Cigar Butt Theory

In 2013, Isaac was an F1 graduate student supporting three children and a spouse who was not working. If you have been in this situation, especially being a first generation immigrant in US, then you know this is a period you are very broke. Every cent you earn goes to paying school fee or supporting extended family back at home.

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One Sunday afternoon, he was working in the garden when he decided to pause and take a rest under a sugar maple tree. He took his phone and opened YouTube. The first video he watched was a Warren Buffet video. At the end, he had learned about cigar butt theory.

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A few months later, he bought a dilapidated house in an auction. Together with the spouse, they repaired and painted the house then got a tenant to rent. The value of the house tripled and they used the equity to buy two other dilapidated houses. They went through this cycle over and over. The last time I talked with Isaac, he had about 132 houses.

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This is what Warren said concerning the Cigar Butt Theory in 1989 “If someone finds a smoldering cigar on the street, what they have found is 90% trash. But they can still get that last 10% of smoke out of it for free. The same is true of cigar butt investments. The stock may be generally a poor investment, but it can still turn a last-minute profit”

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For Isaac, dilapidated house was the cigar butt. He bought it at a low price, did value addition and earned a profit. And I think this is a genius theory especially to someone starting out without access to capital.

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Think of an asset. Can you get a cigar butt of the asset and get that last 10% value out of it or even rebuild it?