Warren Buffett started as a “cigar-butt” investor, learning from Benjamin Graham, and progressed to buying quality companies on sale as influenced by Phil Fisher and Charlie Munger. His later approach gave him the better investment success than the cigar-butt approach did.
Warren Buffett says that, “You find these well-smoked, down-to-the-nub cigars, but they’re free. You pick them up and get one free puff out of them.”1 He learned the hard way that his cigar-butt approach was a fault in an early investment decision in Berkshire Hathaway.
In 1967, Buffett bought National Indemnity Co. for Berkshire Hathaway from Jack Ringwalt.2 Berkshire Hathaway had $20 million net worth in the textile operation and was losing money every year. Buffett continued to invest money in the textile business for 20 years, hoping to turn it around, but finally shut down the textile business. If he had bought an insurance business and liquidated the textile business immediately, those actions might have added another $200 billion net worth for Berkshire Hathaway’s shareholders over the years. Buffett once said, “Our conclusion is that, with few exceptions, when management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”3
He started buying quality companies like National Indemnity and See’s Candies, and they were quite profitable for him. Those businesses generated high income ...