Benjamin Graham framed the idea; Warren Buffett applied it early in his career before pivoting to higher-quality franchises.

How do I calculate NCAV?

NCAV = current assets minus total liabilities. Many cigar butt investors pay no more than two-thirds of that figure to build a margin of safety.

What is Cigar Butt Investing? And How Does it Work?

Q: What is cigar butt investing?

Buying deeply discounted companies where a final puff of value remains, usually when the stock trades below two-thirds of net current asset value.

What is the cigar butt investing approach?

Cigar butt investing targets companies priced so low that one last puff of value remains. The classic setup is a stock trading for less than the cash, receivables, and inventory left after all liabilities are paid. The phrase sticks because you are picking up a discarded cigar for a final puff.

Origin: Graham roots and Buffett's pivot

Benjamin Graham introduced buying net-nets as statistical bargains.
Warren Buffett ran the strategy early (e.g., Sanborn Map) before shifting to quality compounds under Munger's influence.
The idea remains a subset of value investing and overlaps heavily with net-net and balance-sheet strategies.

How to identify a cigar butt

Price sits below NCAV (net current asset value).
A tighter filter: price <= two-thirds of NCAV to cushion errors.
Balance sheet is asset-heavy; earnings quality often weak or cyclical.
Small caps, microcaps, and forgotten listings are typical hunting grounds.

The NCAV formula and the two-thirds rule

NCAV formula:
NCAV = Current Assets - Total Liabilities
Practical haircuts (optional but common): discount inventory and aged receivables before computing NCAV.
Two-thirds rule: Pay no more than 66 percent of NCAV to embed a margin of safety.
Quick visual cue:

NCAV bar:  |=========|  (100%)
2/3 line:  |======        (66%)
Price:     |====           (below the 2/3 line)

How cigar butt investing works in practice

1) Screen for price-to-NCAV discounts (exact-match keyword: cigar butt investing) and filter for cash-rich, low-debt names.
2) Validate the balance sheet line by line; subtract anything questionable or illiquid.
3) Check share count trends to avoid dilution that shrinks NCAV (see the shares outstanding changes table).
4) Assess catalysts: liquidation, asset sale, tender, or self-liquidation via buybacks.
5) Size small and spread bets; cigar butts are often illiquid and idiosyncratic.
6) Exit near NCAV or when the discount closes; do not wait for compounders.

Upside, downside, and liquidation math

Upside often comes from reversion to NCAV or a one-time liquidation value realization.
Downside comes from inventory markdowns, receivable write-offs, governance risk, and time decay if nothing happens.
Dilution and fresh debt can erase the remaining puff faster than price recovers.
Always model a liquidation waterfall: cash + 70-90% of receivables + 0-50% of inventory - all liabilities.

Examples and search-friendly angles

Cash box microcaps, single-product manufacturers with excess working capital, or post-spin leftovers.
Long-tail phrasing to match intent: "cigar butt strategy Buffett", "cigar butt investing example", "cigar butt NCAV rule of thumb".

Internal links and tools to speed the work

Balance-sheet cheatsheet: Net current asset value glossary entry.
Risk checks: Net-net risk checklist and dilution risk guide.
Fresh data: Interesting volume events and Short interest changes to flag sentiment or squeeze potential.
Price action context: Near-lows scanner for names under pressure.

Downsides and risks to respect

Value trap risk: bad businesses can keep burning cash, shrinking NCAV.
Dilution risk: new shares or convertibles reduce per-share NCAV.
Execution risk: liquidations are messy and slow; fees and taxes bite.
Liquidity risk: wide spreads make exits costly; size accordingly.
Governance risk: insiders may prefer survival over shareholder payouts.

Media cues (add visuals for engagement)

Insert a simple chart of Price vs NCAV vs 2/3 NCAV.
Add a liquidation waterfall diagram showing recoveries after haircuts.
A timeline graphic of Buffett's shift from cigar butts to quality can keep readers engaged.

Closing thoughts

Cigar butt investing works when you buy well below a conservatively adjusted NCAV and get paid before the assets melt away. Use the two-thirds rule, verify every line of the balance sheet, and lean on internal tools for dilution and volume tells. The last puff can be profitable, but only if you control the risks and the clock.