There are, in general, two flavors of value investing:
buy cigar butts on the cheap (wretched companies whose stocks more than discount their misery) or buy great companies at good prices.
The gist of the post seems to be that Buffett, early in his investing career, didn't just
buy cigar butts as everyone seems to think, rather his largest investments tended to be quality companies acquired at reasonable prices.
Not exact matches
That strategy, which he calls «
cigar -
butt investing,» is what led him to
buy Berkshire Hathaway (brk - a), the company he now runs, in the first place — only to watch its then - core business (textile manufacturing) die slowly until he shut it down years later.
«
Buying the stock at that price was like picking up a discarded
cigar butt that had one puff remaining in it,» Buffett recounts in his 2014 letter to Berkshire Hathaway investors.
In particular, he
buys «
cigar butts» as he prefers contrarian plays, special situations, and even some GARP plays (growth at a reasonable price).
Munger knew that value investing had to evolve since the «
cigar butt» types of businesses that Graham liked to
buy started to disappear as years passed since the Great Depression.
I agree that
buying unloved businesses at beaten down prices is a form of value investing; it's typically referred to as «
cigar butt investing» and was practiced by Buffett in his partnership days.
Warren Buffett figured this out years ago when he moved away from
buying «
cigar butts» — those statistically «cheap» stocks.
This is despite the fact that, as early as 1965 and while working under Graham, Buffett was becoming aware that the latter's strategy of
buying cheap stocks (what Graham called «
cigar -
butts», or companies selling for less than their net working capital) was not ideal, for it did not consider the quality of businesses, and just a stock's cheapness.
Buying those cheap,
cigar -
butt stocks was a snare and a delusion, and it would never work with the kinds of sums of money we have.
Other examples on mis understood quotes — Quote from Charlie Munger —
Cigar Butts vs
Buying wonderful business.
Buffett has evolved over the years, moving from a deep value «
cigar butt» investor into one that
buys great businesses at reasonable prices.
If you're a Graham - style value investor
buying a low multiple,
cigar butt stock, your two improbable, extreme outcomes are: (1) bankruptcy or (2) the company's unexpected return to high growth.
One mistake was that, by focusing on
cigar butts selling for low single - digit multiple of earnings or a low price in relation to liquidation value, I missed out
buying into higher - quality businesses like Asian Paints and Pidilite, which compounded capital at high rates of return for a long time.
I think he was interested in the compounders at an early age... and although he
bought net - nets and
cigar butts like Cleveland Worsted Mills, most of the money he made — even early on — was due to a few big winners that were for the most part — great businesses.
I guess the lesson for me is that if I'm
buying a spread of
cigar butt companies — a la Walter Schloss or Ben Graham — I'm not willing to pay a higher average earnings multiple for a basket of high ROIC companies.