====== Consolidated Cigar Holdings ======
Consolidated Cigar Holdings was an American cigar manufacturer that became a legendary case study in the world of [[value investing]]. It wasn't a holding company in the modern sense but a struggling business that perfectly illustrates the investment strategy known as [[cigar-butt investing]]. In the early 1960s, a young [[Warren Buffett]] discovered that the company was trading on the [[stock market]] for a price far below its actual worth. The business itself was in decline—fewer people were smoking cigars, and competition was fierce. However, its [[balance sheet]] told a different story. The company owned a massive inventory of high-quality tobacco, which, along with its other assets, was worth significantly more than the company's total stock market valuation. Buffett realized he could buy the company for a fraction of its [[liquidation value]], essentially getting its valuable assets for a massive discount. This investment is a cornerstone example of finding deep value where others see only a failing enterprise.
===== The 'One Free Puff' Principle =====
The Consolidated Cigar deal is the textbook example of the "cigar-butt" or "net-net" approach to investing, a method championed by Buffett's mentor, [[Benjamin Graham]]. The analogy is simple yet powerful: imagine walking down the street and finding a discarded cigar butt. It's ugly and soggy, and no one wants it, but you notice it has one good puff left in it. You can pick it up, take that final puff for free, and then toss the butt away.
In investment terms, a cigar-butt company is a business that's on its last legs. Its future prospects are bleak, and the market has written it off. However, its [[share price]] has fallen so low that it trades for less than its net current assets. An investor can theoretically buy the entire company, sell off the [[assets]], pay off all the [[liabilities]], and still be left with a tidy profit. The profit is that "one free puff." This strategy is the ultimate form of [[deep value investing]], focusing solely on the balance sheet's cold, hard numbers rather than on rosy projections about future growth.
==== Calculating the Value ====
The magic behind identifying a "cigar butt" lies in a simple calculation taught by Graham, focused on finding a company's [[net-net working capital]] (NNWC). The basic idea is:
  * NNWC = Current Assets - Total Liabilities
This formula gives you a rock-bottom estimate of a company's value. It completely ignores long-term assets like property and equipment, which add an extra layer of safety. Buffett looked at Consolidated Cigar and saw that its market capitalization (the total value of all its shares) was significantly less than its NNWC. He was essentially buying dollars for 50 cents. The investment thesis didn't depend on a brilliant turnaround; it was an arbitrage-like opportunity based on the huge gap between price and easily-sellable value. This gap is what value investors call the [[margin of safety]].
===== The Investment in Action =====
Buffett didn't just buy a few shares and hope for the best. He took an activist approach. After accumulating a significant stake in Consolidated Cigar, he gained influence over the company's decisions. His goal wasn't to revive the cigar industry but to unlock the value trapped in the company's assets.
He pushed the management to use the company's cash wisely. The key move was to sell off the large, valuable tobacco inventory. This action converted a slow-moving asset into cash. This cash, which was now "freed" from the failing business, could be used to benefit the [[shareholder]]. In a masterstroke of [[capital allocation]], Buffett used the proceeds from his Consolidated Cigar investment to fund one of his most famous and successful investments: American Express, which was then reeling from the "Salad Oil Scandal." He effectively took the "free puff" from the cigar butt and used that energy to invest in a wonderful, growing business.
===== Is Cigar-Butt Investing Still Relevant? =====
Warren Buffett himself has largely moved on from this strategy. As his investment firm, [[Berkshire Hathaway]], grew to an immense size, buying tiny, failing companies was no longer a practical way to deploy billions of dollars. His focus shifted to buying "wonderful companies at a fair price" rather than "fair companies at a wonderful price." However, for the individual investor, the cigar-butt philosophy still holds valuable lessons.
==== Where to Look Today ====
True cigar-butt opportunities are rarer in today's more efficient markets, but they haven't vanished. They tend to appear in overlooked corners of the market:
  * **[[Micro-cap stocks]]:** These tiny companies are often too small for institutional investors to bother with, leading to mispricings.
  * **Obscure Industries:** Companies in boring or hated sectors can be ignored by mainstream analysts.
  * **Market Panics:** During a market crash or a sector-specific crisis, even good companies can be sold off to cigar-butt levels.
Finding them requires a commitment to independent research and a contrarian mindset. You have to be willing to buy what everyone else is selling.
==== The Risks Involved ====
This strategy is not without significant risk. A cheap stock can always get cheaper. The primary danger is the "value trap," where a company's management burns through the remaining assets before an investor can realize any value. The company's decline might accelerate, wiping out the margin of safety. Furthermore, existing management may be incompetent or hostile to shareholders, actively preventing the liquidation or efficient use of assets. A successful cigar-butt investor needs not only sharp analytical skills but also immense patience and a stomach for volatility.