Warren Buffett’s partner Charlie Munger once criticized Berkshire Hathaway’s early focus on what he called “cigar-butt” investing. Yet it’s a philosophy that also holds true for billboard signs. In this Billboard Mastery podcast we’re going to explore what “cigar-butt” signs actually are and their advantages and disadvantages.
Episode 133: The Good And Bad Of "Cigar-Butt" Signs Transcript
Berkshire Hathaway is Warren Buffett's publicly held conglomerate, one of the most successful investment firms of all time. And Warren Buffett has a business partner, he died a couple years ago, named Charlie Munger. And Charlie Munger was with Buffett almost the entire time of their journey, which began all the way back in the 1950s. But Munger one time told Buffett that he thought they were making a mistake in what they were investing in. And here's what he paralleled it to. He said, you're walking down the street and you see a cigar butt laying on the curb, and you light it up and you might be able to get one or two puffs out of it before it's expired and there's nothing left on it, which isn't very much. But hey, you bought it really cheap. But the problem with that form of investing is just that it's very, very short-term in nature. So he told Buffett, what we got to start doing instead of buying those cigar butt kind of deals is we need to start going in for like full cigars, like regular deals. We got to quit trying to buy the stuff that's so insanely cheap.
This is Frank Rolfe with the Billboard Mastery podcast. We're going to talk about how that lesson from Charlie Munger applies to the mobile home park industry. And the philosophy of Munger, which Buffett has stated many times, is that they decided to change the business model to buying wonderful businesses at fair prices instead of buying fair businesses at wonderful prices. So, in other words, they got out of doing these very small, short-term deals that were super duper cheap and started buying better quality stuff and a little more money. And when you talk about a cigar butt deal in the billboard arena, what are we even talking about? We're talking about, for example, an old wooden billboard. This may be lacking a permit, or it's in very poor condition, or maybe it's an eight-sheet in a bad area with a lot of blockage on it. It's the kind of things that in billboard land typically mean it's really hard to rent the ad space, or there just isn't a lot of longevity to that sign. And I once did a cigar butt deal. I found an old wooden sign, didn't have a permit, just as illegal as could be.
But I went ahead, put an ad back on it, and I lasted about 90, 120 days before the city caught me and made me tear it down. That's a typical kind of a cigar butt deal. So it didn't have a whole lot of money in it. Every day that it was running was making some money, but it was a whole lot of effort for just three or four months. So the longevity aspect of a cigar butt kind of transaction is kind of a little disappointing because you feel like you didn't get very far. And at the same time, often on a cigar butt kind of deal, the ad is one that you can only see through the trees behind the power lines on the left-hand side. And it's been given up for dead by another billboard operator because they don't even want to mess with it anymore. And you're getting it super duper cheap, but it's got this horrible, horrible obstruction or visibility problem. Renting the ad space is very, very hard. Do you spend a whole lot of time, make a lot, a lot of sales calls to get that ad sold at typically a really low price.
And even though you don't have much in the sign and the rate of return is pretty high, it still seemed like a whole lot of effort for not a lot. So how do we fix that? If you right now have been doing cigar butt billboards, how do we get out of that mode? Well, number one, typically people fall into cigar butt deals because they don't have a lot of capital. So if capital has been holding you back, maybe you need to get a capital partner, someone who can put up the cash to do bigger, better signs. So if that's what the problem is, then hey, let's go for that. If that's not the problem, if the problem isn't capital, you have plenty of capital. You just seem to be drawn towards those deals. You got to remember the long-term aspects of our industry. What makes billboards into big money is the fact that you've got a long, long-term cash flow instrument. A typical billboard in America, no one's ever done this stat, but I would say from my own experience, it typically has a lifespan of 30, 40, 50 years and up.
Their cigar butt deals don't have it. They'll never make it. They got problems, structural problems, permitting problems, ad space obsolescence. There's a lot of stuff. So maybe the problem is you got to stop thinking so short-term and start thinking a little more long-term. Remember that at the end of the movie, if you want to sell that thing, someone buying that, they're going to want to have to put a lot of lengthy debt on it to hit the kind of price you want, and they're not going to do if it's a short-term instrument. And if you want to sell to a bigger company, those bigger companies have a lot more pickiness than smaller people do. They're going to want to see a sign that has all the right things, all the right permitting, safety equipment, all that kind of stuff. Now, think of it this way. If you did 10 cigar butt signs, I don't think you would make the same amount of cash flow as one good sign over a multi-decade era. So really, when you look at the risk-adjusted and the amount of effort kind of return, and you really lay it out on paper and are honest about it, then typically you're going to find that the nicer sign, the bigger sign, the better sign, the more expensive sign is overall certainly going to be more profitable.
Now, if you're saying, well, the reason I do cigar butt billboards at this point is I'm just testing out the space just to see if I like the business. So I want to go in with a very low risk. Okay, now that one I can pretty much... I can understand. I've done that before, for sure. Particularly if it's a market you don't know a lot about, you're not sure how hard it is to rent the space. You see the opportunity to get a sign super duper cheap just to go through the exercise of talking to advertisers to see if they want to rent it. That's another deal. So if it's a learning experience, then maybe the cigar butt transaction isn't so bad. Because at the end of the movie, you're definitely going to learn something and it was a very, very cheap education. But if you're not doing it strictly for educational purposes, then it would probably improve you in 2026. If you start weighing every sign you look at, it's saying, okay, is this a cigar butt deal? What am I really trying to achieve here? Remember, rate of return is great. No question about that.
We all strive to have the highest return. Most billboard owners are demand at least a 20% cash on cash return. So hitting a 60% or 100%, it feels good. I've had billboards like that. I've had billboards where literally my rate of return on that billboard is measured by 100 or 200% annually rate of return, that's fantastic.
But that's just one number. Your rate of return is only one item on your dashboard of profitability. And it may behoove you in the new year to be looking at stuff that's a little longer lasting than just the cigar butt. This is Frank Rolfe, the Billboard Mastery Podcast. Hope you enjoyed this. Talk to you again soon.