{"id":2861,"date":"2021-11-07T23:56:00","date_gmt":"2021-11-07T15:56:00","guid":{"rendered":"https:\/\/www.granitefirm.com\/blog\/us\/?p=2861"},"modified":"2025-05-28T09:07:16","modified_gmt":"2025-05-28T01:07:16","slug":"cigar-butt-investment","status":"publish","type":"post","link":"https:\/\/www.granitefirm.com\/blog\/us\/2021\/11\/07\/cigar-butt-investment\/","title":{"rendered":"Problems with Cigar Butt Investment"},"content":{"rendered":"\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_82_2 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #ffffff;color:#ffffff\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #ffffff;color:#ffffff\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/11\/07\/cigar-butt-investment\/#What_is_Cigar_Butt_investment\" >What is Cigar Butt investment?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/11\/07\/cigar-butt-investment\/#The_market_might_find_out_in_several_years_later\" >The market might find out in several years later<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/11\/07\/cigar-butt-investment\/#Lead_to_diversified_investment\" >Lead to diversified investment<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/11\/07\/cigar-butt-investment\/#Circle_of_competence_or_competitiveness_not_considered\" >Circle of competence or competitiveness not considered<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/11\/07\/cigar-butt-investment\/#Target_is_usually_a_small_business_with_poor_quality\" >Target is usually a small business with poor quality<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/11\/07\/cigar-butt-investment\/#Long-term_investment_not_considered\" >Long-term investment not considered<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/11\/07\/cigar-butt-investment\/#How_does_it_affect_Buffett\" >How does it affect Buffett<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/11\/07\/cigar-butt-investment\/#Mungers_opinion\" >Munger&#8217;s opinion<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/11\/07\/cigar-butt-investment\/#Related_articles\" >Related articles<\/a><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading has-medium-font-size\"><span class=\"ez-toc-section\" id=\"What_is_Cigar_Butt_investment\"><\/span><strong>What is Cigar Butt investment?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Most investors who have a little research on Buffett may know that Buffett used his own investment in the early stage of his investment career, especially during the Warren Buffett partnership that had not yet established Berkshire (ticker:s: BRK.A and BRK.B), is his mentor Graham\u2019s &#8220;Cigar Butt Investment Method&#8221; means:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Only study the company&#8217;s financial report<\/li>\n\n\n\n<li>Identify companies whose value is undervalued<\/li>\n\n\n\n<li>Doesn&#8217;t consider non-quantitative factors at all<\/li>\n\n\n\n<li>When the stock price of the target company rises above its intrinsic value, it will be sold out.<\/li>\n\n\n\n<li>Look for the next investment target<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading has-medium-font-size\"><span class=\"ez-toc-section\" id=\"The_market_might_find_out_in_several_years_later\"><\/span><strong>The market might find out in several years later<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p><a href=\"https:\/\/rbcpa.com\/\/wp-content\/uploads\/2016\/12\/1962.01.24.pdf\" target=\"_blank\" rel=\"noreferrer noopener\">In the 1961 Buffett Partnership\u2019s annual letter to shareholders<\/a>, it was mentioned that \u201csometimes the value correction will be very fast, but most of the time it takes a year or even several years to achieve. It is often difficult for us to know exactly when we buy. Know when a stock will appreciate at its current price level.&#8221; Therefore, this company must be able to survive until then, or it may go out of the market or close down before that time.<\/p>\n\n\n\n<h2 class=\"wp-block-heading has-medium-font-size\"><span class=\"ez-toc-section\" id=\"Lead_to_diversified_investment\"><\/span><strong>Lead to diversified investment<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Since only study financial reports, and must wait for the market to discover the value of the target company, in most cases you must buy many different companies to win by volume.<\/p>\n\n\n\n<h2 class=\"wp-block-heading has-medium-font-size\"><span class=\"ez-toc-section\" id=\"Circle_of_competence_or_competitiveness_not_considered\"><\/span><strong>Circle of competence or competitiveness not considered<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>In this way of investment, the main consideration is basically the margin of safety. The so-called ability circle investment is not considered at all, and the competitiveness of the company is not considered at all. There is only one simple consideration, which is cheap enough and substantially lower than the intrinsic value.<\/p>\n\n\n\n<h2 class=\"wp-block-heading has-medium-font-size\"><span class=\"ez-toc-section\" id=\"Target_is_usually_a_small_business_with_poor_quality\"><\/span><strong>Target is usually a small business with poor quality<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Just like Munger\u2019s famous saying, &#8220;High-quality, excellent companies usually have unattainable stock prices.&#8221; Most of these investment opportunities are unknown &#8220;second-rate companies, third-rate prices&#8221; or &#8220;third-rate companies, fourth-rate prices.&#8221; If you study Buffett carefully, his most famous early investment cases, Sanborn Map and Dempster Farm Tools, belong to this category.<\/p>\n\n\n\n<p>&#8220;Although the stocks we hold are cheap, the cheap price of a thing does not mean that its price will not continue to fall. When the market falls, this part of us will also fall.&#8221; Buffett in 1961 also mentioned it in the partnership&#8217;s annual letter to shareholders.<\/p>\n\n\n\n<h2 class=\"wp-block-heading has-medium-font-size\"><span class=\"ez-toc-section\" id=\"Long-term_investment_not_considered\"><\/span><strong>Long-term investment not considered<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>According to this investment method, as long as the stock price rises above the recognized intrinsic value of the company, it will be released. Long-term holdings are not considered, and of course compound interest over time is not considered. The greatest advantage of holding stocks is completely lost, and it is difficult to accumulate substantial wealth.<\/p>\n\n\n\n<p>Experienced senior investors know that small businesses with poor quality are usually the sorting targets. What&#8217;s worse is that in the long run, it is hard to escape the fate of being off the market, that is, the funds you invest may be in vain.<\/p>\n\n\n\n<h2 class=\"wp-block-heading has-medium-font-size\"><span class=\"ez-toc-section\" id=\"How_does_it_affect_Buffett\"><\/span><strong>How does it affect Buffett<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Smart readers may have thought that if Buffett had used this investment method throughout his life, it would be difficult for him to accumulate current assets, achieve current amazing achievements, and return on investment &#8212; at best, he would be just a rich man. Graham&#8217;s investment is not very successful in terms of rate of return.  Graham&#8217;s  main achievement is to establish a systematic and feasible modern investment theory.<\/p>\n\n\n\n<p>You and I all know about the subsequent development. Buffett drastically modified this set of investment methods:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Instead of simply using working capital, use discounted cash flow (DCF) and private market valuation as the margin of safety when investing.<\/li>\n\n\n\n<li>Affected by the great influence of Charlie Munger, after the real case verification of the acquisition of See&#8217;s Candies &#8212; the invisible value of non-quantitative, future growth rate of the company, long-term outlook of the company, market share, management team ability, and moat was added, as an important consideration when investing.<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"152\" height=\"96\" src=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2022\/09\/Flickr-1600x1200-5.jpg\" alt=\"Cigar Butt Investment\" class=\"wp-image-13969\" srcset=\"https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2022\/09\/Flickr-1600x1200-5.jpg 152w, https:\/\/www.granitefirm.com\/blog\/us\/wp-content\/uploads\/sites\/2\/2022\/09\/Flickr-1600x1200-5-150x96.jpg 150w\" sizes=\"auto, (max-width: 152px) 85vw, 152px\" \/><figcaption class=\"wp-element-caption\">credit: Flickr<\/figcaption><\/figure>\n\n\n\n<p>Buffett quickly discovered the problem with the cigar butt investment law. If he hadn&#8217;t adjusted it sooner, we probably wouldn&#8217;t know this guy in the investment world today because he wouldn&#8217;t have become so successful and great. &#8212; This is what makes Buffett great. You can refer to my other article &#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/04\/07\/buffett-deserves-study\/\" target=\"_blank\" rel=\"noreferrer noopener\">Why Buffett deserves further study?<\/a> &#8220;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Mungers_opinion\"><\/span>Munger&#8217;s opinion<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Munger once said: &#8220;I think Ben Graham wasn\u2019t nearly as good an investor as Warren Buffett is or even as good as I am.&nbsp; Buying those cheap, cigar-butt stocks [companies with limited potential growth selling at a fraction of what they would be worth in a takeover or liquidation] was a snare and a delusion, and it would never work with the kinds of sums of money we have.&#8221;<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Related_articles\"><\/span>Related articles<span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2025\/05\/27\/benjamin-graham-on-value-investing-grahams-bio-book\/\">&#8220;Benjamin Graham on Value Investing&#8221;, Graham&#8217;s bio book<\/a>&#8220;<\/li>\n\n\n\n<li> &#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/06\/17\/why-i-prefer-growth-stocks-instead-of-value-stocks\/\">Why I prefer growth stocks instead of value stocks?<\/a>&#8221; <\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2022\/04\/07\/buffett-deserves-study\/\" target=\"_blank\" rel=\"noreferrer noopener\">Why Buffett deserves further study?<\/a>&#8220;<\/li>\n\n\n\n<li>&#8220;<a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/06\/23\/value-investing\/\" target=\"_blank\" rel=\"noreferrer noopener\">The past and present of value investing<\/a>&#8220;<\/li>\n\n\n\n<li><a href=\"https:\/\/www.granitefirm.com\/blog\/us\/2021\/11\/07\/cigar-butt-investment\/\" target=\"_blank\" rel=\"noreferrer noopener\">&#8220;Problems with Cigar Butt Investment<\/a>&#8220;<\/li>\n<\/ul>\n\n\n\n<p><em><strong>Disclaimer<\/strong><\/em><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><em>The content of this site is the author\u2019s personal opinions and is for reference only. I am not responsible for the correctness, opinions, and immediacy of the content and information of the article. Readers must make their own judgments.<\/em><\/li>\n\n\n\n<li><em>I shall not be liable for any damages or other legal liabilities for the direct or indirect losses caused by the readers&#8217; direct or indirect reliance on and reference to the information on this site, or all the responsibilities arising therefrom, as a result of any investment behavior.<\/em><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Cigar Butt Investment. Most investors who have a little research on Buffett may know that Buffett used his own investment in the early stage of his investment career, especially during the Warren Buffett partnership that had not yet established Berkshire (ticker:s: BRK.A and BRK.B), is his mentor Graham\u2019s &#8220;Cigar Butt Investment Method&#8221; means:<\/p>\n","protected":false},"author":1,"featured_media":13969,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[32,50,15,392,36,35,397,70,84,375,11],"tags":[48,49],"class_list":["post-2861","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-value-investing","category-benjamin-graham","category-charlie-munger","category-circle-of-competence","category-concentrated-investing","category-long-term-investing","category-margin-of-safety","category-patience","category-private-equity","category-time","category-buffett","tag-brk-a","tag-brk-b"],"_links":{"self":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/2861","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/comments?post=2861"}],"version-history":[{"count":25,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/2861\/revisions"}],"predecessor-version":[{"id":36644,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/posts\/2861\/revisions\/36644"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media\/13969"}],"wp:attachment":[{"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/media?parent=2861"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/categories?post=2861"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.granitefirm.com\/blog\/us\/wp-json\/wp\/v2\/tags?post=2861"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}