unless you are a liquidator, that kind of approach to buying businesses is foolish".

Buffett goes on to say that he had to learn the hard way, several times, to understand the principle that "time is the friend of a good business but the enemy of a mediocre business". He provides a clear example on this lesson with Hochschild, a department store company. Buffett bought the company at a large discount to book value and the deal included some hidden real estate value and a large LIFO inventory cushion. At the time Warren felt confident on the purchase, but three years later he felt fortunate to be able to exit the investment at a break-even.

Buffett comments that over 25 years, he has learned that it's best to avoid difficult business problems and not to try to solve them.


----------



## sags (May 15, 2010)

Often the answer to a viewer question to a guest on BNN results in the answer........sure you could buy the weak or battered company.......and it could have an upside..........but why not just take the money and invest in a better company?

It isn't like there is a shortage of companies to choose from.


----------



## financialuproar (Jan 26, 2010)

sags said:


> Often the answer to a viewer question to a guest on BNN results in the answer........sure you could buy the weak or battered company.......and it could have an upside..........but why not just take the money and invest in a better company?
> 
> It isn't like there is a shortage of companies to choose from.


The reason to buy the battered company is simple. Because it represents a greater potential upside than buying a company where the future already looks rosy. The big challenge is sifting through the rough for the few diamonds.


----------



## sags (May 15, 2010)

You are absolutely right, but that requires not only due diligence, but the knowledge to know where to look and how to interpret the information when you discover it.

That is far beyond the duty that most people would set for themselves, or were capable of completing....and I would have to include myself in that group. I could look at a company balance sheet all day.............and still not know exactly what all those numbers meant in the real world. I take solace in the fact that many experienced and successful investors, come to the same conclusion...........but for a different reason.

Although they have the ability to find and decipher the information in most instances, corporate accounting methods can make it almost impossible to understand what is truly going on within the company. 

And then there is some outright fraud and obfuscation to deal with.

Some people have that ability and are much more successful investors than most.........but I think the number is limited.


----------



## Rusty O'Toole (Feb 1, 2012)

Everybody knows how to make money. Buy low and sell high, right? But prices are always lowest when the outlook is most gloomy either for the individual stock or the market as a whole.

Buffet's fortune was made by shopping for bargains. Looking for beaten down stocks with a heart of gold.

One (good) example was American Express. The stock took a beating in 1963 when it was revealed that they had been defrauded of $5 million on loans they made on non existent salad oil.

http://en.wikipedia.org/wiki/Salad_Oil_Scandal

Buffet satisfied himself that the loss was not enough to seriously hurt the company and that consumer confidence in their credit cards was unimpaired.

He bought a lot of stock at a discount and waited for it to recover.

This was an example of a good stock beaten down by bad news. The cigar butt stocks are a different story. They are companies that are beaten down for a reason, but one hopes they will recover one more time before they die.

It would be like comparing a young athlete who catches the flu to an octogenarian with the same flu.


----------



## Mall Guy (Sep 14, 2011)

namelessone said:


> Buffett describes the cigar-butt style of investing as buying a company at a sufficiently low price and then waiting for a favorable "hiccup" in the companies fortunes that creates an opportunity to sell the stock at a profit. The comparison to a cigar-butt is made because the company in question usually has "one puff of smoke left". Buffett writes that "unless you are a liquidator, that kind of approach to buying businesses is foolish".


I think we call this HBC :biggrin: and they made out like bandits . . .


----------



## Jungle (Feb 17, 2010)

The cigar butt company would be like GE or TA?


----------



## namelessone (Sep 28, 2012)

The message I got from Buffett/Charlie is that it's better to pay a fair price for a superior company than pay a good price for a mediocre company that are having prolong difficult problems. Sometimes, Benjamin's value approach is misleading.

Sometimes cheap stocks are value trap. They'll trap you there for years. There's no sight of coming out. On the other hand, if you pay a fair price for good companies, you'r riding their growth for years to come. 

Which are better to own? Good companies that don't look cheap such as: Fast, SJ.TO, CNR.TO or mediocre companiese that look cheap: S.TO, ADX.TO , MFC.TO

Particularly DRX.TO, its market cap equals to current asset minus total liability. It's like getting the company for free? And you get 1.55% dividend. Sounds like a good deal but the stock is going nowhere because the industry is stagnant.


----------

