The Cigar Butt Approach

Buying cheap, selling quick

Investing Value Investing

Problem it solves

poor financial decisions

Best for

Short-term investors

Not ideal for

Long-term investors

Overview

Why this framework exists

The Cigar Butt Approach involves buying stocks at a low price with the intention of selling them quickly for a profit, regardless of the company's long-term prospects. This approach is often used by value investors who look for undervalued companies with potential for short-term gains.

Core principles

3 total

Buy low, sell high
Focus on short-term gains
Don't worry about long-term prospects

Steps

3 steps

Identify undervalued stocks
Look for stocks that are trading at a low price compared to their intrinsic value.
Pro tipUse financial ratios such as price-to-earnings to identify undervalued stocks.
WarningBe cautious of value traps, where stocks appear cheap but have underlying issues.
Buy at a low price
Purchase the stock at a price that is lower than its intrinsic value.
Pro tipUse dollar-cost averaging to reduce the impact of market volatility.
WarningBe prepared for potential losses if the stock price does not recover.
Sell quickly
Sell the stock as soon as it reaches a price that is higher than the purchase price.
Pro tipUse stop-loss orders to limit potential losses.
WarningBe cautious of selling too quickly, as this can result in missing out on potential long-term gains.

Checklist

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Identify undervalued stocks
Buy at a low price
Sell quickly
Monitor and adjust

Examples

1 cases

Berkshire Hathaway's early investments

Warren Buffett used the Cigar Butt Approach in his early investments, buying stocks at low prices and selling them quickly for a profit.

OutcomeThe approach resulted in some short-term gains, but ultimately led to a focus on long-term investing.

Common mistakes

2 traps

Focusing too much on short-term gains

The Cigar Butt Approach can lead to a focus on short-term gains, rather than long-term prospects, which can result in missing out on potential long-term growth.

Ignoring underlying issues

The approach can lead to ignoring underlying issues with the company, such as poor management or industry trends, which can result in losses.