Buffet's view on NCAV "cigar butts"

Hello Serenity,

I've been reading Buffet's 1989 annual letter and noticed that his tone seems to contradict some of the thing's he said in Superinvestors. Would definitely like to hear your insights on how to properly follow Graham's and Buffets principles. Do I look at NCAVs as a philosophy that is sustainable or is it something that really only works sometimes as Buffet said "that kind of approach to buying businesses is foolish".

For example From Superinvestors:

"One sidelight here: it is extraordinary to me that the idea of buying dollar bills for 40 cents takes immediately with people or it doesn’t take at all. It’s like an inoculation. If it doesn’t grab a person right away, I find that you can talk to him for years and show him records, and it doesn’t make any difference. They just don’t seem able to grasp the concept, simple as it is."
" I have never been able to figure out why it’s riskier to buy $400 million worth of properties for $40 million than $80 million. And, as a matter of fact, if you buy a group of such securities and you know anything at all about business valuation, there is essentially no risk in buying $400 million for $80 million, particularly if you do it by buying ten $40 million piles for $8 million each. "

For example from the annual letter:

My first mistake, of course, was in buying control of
Berkshire. Though I knew its business - textile manufacturing -
to be unpromising, I was enticed to buy because the price looked
cheap. Stock purchases of that kind had proved reasonably
rewarding in my early years, though by the time Berkshire came
along in 1965 I was becoming aware that the strategy was not

If you buy a stock at a sufficiently low price, there will
usually be some hiccup in the fortunes of the business that gives
you a chance to unload at a decent profit, even though the long-
term performance of the business may be terrible. I call this the
"cigar butt" approach to investing. A cigar butt found on the
street that has only one puff left in it may not offer much of a
smoke, but the "bargain purchase" will make that puff all profit.

Unless you are a liquidator, that kind of approach to buying
businesses is foolish. First, the original "bargain" price
probably will not turn out to be such a steal after all. In a
difficult business, no sooner is one problem solved than another
surfaces - never is there just one cockroach in the kitchen.
Second, any initial advantage you secure will be quickly eroded
by the low return that the business earns. For example, if you
buy a business for $8 million that can be sold or liquidated for
$10 million and promptly take either course, you can realize a
high return. But the investment will disappoint if the business
is sold for $10 million in ten years and in the interim has
annually earned and distributed only a few percent on cost. Time
is the friend of the wonderful business, the enemy of the

You might think this principle is obvious, but I had to
learn it the hard way - in fact, I had to learn it several times
over. Shortly after purchasing Berkshire, I acquired a Baltimore
department store, Hochschild Kohn, buying through a company
called Diversified Retailing that later merged with Berkshire. I
bought at a substantial discount from book value, the people were
first-class, and the deal included some extras - unrecorded real
estate values and a significant LIFO inventory cushion. How could
I miss? So-o-o - three years later I was lucky to sell the
business for about what I had paid. After ending our corporate
marriage to Hochschild Kohn, I had memories like those of the
husband in the country song, "My Wife Ran Away With My Best
Friend and I Still Miss Him a Lot."

I could give you other personal examples of "bargain-
purchase" folly but I'm sure you get the picture: It's far
better to buy a wonderful company at a fair price than a fair
company at a wonderful price. Charlie understood this early; I
was a slow learner. But now, when buying companies or common
stocks, we look for first-class businesses accompanied by first-
class managements.

Dear Gambit,

Thank you for your forum post!
Buffett appears to have evolved over the years, from being a cigar-butt bargain hunter to following Graham's Value Investing principles in their entirety.

Serenity's article - Is Warren Buffett A Value Investor? - discusses the topic in greater detail.

Graham Resources