Introduction
In the vast world of investing, strategies abound- from high-growth tech stocks and blue-chip dividends to real estate and crypto. Yet, one of the most intriguing and historically effective methods remains largely underappreciated by the modern retail investor: Cigar Butt Investing.
Made famous by Benjamin Graham and adopted (at least early in his career) by Warren Buffett, cigar butt investing focuses on finding companies that are so cheap they still have “one last puff” of value left in them- just enough to generate a profit before being discarded.
In this blog, we’ll take a deep dive into this contrarian and often misunderstood approach to investing. We’ll explore what cigar butt investing is, its historical origins, how to identify cigar butt stocks, its pros and cons, and whether it still works in today’s markets.
What is Cigar Butt Investing?
The metaphor is simple yet powerful: imagine walking along a sidewalk and finding a used cigar with one last puff left. It’s not attractive, it’s not fresh, and it’s definitely not something you’d usually pick up. But if it’s free and offers one more puff, some might say it’s worth it.
In the investment world, a “cigar butt stock” is typically:
- An old or struggling company
- Trading at very low valuation multiples (e.g., P/B < 1)
- Often ignored or abandoned by the market
- Not necessarily a good long-term business
- But cheap enough to offer a short-term gain
This approach relies heavily on buying at a deep discount to intrinsic value, even if the company has poor growth prospects.
The Origins of Cigar Butt Investing
Benjamin Graham: The Father of Value Investing
Cigar butt investing finds its roots in Benjamin Graham’s teachings. In his legendary book Security Analysis (1934) and later in The Intelligent Investor (1949), Graham outlined strategies for purchasing deeply undervalued companies.
He didn’t require excellent management, amazing products, or expanding market share-just a margin of safety.
Graham focused on net-nets, companies trading for less than their net current asset value (NCAV): NCAV=Current Assets−Total Liabilities\text{NCAV} = \text{Current Assets} – \text{Total Liabilities}
If a stock traded below this figure, Graham considered it a bargain- often for good reason, but occasionally due to market inefficiencies.
Warren Buffett: A Cigar Butt Evolution
A young Warren Buffett was profoundly influenced by Graham. In fact, his early investment firm, the Buffett Partnership, used cigar butt investing almost exclusively. Buffett once said:
“If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit.”
However, as Buffett matured (especially under the influence of Charlie Munger), he moved toward purchasing “wonderful businesses at fair prices” instead of “fair businesses at wonderful prices.” Still, cigar butt investing was pivotal to his early success and is useful to study.
Characteristics of a Cigar Butt Stock
Cigar butt stocks typically share several traits:
| Attribute | Description |
|---|---|
| Low Price-to-Book (P/B) | Often below 1.0, suggesting assets are worth more than the market cap. |
| Negative Earnings or Margins | Financials may show losses or minimal profitability. |
| Declining Industry | May operate in outdated or dying sectors (e.g., print media, coal). |
| Asset-Rich, Cash-Poor | Real estate, inventory, or equipment-heavy but with weak cash flow. |
| Little to No Analyst Coverage | Overlooked by institutional investors. |
| Temporary Troubles | Sometimes punished due to temporary bad news. |
How to Identify Cigar Butt Opportunities
1. Screen for Deep Value Metrics
Look for:
- Price-to-Book (P/B) < 1
- Price-to-NCAV < 1
- EV/EBITDA < 6
- Low P/S and P/E ratios
Tools like Finviz, Screener.in (India), or platforms like GuruFocus or ValueLine can help filter these.
2. Analyze the Balance Sheet
Check for:
- Strong current assets (cash, receivables, inventory)
- Low or manageable total liabilities
- Hidden asset value (e.g., owned real estate marked at historical cost)
3. Assess Liquidation Value
In a worst-case scenario, what can the business sell for? Look at:
- Tangible assets
- Intellectual property
- Inventory or receivables recovery rate
- Book value discount rate (conservatively assume you won’t get full book value)
4. Look for Catalysts
A cigar butt with a puff is great- but a puff with a spark is even better. Catalysts can include:
- Asset sales
- Management change
- Share buybacks
- Legal wins or settlements
- Industry rebound
Famous Cigar Butt Examples
Berkshire Hathaway (Ironically)
Buffett’s most famous holding, Berkshire Hathaway itself, was initially a cigar butt textile company. He bought it cheap for its assets-eventually converting it into a holding company for better businesses.
American Express (Amex) – The Salad Oil Scandal
After the scandal in the 1960s, Amex stock plummeted. Buffett analyzed and concluded the core brand and business were intact. This was a classic cigar butt that turned into a compounder.
Washington Post
Another case where Buffett identified deep value in media assets, especially compared to the stock’s trading price.
Risks of Cigar Butt Investing
Cigar butt investing is not for the faint of heart. It involves real risk:
| Risk | Explanation |
|---|---|
| Value Traps | A stock may seem cheap but continue falling or never recover. |
| Poor Management | Weak leadership may destroy whatever value is left. |
| Illiquidity | These stocks often have low trading volumes. |
| Long Waiting Time | Market revaluation could take years-or never happen. |
| No Moat | Unlike Buffett’s later picks, cigar butts often have no competitive advantage. |
| Bankruptcy | You could lose everything if the business collapses. |
Does Cigar Butt Investing Still Work Today?
The Case For It
- Behavioral Biases Remain: Fear, overreaction, and neglect still exist in markets.
- Retail Blind Spots: Small-cap or micro-cap spaces are often inefficient.
- Global Markets: In less efficient markets like small-cap India, Southeast Asia, or Eastern Europe, opportunities abound.
- Hidden Value Exists: Asset-rich businesses are often mispriced.
The Case Against It
- Market Efficiency Has Increased: Algorithms and data access reduce pricing inefficiencies.
- Higher Transaction Costs: Buying and selling obscure stocks isn’t always cheap.
- Regulatory & Legal Complexity: Hidden liabilities can be more dangerous than before.
- No Long-Term Compounding: Cigar butts aren’t “buy and hold forever” candidates.
How to Use Cigar Butt Investing Today
1. As a Small Part of a Diversified Strategy
Use it for:
- Special situations
- Short-term arbitrage
- Event-driven trades (e.g., spin-offs, bankruptcies)
2. Focus on Global or Micro-Cap Markets
In India or emerging markets, you can still find “Graham-style” deals.
3. Combine with Catalyst Investing
Don’t just buy cheap- buy cheap with a reason for it to rise.
Famous Investors Who Used This Style
| Investor | Description |
|---|---|
| Benjamin Graham | The pioneer focused purely on balance sheet values. |
| Warren Buffett (Early) | Master of cigar butts before shifting to high-quality businesses. |
| Seth Klarman | Baupost Group; blends deep value with risk management. |
| Joel Greenblatt | Merged value with special situations like spin-offs. |
| Peter Cundill | Canadian investor known for deep-value cigar butt strategies globally. |
Final Thoughts: Is Cigar Butt Investing Right for You?
Cigar butt investing can be powerful- but it’s not glamorous. It requires:
- Patience
- Deep research
- Risk tolerance
- Ability to go against the crowd
Most investors today prefer long-term compounders with strong moats. However, if you’re willing to do the work, have a contrarian mindset, and want to look where others aren’t, cigar butt investing can offer substantial returns- especially in inefficient markets or economic downturns.
Just remember: you’re looking for that one last puff. It won’t last forever, but it might be worth the effort.
Conclusion
Cigar butt investing remains one of the most classic, misunderstood, yet insightful strategies in value investing. Whether used in pure form or blended into a broader value strategy, it teaches timeless lessons about price vs. value, margin of safety, and behavioral bias.
As Warren Buffett once said, even though cigar butts are not his preferred strategy anymore, “I made a lot of money on cigar butts.”
So perhaps it’s worth bending down to pick up one or two- if only to better understand what true value means.
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