What is cigar butt investing?
- You buy stocks trading below their net-net value.
- The idea is to get one last puff of profit before the company fades.
- Benjamin Graham coined the term from a cigar butt found on the street.
- Buffett moved past cigar butts toward wonderful businesses at fair prices.
- You need a margin of safety because the stock can keep falling.
- This strategy works best in bear markets and after panic.
What is cigar butt investing?
Cigar butt investing is a value strategy where you buy a cheap asset selling below value. You hunt stocks at a deep discount, often a net-net under its assets. You gamble on one last puff of profit.
The image is a free ride. You find a discarded cigar on the street, damp and unwanted. It still holds one last draw. You take it for nothing and smoke that puff. The stock is the same leftover worth grabbing while it lasts.
Where does the name come from?
Benjamin Graham, the father of value investing, coined the phrase. A soggy cigar butt on the pavement has little going for it. It keeps one final puff. Graham reasoned a beaten stock could offer the same small, quick claim on value.
What exactly is a net-net?
A net-net trades below its current assets after you subtract all liabilities. Graham favored buying at two-thirds of net current asset value, or even less. The math gives you a cushion against error. You are buying dollars for less than fifty cents.
You find these names by screening balance sheets, not by reading charts. The screen flags stocks trading near their working capital. Most are small, ignored, and ugly. That plainness is what keeps the price down and the return possible.
What are the stricter ways to measure a bargain?
Net net working capital (NNWC) is the strictest screen. Cash gets its full value, but you discount receivables to 75 cents and inventory to 50 cents on the dollar. The haircut keeps you honest about what a forced sale really returns.
Net tangible assets (NTA) strip out goodwill and every intangible you cannot touch. What remains is plant, property, and cash, the pieces a liquidator can actually sell. Some screens stop at net cash alone, counting only cash above all debts, and the harsher the test the wider your margin.
Why did Buffett walk away from it?
Warren Buffett bought his early millions the cigar butt way. He later called those purchases the worst business you can sink time into. Time is the enemy of a mediocre company. A wonderful business at a fair price beats a fair one on sale, so he shifted toward quality.
What are the risks?
The last puff may never come. A stock below its assets can keep bleeding, and the value keeps shrinking while you wait. You need a margin of safety and a hard sell rule. Never bet a big slice of your money on one damp stub.
How do people run the playbook?
Walter Schloss ran it as a statistical sweep, holding about one hundred names at once and riding the law of averages. He returned 15.3 percent a year over four decades. The group carries the weight, not any single pick.
Buffett ran it concentrated in his partnership, betting bigger on fewer finds and compounding at 24.5 percent a year. Peter Cundill bought Tiffany below book value, sold within a year near 50 percent higher, and watched the buyer flip it again soon after.
When does it work best?
It works after a panic, when fear stamps the whole market down. Sellers stop distinguishing the broken from the merely unloved. That is when the deepest discounts show up. The edge is buying genuine value at a discount and holding on.
Does cigar butt investing still work today?
The easy puffs are mostly gone. Competition exploded once the strategy went public, and more buyers chasing the same cheap names pushed prices up until the edge shrank. What worked in the 1950s draws thin in a crowded field.
Information also moves faster now, so beaten-down names get spotted and bid on within hours, not months. The window a patient buyer once had has narrowed to near nothing for most investors without an edge deep enough to act first.
The assets themselves changed too. Modern firms hold intangibles like brand and patents, which do not show in a liquidation number the way factories and inventory do. A net-net built on old-fashioned book value captures less of what a business is actually worth.
So treat cigar butt investing as a rare and demanding craft, not a steady income stream. It still rewards those who screen ruthlessly and act with conviction, but the margin of safety you bought in a panicked decade is seldom handed out at today's prices.