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Collection: Warren Buffett - #246 'Would Cigar Butt Strategy Work Now?'



Good afternoon. My name is Martin O’Leary (PH) and I’m from Houston, Texas. My question to you is this.

In your annual report this year, in the letter to the shareholders, you indicated that it was 50 years ago that you met Benjamin Graham, and that he had a major impact in your life, especially in your investment success.

Moreover, you’ve stated in the past that “The Intelligent Investor” is, by far, the greatest book ever written on investing.

One of the central tenants in the book was that if you bought a group of stocks, say, 10 or 20, that traded at two-thirds or less than net current assets, that you would be assured of a margin of safety, coupled with a satisfactory rate of return.

Today, if you were to find 10 or 20 stocks that trade at two-thirds of net current assets, would you be inclined to purchase those stocks for your own personal portfolio, not for Berkshire Hathaway?

And the second question, since I’ve mentioned the book, I was wondering which books that you and Mr. Munger have been reading lately and would recommend. Thank you.


Yeah, in respect to your first question, you could probably — if you found a group like that — and you won’t, I don’t think — you’d probably do all right buying the group.

But not because the businesses themselves worked out that well over time, but because there would probably be a reasonable amount of corporate activity in a group like that, either in terms of the managements taking them private, or takeovers, or that sort of thing.

But those sub-working capital stocks are just almost impossible to find now. And if you got into a market where a lot of them existed, you’d probably find wonderful businesses selling a lot cheaper, too. And our inclination would be to go with a cheap, wonderful business.

I don’t think you’ll get — in a high market or something close to it — I don’t think you’ll get a lot of sub- working capital stocks anymore. There’s just too much money around to promote deals before they really get to that point.

But that was a technique. It was 50 years ago.

And is Walter Schloss here still? Walter, are you here? Stand up if you’re here.

I met Walter 50 years ago when I met Ben Graham. I know Walter’s — came out this year, but he already knows everything I’ve been talking about, so he may have left.

But Walter, actually, has practiced in securities, much closer to the original — he’s run a partnership now for 46 years, I guess it is. And he’s done it much more with the type of stocks that Ben was talking about in those days.

And he has a record that is absolutely sensational, that is far better than people who get promoted and go on television shows and do all of that sort of thing.

And he’s done it in, you know, what I tend to call cigar butt companies. You know, you get one free puff and that’s about it, but they don’t cost anything.

And that’s — that was the sub-working capital type situations. Walter’s had to extend that somewhat, but it’s been a great, great record over a considerable — I mean, 46 years — a very considerable period of time.

So I think, if you found that kind of a group and did it as a group operation, and Ben always emphasized a group operation because when you’re dealing with lousy companies but you expect a certain number to be taken over and all that, you’d better have a group of them.

Whereas if you deal with wonderful companies, you only need a couple. But I think, if you see that period again, we’ll be very active. But it won’t be in those kind of securities.



Yeah. And there’s another change. In the old days, if the business stopped working, you could take the working capital and stick it in the shareholders’ pockets.

And nowadays, as you can tell from all the restructuring charges, when things really go to hell in a bucket, somebody else owns a lot of the working capital. The whole culture has changed.

If you have a little business in France and you get tired of it, as Marks & Spencer has, the French say, “What the hell do you mean trying to take your capital back from France? There’re French workers in this business.”

And they don’t care. They don’t say, “It’s your working capital. Take it back, when the business no longer works for you." They say, “It’s our working capital.” The whole culture has changed on that one.

Not completely, but a lot from Ben Graham’s day. There’re a lot of reasons why the investment idiosyncrasies of one era don’t translate that perfectly into another.


That list that was published, I forget whether it was published in the 1951 edition of “Security Analysis” or the ’49 edition of “Intelligent Investor,” but there were a list of companies.

There was Saco-Lowell, there was Marshall-Wells, there was Cleveland Worsted Mills, there was Foster Wheeler, and all those companies were sub-working capital companies selling at three or four times earnings.

And there was a — if you bought a group of stocks like that, you were going to do well. But, you know, I — you certainly don’t see that in companies of any size today.

And I’ve seen a few lists of tech companies selling below cash. But they’re determined to use that cash. And it may not be there in a year or two.

It was a different breed of animal, to some extent, in Ben’s list at that time.


~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.


[YAPSS Takeaway]

What Charlie talks about in this video reminds me of Mohnish Pabrai mistake on Sears that Charlie helped him to realise.

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