I was reading The Essays of Warren Buffett: Lessons for Corporate America by Lawrence A. Cunningham. The section that interest me was Cigar Butts and the Institutional Imperative. Buffett has learned from past mistakes not to buy cheap, deeply valued stocks with poor economics because time would work against his investments. He learned how to buy cheap stocks from Graham, but shied away from those stocks as he learned from his mistakes.
Here are the reasons to avoid cigar butt stocks:
1. An investor is not sure when the price discrepancy will converge and as time passes, the advantage will decrease as time passes due to the poor business.
2. Cigar Butt stocks are usually troubled and as soon as one problem is solved, another one crops up.
It is better to buy a great business at a fair price than a cheap business at a favorable price. This is similar to what Fisher’s investment style.
