Cigar Butts

In 1949, Benjamin Graham published one of the most influential books about stock market buying and selling. It was called The Intelligent Investor, and it sought to demystify stock investing by breaking down the underlying principles for the general public.

The markets during the 1930s had seen wild swings after the brutal crash of 1929, followed by sudden upswings and more crashes. By the end of WWII, folks were ready to start buying again, and Graham’s book was here to help with actionable advice.

Graham’s insight was to consider each stock as a portion of the underlying business it represented, and to think like a business owner. By far Graham’s most famous student is Warren Buffett, who attributes this idea to Graham:

In the short run, the market is a voting machine but in the long run it is a weighing machine.

Graham was all about intrinsic value, and how that could vary from the actual stock price. If intrinsic value was way higher than the stock was selling for, it was time to buy. Likewise, if a stock was priced much higher than its intrinsic value, it would be prudent to sell.

I’m oversimplifying and going through this all quickly so I can get to the idea of cigar butts.

According to Buffett, Graham had observed that wealthy people walking around New York City would discard their expensive cigars, often before they had completely finished. His idea was that you could pick up this perfectly good cigar and get a few more good puffs, essentially for free.

Graham likened this to owning a dud of a business or some other assets that were so badly beaten down, their selling price was at such a silly discount as to make them easy buys.

This is the first style of investing that really resonated with me, but I don’t think I learned it from Ben Graham or Warren Buffett.

I think my education began at flea markets, where merchants peddled their wares at the widest range of prices anywhere. After finding a Transformers comic book in the trash one day, my obsession with comic collecting took off. I couldn’t find very many free comic books, but flea markets provided a chance to dig and discover some very cheap finds.

These discoveries didn’t usually provide me with the hottest comic books to collect. I wanted X-men or McFarlane Spidermans or Batman, but I would find stuff like Strawberry Shortcake or Archie Comics. I understood that there was value in the cruddiest of comics, and if I collected enough of them, I could eventually afford one that I actually wanted.

These crud comics were my cigar butts.