Introduction: The Wisdom of Charlie Munger and Ben Graham’s Cigar Butt Strategy
I was reading a library book on the bus on the ride home after picking up my teen some breakfast cereal and gaming snacks, and I came across this wisdom from Charlie Munger on Ben Graham and cigar butts. It really got me thinking. Munger was discussing how Warren Buffett, at first, used Ben Graham’s approach when it was still relevant. Especially post-Depression, people were too scared to invest in the stock market. For Buffett, like Graham, protecting himself from a total loss was a priority. In a time when fear ran high, finding opportunities to avoid losing everything was a survival mechanism.
Ben Graham’s Investment Philosophy: Safety of Margin and Cigar Butts
Now, Ben Graham was known as the father of value investing. One of the key pillars of his strategy was the “safety of margin,” a concept that is both simple and powerful. Graham’s philosophy was that you could make mistakes in your investments, but if you bought at the right price—low enough to provide a cushion—you could absorb those mistakes without catastrophic losses. This idea was invaluable after the Great Depression, where the fear of losing everything was real. It gave investors a way to protect themselves and reduce risk.
And to understand where Graham was coming from with the “safety of margin,” you need to know the personal backdrop behind it. The Great Crash and the Depression almost destroyed Ben Graham. The financial devastation he witnessed and the impact it had on him shaped his thinking, pushing him to focus on finding ways to avoid total destruction in the market. His need for a margin of safety became a direct response to the loss and uncertainty of those times, a cushion to ensure investors didn’t go bankrupt if the market took a downturn.
Another strategy that Graham developed was the “cigar butt” method. This is where the real analogy comes in: imagine picking up a half-smoked cigar off the ground. Some people will take the last few puffs, getting whatever value is left before flicking it away. In investing terms, cigar butts referred to buying distressed companies—companies that were trading at a steep discount because they were near the end of their life. The idea was to buy these companies cheaply enough so that, even if they were on the verge of liquidation, they still had a little value left to squeeze out before they were completely done.
Warren Buffett’s Early Approach: Cigar Butts and Risk Management
In Buffett’s early days, this strategy made sense. The market was recovering, and the fear of total loss was very much in the air. Companies were undervalued, and there was opportunity in those distressed assets. Warren Buffett wasn’t afraid to pick up those cigar butts. He didn’t mind taking on small, beaten-down companies if they were cheap enough to offer safety. The goal wasn’t to find the next big winner; it was to avoid big losses.
It’s like that whole concept of “cigar butts” is fascinating, right? It’s like picking up the last bits of a once-great opportunity, getting whatever’s left before it’s done. It made sense for a while, especially in the context of a post-depression market where fear ran high, and investors were just trying to protect themselves from total loss. Ben Graham’s whole margin of safety concept was a kind of armor against mistakes, giving you some cushion in a world where the risk of losing everything felt very real.
Charlie Munger’s Influence: Moving Away from the Cigar Butt Strategy
But then, Charlie Munger came into the picture. And Munger had a profound effect on Buffett’s thinking. While Graham’s approach had been focused on avoiding mistakes and minimizing risk, Munger challenged Buffett to think differently. Instead of just looking for cheap, distressed companies to avoid large losses, Munger encouraged Buffett to focus on companies with long-term growth potential.
Munger shifted the conversation from simply finding undervalued companies with limited upside to investing in businesses with enduring competitive advantages. The idea was not to just pick up the last few puffs of a dying company but to look for companies that would provide sustainable value over the long haul. Munger’s perspective was holistic: he wanted to find companies that were going to thrive for years, not just give a small return and fizzle out.
Warren Buffett’s Strategic Shift: From Cigar Butts to Wonderful Companies at Fair Prices
This shift in strategy completely changed Buffett’s approach. Instead of focusing on distressed companies with little growth potential, he began to search for high-quality companies with solid management, competitive advantages, and strong potential for long-term growth. It’s clear that this shift came from Charlie Munger’s influence. Buffett started investing in companies like Coca-Cola, where he could buy into a solid, established business at a reasonable price and hold it for decades. This was no longer about finding quick, small wins—it was about finding wonderful businesses and holding them for the long term.
Buffett’s focus on “wonderful businesses at fair prices” was a huge turning point. The companies he began to focus on weren’t just undervalued—they were built for the long-term. They had strong brands, competitive advantages, and the ability to keep growing, even when the market was uncertain.
Berkshire Hathaway Today: The Cigar Butt Strategy No Longer Fits
Charlie Munger’s point about how these “cigar butt” strategies don’t work for Berkshire Hathaway today is also insightful. The scale at which they operate today doesn’t leave much room for these small, distressed opportunities. You can’t take a small, undervalued company and transform it into huge returns when you have billions to deploy. Instead, they focus on finding companies with durable competitive advantages, ( Buffett refers to these as moats) strong management, and a proven ability to generate consistent growth over the long term. They’re looking for businesses that can continue to grow and thrive, not just companies that offer a bit of value before they burn out.
It’s a great reminder of how much the market changes, and how strategies that work in one era might not make sense in another. What was once a survival mechanism—finding those cigar butts—has evolved into a more sophisticated and strategic approach with Berkshire. Today, it’s all about the efficiency of capital, finding businesses that will not only have value today but will continue to grow for years to come.
Warren Buffett’s Wealth: The Long Game Pays Off
Overall, Munger encouraged Buffett to think long-term. Invest in companies with strong competitive advantages, and hold them for years or decades. This was the growth machine to Buffett’s wealth. It wasn’t about quick wins. It was about playing the long game. It was about finding businesses that would compound wealth over time. Companies like Coca-Cola, American Express, and See’s Candies are prime examples of this approach paying off. By holding onto them for decades, Buffett was able to reap the benefits of their growth and their dividends.
The real wealth for Buffett came from embracing this long-term perspective. Instead of trying to chase after short-term opportunities, he focused on finding great companies and holding them for the long haul. This approach created lasting value, and it’s what made Berkshire Hathaway one of the most successful investment firms in history.
Conclusion: The Evolution of Buffett’s Strategy and the Power of Long-Term Investing
In the end, the evolution of Warren Buffett’s investment strategy shows just how much investing philosophy can shift as time goes on. From picking up cigar butts to looking for businesses that will generate value for decades, Buffett’s approach matured and grew as he learned from his experiences and from Charlie Munger’s influence.
It’s a lesson in how to think about investing not just for short-term profits but for long-term value. Whether you’re investing in stocks, real estate, or your own business, the core lesson is the same: look for things that will last. Find companies—or opportunities—that will continue to grow, generate value, and compound over time. And remember, as Buffett and Munger show us, the real power of investing lies in playing the long game.
P.S. its also a great lesson in forming great partnerships.
The Broke College Student 
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