Post by oldman on Oct 19, 2013 8:37:55 GMT 7
Yes, in the past, I did use the cigar butt investing method made famous by Benjamin Graham. Basically, after you have smoked a cigar, the butt remains. Like a cigar, some companies did well in the past and they were shining bright before. But changes in the industries may have caused their businesses to sunset and hence, their 'star' does not shine brightly anymore. What is left is the cigar butt ... remnants of a once thriving company. However, most of these companies still have solid assets though their businesses are in decline.
If you look at the 2 companies that I have shared that are in my portfolio, you will realise that Powermatic Data Systems is a solid company with solid earnings. They are in the high tech networking industry and produce many of the latest networking devices that are in use today. Isetan is in the retail business and they too are leaders in their industry and are doing well financially. Though these companies have more assets than their market capitalisation, I would not consider these as cigar butt type companies.
However, General Magnetics is a cigar butt investment that I made a few years ago. This company was in the manufacturing of DVDs which we all know is a sunset industry. The reason I use 'was' is because at the last AGM, they announced that they are in the final process of withdrawing from this business. With cigar butt companies, my hope is that they will transform themselves and I think that General Magnetics is heading in the right direction, though the delisting has put some brakes on its effort to transform.
Whether it is a cigar butt investment or not, minority shareholders will still not have any control over any of the assets. The interests of the controlling shareholders will still not be totally aligned. The 'bird' will still not be in our hands. The cash and properties may still not be put to the most efficient use, or worse, being misused. Over the years, cash may be poorly invested or worse, squandered.
Yes, the sad truth about any investment, cigar butt or not, is that as minority shareholders, we will not have any control over how the assets are used or misused. This is the risk that all investors take. This is why, to reduce this risk, I like to buy companies with assets at a significant discount.
Nowadays, I prefer buying companies with sound businesses than cigar butt companies which I have bought in the past as I realise that the transformation of any cigar butt company can take ages to materialise. Saying that, having one or two such companies in your portfolio may also prove exciting as company transformations can also have a positive transforming effect on the value of one's portfolio ... if you pick the right one and have time on your hands.
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"Hi Michael, your way of obtaining margin of safety is via cash and properties, i.e. assets owned by the company. You place lesser weight to earnings power and the quality of business. One may classify such an approach as cigar butt investing (as coined by Buffett). One of the greatest concerns I have about cigar butts, is that minority investors have no control over the assets. The “bird” is not in our hands, so to speak. Where the interest of the controlling shareholder and us (minority s/h) is not aligned, which is very often the case, it is not difficult to imagine scenarios where the cash and properties are not put to most efficient use, or worse, being misused. And if the business is not one with attractive characteristics, it is also more likely that over the years, cash may be poorly invested, or worse, squandered. I am sure you are aware of such risks. From my reading of the Intelligent Investor, Graham operates in similar manner as you, except that he diversifies greatly. I believe broad diversification helps for cigar butts."
If you look at the 2 companies that I have shared that are in my portfolio, you will realise that Powermatic Data Systems is a solid company with solid earnings. They are in the high tech networking industry and produce many of the latest networking devices that are in use today. Isetan is in the retail business and they too are leaders in their industry and are doing well financially. Though these companies have more assets than their market capitalisation, I would not consider these as cigar butt type companies.
However, General Magnetics is a cigar butt investment that I made a few years ago. This company was in the manufacturing of DVDs which we all know is a sunset industry. The reason I use 'was' is because at the last AGM, they announced that they are in the final process of withdrawing from this business. With cigar butt companies, my hope is that they will transform themselves and I think that General Magnetics is heading in the right direction, though the delisting has put some brakes on its effort to transform.
Whether it is a cigar butt investment or not, minority shareholders will still not have any control over any of the assets. The interests of the controlling shareholders will still not be totally aligned. The 'bird' will still not be in our hands. The cash and properties may still not be put to the most efficient use, or worse, being misused. Over the years, cash may be poorly invested or worse, squandered.
Yes, the sad truth about any investment, cigar butt or not, is that as minority shareholders, we will not have any control over how the assets are used or misused. This is the risk that all investors take. This is why, to reduce this risk, I like to buy companies with assets at a significant discount.
Nowadays, I prefer buying companies with sound businesses than cigar butt companies which I have bought in the past as I realise that the transformation of any cigar butt company can take ages to materialise. Saying that, having one or two such companies in your portfolio may also prove exciting as company transformations can also have a positive transforming effect on the value of one's portfolio ... if you pick the right one and have time on your hands.
----------------
"Hi Michael, your way of obtaining margin of safety is via cash and properties, i.e. assets owned by the company. You place lesser weight to earnings power and the quality of business. One may classify such an approach as cigar butt investing (as coined by Buffett). One of the greatest concerns I have about cigar butts, is that minority investors have no control over the assets. The “bird” is not in our hands, so to speak. Where the interest of the controlling shareholder and us (minority s/h) is not aligned, which is very often the case, it is not difficult to imagine scenarios where the cash and properties are not put to most efficient use, or worse, being misused. And if the business is not one with attractive characteristics, it is also more likely that over the years, cash may be poorly invested, or worse, squandered. I am sure you are aware of such risks. From my reading of the Intelligent Investor, Graham operates in similar manner as you, except that he diversifies greatly. I believe broad diversification helps for cigar butts."
