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Buying stocks like gutter cigar butts
Buffett bought what the market treated as cats and dogs, because they were cheap. The picture is a disgusting one: you pick the butt out of the gutter, smoke it, and get three puffs for free.
Buffett's longtime partner Charlie talked him out of it. Charlie convinced Warren to look for great companies at a good price instead of any company at a great price. Most people credit that as Charlie's greatest contribution.
They probably had the highest combined IQ of any partnership in history, though of different kinds. Charlie was a classicist, a humanist, and a man of letters, while Warren was an incredible computing machine. Warren used Charlie as a sounding board and a logic checker, and when Charlie got together with friends, he mostly skipped investments, money, and companies and talked about ideas.
Where did Buffett learn cigar butt investing?
Buffett learned it from Benjamin Graham, whom he studied under at Columbia Business School and later worked for at Graham-Newman in the 1950s. Graham's method included buying stocks priced below net current asset value, meaning current assets minus all liabilities. That left the business's buildings and equipment effectively free to the buyer. Buffett used the cigar butt image in his shareholder letters to describe the approach.
How did See's Candies change Buffett's thinking?
In 1972, Blue Chip Stamps, a company in which Buffett and Charlie Munger were investors, bought See's Candies for about $25 million. See's had a strong brand and loyal customers, and it earned high profits on little invested capital. Buffett has said the purchase taught him the value of a business that can raise prices without losing customers. Berkshire Hathaway later took full ownership of Blue Chip Stamps.
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