Anyone consider themselves a cigar butt investor any more?

[coc]

Just curious. This is not a pissing contest on what's the "best" way to do this. Just wondering if anyone buckets themselves in that way any longer.

[Spekulatius]

Well I own $BTI so emphatically yes.

[ValueArb]

Every single position I own is a cigar butt.

[TwoCitiesCapital]

I do tend to focus on assets more than earnings - but I dunno if that alone is a "cigar butt" investor or just a traditional deep value approach. 

 

I like to buy things @ clear discounts to assets. 

 

Fairfax in 2020. 

Fairfax India from 2019 - now

Exor from 2015 - now

Fixed income CEFs in Q4 of last year

GBTC in 2021-2023

 

Etc. etc. etc.

 

All demonstrated asset plays with easily verifiable discounts to NAV and typically some sort of reasonable track record in growing it. 

 

I just feel far more comfortable holding those, and knowing when to buy/sell them, versus trying to project earnings/revenues into some distant future and then determining an appropriate discount rate back. 

 

 

[keegomaster]

9 minutes ago, TwoCitiesCapital said:

I do tend to focus on assets more than earnings - but I dunno if that alone is a "cigar butt" investor or just a traditional deep value approach. 

 

I like to buy things @ clear discounts to assets. 

 

Fairfax in 2020. 

Fairfax India from 2019 - now

Exor from 2015 - now

Fixed income CEFs in Q4 of last year

GBTC in 2021-2023

 

Etc. etc. etc.

 

All demonstrated asset plays with easily verifiable discounts to NAV and typically some sort of reasonable track record in growing it. 

 

I just feel far more comfortable holding those, and knowing when to buy/sell them, versus trying to project earnings/revenues into some distant future and then determining an appropriate discount rate back. 

 

 

Would you be willing to share names of the Fixed Income Closed End Funds you own? Haven't looked at CEFs in a long time... wondering what discount to NAV is like these days... Thanks!

 

[brobro777]

51 minutes ago, Spekulatius said:

Well I own $BTI so emphatically yes.

 

 

Hiyooooooo

 

 

[thowed]

I think it would be interesting to see if interest rates went (and stayed) higher, whether this makes cigar butt investing more practicable again.

 

It feels like Zero interest rates meant that so little was cheap enough for a classic value strategy.

[ValueArb]

11 minutes ago, thowed said:

I think it would be interesting to see if interest rates went (and stayed) higher, whether this makes cigar butt investing more practicable again.

 

It feels like Zero interest rates meant that so little was cheap enough for a classic value strategy.

 

I'm not sure this is true. I found a lot of cigar butts between 2000 and 2008, then stopped actively investing for more than a decade. Since I restarted in 2021 I have had no trouble finding lots of targets trading at well below net current assets. So clearly I missed almost the entire zero interest rate period, but it clearly didn't hold true at the end.

 

And I'm skeptical that anyone was overpaying for cigar butts during when so many were happy to overpay for profitless tech companies. We know that "value" stocks (the academic definition) in general did poorly during the entire period, so it seems likely that cigar butts would have been equally out of favor.

 

It would be an interesting back-test to count public net-nets by quarter going back to 2008 and see if there was a tendency to value them closer to their cash position that caused their numbers to decline greatly, as I might just anchored on thinking net-nets have always been unpopular so they will always be unpopular, which I have no real rational basis to assume. 

[Eldad]

24 minutes ago, thowed said:

I think it would be interesting to see if interest rates went (and stayed) higher, whether this makes cigar butt investing more practicable again.

 

It feels like Zero interest rates meant that so little was cheap enough for a classic value strategy.

Or a 30% decline. I kinda switch to cigar butt mode when it’s really bad out there. 

[Gregmal]

I’m not even sure what a cigar butt is in relation to todays investing world. Maybe merger arb? Generally I don’t have an interest in terminally declining businesses, which was always what my understanding of cigar butts was.

[bizaro86]

42 minutes ago, Gregmal said:

I’m not even sure what a cigar butt is in relation to todays investing world. Maybe merger arb? Generally I don’t have an interest in terminally declining businesses, which was always what my understanding of cigar butts was.

 

I'd say a contemporary example of a cigar butt would be a biotech firm that had its drug candidate fail and is now trading for less than the cash on the balance sheet. There have been many of these lately.

 

Anything with a decent ongoing business (which includes most merger arb) doesn't qualify as a cigar butt, imo.

[coc]

Yes good discussion. I think of a cigar butt as a business you don't love but the stock is an interesting trade based solely on valuation. One puff and gone. Truly the mirror image of the "Find quality and then pay a fair price" type attitude.

Edited January 24 by coc

[coc]

2 hours ago, ValueArb said:

Every single position I own is a cigar butt.

 

Did you land in this territory by design or by accident?

[TwoCitiesCapital]

1 hour ago, keegomaster said:

Would you be willing to share names of the Fixed Income Closed End Funds you own? Haven't looked at CEFs in a long time... wondering what discount to NAV is like these days... Thanks!

 

 

JLS was my most recent buy. ~15% discount to NAV, limited duration, and a 9-10% yield from mostly mortgage-type securities. Early evidence is NAV gap is closing via price appreciation. 

 

DLY I was a little early in buying in late 2022 and 2023. Was a 10-15% discount to NAV, but the gap closed largely by NAV coming down and not price going up. Still collecting 8-9% yields with very little price impairment. 

 

Looked at WIW and WIA which are leveraged TIPS/inflation-linked funds trading at 10-15% discounts and 7-8% yields, but never pulled the trigger. Liked mortgages a little better than I liked real yields at that point. 

 

Plenty of CEFs trade at discounts stilp, but we're entering a period where they tend to have weak seasonal performance so am waiting to see how the opportunities unfold. 

 

Edited January 24 by TwoCitiesCapital

[ValueArb]

1 hour ago, coc said:

 

Did you land in this territory by design or by accident?

 

Because Buffett's highest returns by far were when he focused on cigar butts.

[coc]

13 minutes ago, ValueArb said:

 

Because Buffett's highest returns by far were when he focused on cigar butts.

Fair enough. Have you been happy with your own returns pursuing it? (Not compared to WB - compared to your expectations.)

[dwy000]

Does this even work anymore?  It seems the value was there because very few were willing to put in the effort to page through S&P manuals or go through the balance sheets of 1000 microchips.

 

But now that anyone can run a NCAV screener or sign up to a dozen services that filter and recommend this stuff a lot of the juice is gone.  Especially when you have to find 25 of them at a time to make it work out on a portfolio basis over the longer term. 

[Intelligent_Investor]

Its very rare, most screens just turn up pages and pages of shitcos. Computers have really arbed the shit out of certain types of stocks

[ValueArb]

48 minutes ago, coc said:

Fair enough. Have you been happy with your own returns pursuing it? (Not compared to WB - compared to your expectations.)

 

My returns in 2000 to 2008 were 40% annualized. Returns in 2021 to 2022 were a bit over 20% a year. Returns last year were negative, I had lost around 3% on average over all accounts.

 

My key to generating high returns out of net-nets was always to concentrate on a handful with strong catalysts (buyout, recapitalization, large returns of capital or liquidation). Last year I focused exclusively on bio-techs for the first time, and made the mistake of proritizing the ones with highest discount to NAV instead of focusing on shareholder base and board composition. I might have gotten unlucky since I'm so concentrated and maybe that would have worked out if I bought 30+ at a time, but thats probably an excuse. The reality is I relearned the lesson that its better to have a 15% discount and a board focused on shareholder value than a 30% discount and a board focused on keeping their jobs and finding new drugs. 

[coc]

2 hours ago, dwy000 said:

Does this even work anymore?  It seems the value was there because very few were willing to put in the effort to page through S&P manuals or go through the balance sheets of 1000 microchips.

 

But now that anyone can run a NCAV screener or sign up to a dozen services that filter and recommend this stuff a lot of the juice is gone.  Especially when you have to find 25 of them at a time to make it work out on a portfolio basis over the longer term. 

 

I hear this a lot, but primarily from people who haven't tried it and aren't doing it. Thus the thread. But cigar butts =/= NCAV stocks.

 

1 hour ago, ValueArb said:

 

My returns in 2000 to 2008 were 40% annualized. Returns in 2021 to 2022 were a bit over 20% a year. Returns last year were negative, I had lost around 3% on average over all accounts.

 

My key to generating high returns out of net-nets was always to concentrate on a handful with strong catalysts (buyout, recapitalization, large returns of capital or liquidation). Last year I focused exclusively on bio-techs for the first time, and made the mistake of proritizing the ones with highest discount to NAV instead of focusing on shareholder base and board composition. I might have gotten unlucky since I'm so concentrated and maybe that would have worked out if I bought 30+ at a time, but thats probably an excuse. The reality is I relearned the lesson that its better to have a 15% discount and a board focused on shareholder value than a 30% discount and a board focused on keeping their jobs and finding new drugs. 

 

Wonderful job. Can I ask why you stopped for well over a decade if things were working so well? And how concentrated have you typically liked to be? 

Edited January 25 by coc

[TwoCitiesCapital]

4 hours ago, ValueArb said:

 

Because Buffett's highest returns by far were when he focused on cigar butts.

 

+1

 

Even Buffett said when he switched strategies that it was likely to result in lower returns and more risk/volatility. 

 

But you just can't invest tens of billions into cigar butt like stocks due to size/flow constraints and constantly turn the portfolio over. He saw the writing on the wall of compounding insurance float early on and had to come up with the "buy quality/hold forever" strategy. 

 

Buying cheap for the sake of cheap still seems to work - but the 80-90% drawdowns you can experience when doing it blindly as per quantitative screens is probably intolerable for most. 

Edited January 25 by TwoCitiesCapital

[KPO]

7 hours ago, Gregmal said:

I’m not even sure what a cigar butt is in relation to todays investing world. Maybe merger arb? Generally I don’t have an interest in terminally declining businesses, which was always what my understanding of cigar butts was.

It like seems you and I bought EBay around the same time before posting about it. It probably qualifies, although I’d argue there’s a solid base of customers that makes this one more durable than something in obvious secular decline. 

[Gregmal]

18 minutes ago, KPO said:

It like seems you and I bought EBay around the same time before posting about it. It probably qualifies, although I’d argue there’s a solid base of customers that makes this one more durable than something in obvious secular decline. 

eBay is the furthest thing from a melting ice cube. The VIC write up posted yesterday sums it up as well as any of us could have in the thread. eBay will exist a decade from now, and it doesn’t need to do anything for us to make a satisfactory return. 

[KPO]

21 minutes ago, Gregmal said:

eBay is the furthest thing from a melting ice cube. The VIC write up posted yesterday sums it up as well as any of us could have in the thread. eBay will exist a decade from now, and it doesn’t need to do anything for us to make a satisfactory return. 

Yeah, I don’t have illusions of meaningful free cash flow growth here, but I do envision per share growth driven by a stable to minimally decreasing business that repurchases shares at a rate that leads to modest FCF per share growth. 

[ValueArb]

13 hours ago, coc said:

Wonderful job. Can I ask why you stopped for well over a decade if things were working so well? And how concentrated have you typically liked to be? 

 

I started off living off a small portfolio, and as it grew so did my spending (bought an expensive house, had two kids, one who required expensive therapy when young). In 2007 I knew the housing market was set to crash but didn't have any way to short it and loved my house too much to sell. So instead I levered up (with 15 year mortgages) to take my equity out and put it into the stock market, not thinking it would crash along with real estate. So when my portfolio was down 50% at one point in 2008 I was in a ton of illiquid stocks with big spreads being forced to liquidate at well below IV to cover my monthly burn. I had no idea how long it would take to turn around and afraid I'd burn through all of it in a few years so I went back to work.

 

My goal was always five positions, but always ended up around 10 because the best ideas are reallly illiquid, you can't always get as much as you want at good prices, and can't always get out as quickly as you like when the get close to IV. So I'd usually have 3-4 favorites that i would grow as I slowly got out of others.