How

Warren Bue- Made

His First Billion Dollars

Copyright 2015 Satyajeet Mishra

All Rights Reserved

Please feel free to share this ebook whichever way you like.
But please dont change the contents when you do. Thank you!

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Purpose: This document is purely for educa=onal and informa=on purposes only. It does not make
oers to buy or sell securi=es. It does not intend to provide investment advice or research analysis.

Recommenda2ons: This document is not a personal recommenda=on. You should base your
investment decisions on your individual situa=on, nancial posi=on and objec=ves. Also consider
using such independent professional advice as you believe necessary.

Disclaimer: Satyajeet may invest in shares from =me to =me in a personal or professional capacity.

Warren Bue- is now famous for amassing immense

wealth by buying high-quality stocks and holding
them for a long =me.

We are big fans of that approach. Dont get us wrong.
But its a bit misleading. Especially if youre a
beginning investor.

Heres why: Thats not how Bue- made his very rst
billion dollars.
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When he rst began, Bue- didnt have the huge

money working for him, that he does now. In fact,
there is a li-le known secret behind how Bue- went
about making his very rst billion.

That li-le known secret is hidden inside a picture.

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Heres the picture again

Thats right. Cigar bu-s.

What is a Cigar Bu-?

Cigar bu- is a stock whose price has become very

cheap. So cheap, that it is even less than the value
of the assets that the company owns. Its like
buying a piggy bank with 100 one-rupee coins in
it, but at a price of rupees 40.

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Why Would Any Stock be

That Cheap?

A Stock Can Become Really Cheap if

The company makes a string of losses.
The business is boring and unglamorous.
Its an asset-heavy business like manufacturing,
mining, banking, insurance etc.
The industry it operates in is going through a tough
=me.
Its a li-le-known stock and is not covered by many
analysts.
There is general pessimism in the stock markets due
to a lot of nega=ve news about the economy.
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11

Why Should You Buy Cigar Bu-s?

Whats the Benet?

Inves=ng in cigar bu-s can be highly protable.

As Warren Bue- says, Buying the stock at that price (is)
like picking up a discarded cigar bu- that (has) one pu
remaining in it. Though the stub might be ugly and soggy,
the pu would be freeThe many dozens of free pus I
obtained in the 1950s made that decade by far the best of
my life for both rela=ve and absolute investment
performance. ~ Le-er to shareholders, 2014

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13

How to Value Cigar Bu-s?

Case # 1: Berkshire Hathaway

Source: Warren Bue-s le-er to shareholders, 2014

Berkshire Hathaway is an example of a cigar bu- that Warren

Bue- bought. He valued it by looking at its assets. The
balance sheet read*:

Equity & Liabili2es
Equity**

20.20

* On a per share basis. **The

debt gure was not available.

Assets

Fixed Assets

9.95

Working capital
20.20

10.25
20.20

The stock price was $7.50. Thats at a 63% discount to total

net-assets of $ 20.20 and at a 27% discount to net short-term
assets of $ 10.25.

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15

What Safety Measures Should You

Take Before Buying Cigar Bu-s?

You Should Make Sure

1. The stock price is a lot less than the value of assets on the
balance sheet. In fact, it should be less than even the short-
term assets alone.
2. The business is at least of mediocre quality. There should be
some hope of improvement in prospects. Of course, cigar
bu-s will never really be high quality businesses. But make
sure you avoid companies with absolutely no chances of
improvement.
3. The assets actually exist. If possible, do some due diligence
about the accoun=ng quality. Also check - is the
management honest?
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Should Your Pormolio be

Concentrated or Diversied?

Your pormolio of cigar bu-s should be diversied.

Thats because cigar bu-s are usually mediocre companies.
One cannot be really sure of the quality of business. A given
cigar bu- may turn out to be actually a really bad business
instead of merely mediocre. Hence you should own not one,
but several cigar bu-s. In other words, you should diversify.

If you have taken the other safety measures, then the
chances are very low that all the cigar bu-s in a diversied
pormolio will turn out to be poor stocks. Hence, at the overall
pormolio level, youll do well.
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How Long Should You Hold on

to Your Cigar Bu- Stocks?

The holding period will usually be short. To quote

Warren Bue-, Marginal businesses purchased at
cheap prices may be a-rac=ve as short-term
investments. ~ Le-er to shareholders, 2014

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When Should You Sell Your

Cigar Bu- Stocks?

As soon as something good happens (usually temporarily) in

the business, industry or economy; the news comes out and
there is a bump in the stock price.

In Warren Bue-s words, One pu remaining in it. Though
the stub might be ugly and soggy, the pu would be free.
Once that momentary pleasure was enjoyed, however, no
more could be expected. ~ Le-er to shareholders, 2014

It is important to be disciplined about this. Do not expect too
much from the cigar bu-. A mediocre company wont
miraculously turn into a great one just because we hold it.
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23

Should the Churn be High or Low

in Your Pormolio of Cigar Bu-s?

Pormolio churn will be high.

As Warren Bue- says, There it was my free pu,
just wai=ng for me, aper which I could look
elsewhere for other discarded bu-s. ~ Le-er to
shareholders, 2014

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25

At What Stage of Your Inves=ng

Career are Cigar Bu-s Useful?

In the early stages of your career. When youre just star=ng

out.

The short-term, high-churn nature of a cigar bu- pormolio
can be a real blessing when youre trying to increase the size
of your small fund. Later, with a larger fund, you have to look
at be-er quality stocks.

As Warren Bue- puts it, My cigar-bu- strategy worked
very well while I was managing small sums. But a major
weakness in this approach gradually became apparent: Cigar-
bu- inves=ng was scalable only to a point. With large sums, it
would never work well. ~ Le-er to shareholders, 2014
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Why Could Bue- Buy Many Cigar Bu-s

in the 1950s? Is it Possible Today?

Cigar Bu-s Worked in 1950s Because

There were fewer asset-light service companies. Most listed companies were in
manufacturing, mining and transporta=on with asset-heavy balance sheets.

Stock markets werent as compe==ve as they are today. Exchanges werent
electronic. There was no internet to provide quick informa=on. There were fewer
money managers. Fewer equity research analysts. Also, markets were s=ll feeling the
aper-eects of the great depression. Cigar bu- inves=ng is well-suited to bearish
markets.

It is indeed more dicult to apply the cigar bu- approach to inves=ng today.

Dicult, but not impossible. Mainly because human psychology has not changed.
There is much irra=onality s=ll in the stock markets. So if an investor is pa=ent, then
the easy access to informa=on etc. is actually a great advantage. Things are actually
easier now for such an investor. Warren Bue- made this very point in an
interac=on with students during a visit to India.
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29

Can You Buy Cigar Bu-s in India Today?

Where Would You Find Such Stocks?

Look for Indian Cigar Bu-s in

Small caps and not large caps.
Inecient, shallow pockets of the stock
market.
When markets are depressed like they were
between 2008 and 2012. Not in 2014.
Boring, unglamorous sectors. Manufacturing
companies and not in service companies like
IT or asset-light companies like FMCG.
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31

When Does the Cigar-Bu-

Inves=ng Fail?

Dicult to Apply Cigar Bu- Inves=ng if

Its an asset-light business like services, consumer
goods etc.
The company is prot making.
The industry it operates in is a hot, sunrise sector.
The business is glamorous.
Its a well-known stock and is covered by many
analysts.
In strong bull market condi=ons when there is
euphoria due to a lot of posi=ve news about the
economy.
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33

Where Can You Learn More About

Cigar Bu- Inves=ng?

 Benjamin Grahams book Security Analysis

There are 6 edi=ons of the book. Warren Bue-
himself recommends the 2nd edi=on. Buy Indian
print of the 6th edi=on because it includes the 2nd
edi=on as a sop copy and is inexpensive.

Warren Bue-s le-ers to partners

Bue- began his inves=ng career with his own
hedge fund. He ran it for 13 years. You can get 28
of the le-ers he wrote to his partners during that
=me. It is the bible for cigar bu- inves=ng in
ac=on.
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