Reported by Joe Nocera, The New York Times, 03/03/15
Fifty years ago, a young investor named Warren Buffett took control of a failing textile company, Berkshire Hathaway. “I found myself ... invested in a terrible business about which I knew very little,” Buffett relates in his annual letter to shareholders, which was released over the weekend. “I became the dog who caught the car.”
Buffett describes his approach in those days as “cigar butt” investing; buying shares of troubled companies with underpriced stocks was “like picking up a discarded cigar butt that had one puff remaining in it,” he writes. “Though the stub might be ugly and soggy, the puff would be free.” He continues: “Most of my gains in those early years ... came from investments in mediocre companies that traded at bargain prices.
”But that approach had limits. It took Charlie Munger, the Los Angeles lawyer who has been his longtime sidekick, to show him that there was another way to win at the investing game: “Forget what you know about buying fair businesses at wonderful prices,” Munger told him. “Instead, buy wonderful businesses at fair prices.” Which is what Buffett’s been doing ever since.