Warren Buffett has long discussed “cigar butt” investing and how it contrasts with his favorite: “value investing”. However, there is much to like about “cigar butt” investing. In this Billboard Mastery podcast we’re going to review Buffett’s concept and why billboards offer a great entry into that type of high return/low cost investing.
Episode 86: The Joy Of Cigar Butts Transcript
Warren Buffet is thought to be the greatest investor in American history, he has certainly had the highest rates of return for the longest time, and when Warren Buffett talks about investing, people take it very seriously. Now, he talks often just off the cuff, he talks and gives speeches, and sometimes he writes his thoughts in his letter to shareholders. And in one of those letters to shareholders, he had a thought that he called cigar butt investing. And the question is, how does that relate to the billboard industry? And in fact, there are many parallels. This is Frank Rolfe with the Billboard Mastery Podcast. We're talking about Warren Buffet's concept of cigar butt investing and how it applies to signs. So here's the quote, the quote is, "A cigar butt found on the street, that only has one puff left in it may not offer much of a smoke, but the bargain purchase price will make that puff all profit."
So what did Warren Buffet mean by that? He meant that sometimes you find deals that are very, very inexpensive to get involved in, that have a high, super high rate of return, and though it may not be a giant amount of money, and it may not last for centuries, it's still based on what you put down, very, very appealing. And when I read that quote and I think about how it applies to billboards, it immediately comes to mind, those billboard opportunities that don't cost very much money, but have a really, really high yield. Now, the first type of billboard, and I'm a huge fan of this type of billboard that you can get in so inexpensively and has very, very amazing rates of return and long-lasting residual income, is a good old-fashioned wooden billboard. This is a billboard made of telephone poles, 2x4 stringers and plywood sheets, and it's the old original. It's exactly what all billboards looked like up until the advent of steel, so every billboard in America from the 1920s all the way to the 1950s and '60s was made out of old wooden telephone poles for the most part, and these are very inexpensive signs to build even today, you can build a wooden telephone pole billboard in most, any market for probably around $5000. Now, what do you do with that?
Well, a wooden telephone pole billboard, even though it's made of wood has a very, very long shelf life, I have myself bought billboards made of wood that were at least half a century old, still standing, still working fine, and you can rent a sign like that, typically add in more of a ex-urban market outside the initial city urban or even suburban centers. You can rent those things for typically a couple hundred dollars a month per side, and maybe you pay your lot rent of let's say, 20% of that revenue and you don't have any cost 'cause they typically are not lighted and they don't require much. And you only rent them typically one time a year. So you can make on a sign like that, probably about $3000 a year of net income on a $5000 investment, that means it only takes you two years to get all your money back, and then every year thereafter for however many years it stands, and you keep it rented, that all basically goes in your pocket. So that's definitely cigar butt investing. And then you've got those eight-sheet signs turned across America, little metal mono-pole signs that are very, very small.
Typically about 5x12 feet in size, and those little billboards, which were built back in the 1970s to advertise liquor and tobacco, typically in urban centers, you can buy those signs abandoned on properties for typically around $1000, then you could bring that back to life and you can rent that kind of a sign because of its location for probably $200-300 a month per side, and you take out your lot rent and basically you're right back to the same spot, you're probably making about $3000 a year, again, off an investment, even buying the sign and putting up the vinyls, probably have maybe a $2000 or $3000. So you get all your money back in a year, and then thereafter that's profit. And then don't forget about all those abandoned signs, you see them frequently on highways across America, people built them in the olden days, then they lost track, they die, they lost interest, and you can often go to the property owner on those signs, order the original builder and buy them and bring them back into service, and typically you're not spending a huge amount of money on that.
I once found a wooden telephone pole sign out on Highway 75 in Dallas, just sitting there in complete abandonment, I brought it back to life. And that sign, which only cost me a few thousand dollars to get back into business ultimately was making about $20,000 a year, that's how high the rents were. So that's cigar butt investing at its finest. And then don't forget about wallscapes, you can mount a billboard in any old kind of masonry wall, it could be brick, it could be concrete, it could be wood. And as long as the permits allow, you can put an ad directly on that, saves you the middle man of putting up any poles to mount to ad on. And so those signs are very inexpensive because you don't have any infrastructure, so you can build a sign like that, which basically is just mounting stainless steel hooks to the wall to put some vinyl on to, and you can build those things for, again, just a few thousand dollars. And huge rate of return based on the select market, but let's just say it makes three grand, four grand, a year, you probably get all your money back in less than a year, and then on ad infinitum.
And then of course, you have this concept of putting together billboard leases and permits and selling them to other billboard companies, so you don't have any cost out of pocket at all, that's probably the best form of cigar butt investing because you have almost no money in it. Then so you have a high, super high rate of return for the amount you've invested. The bottom line to it all is there's nothing wrong with cigar butt investing, not at all. Now, Warren buffet segued over time into what he calls value investing, but the problem with value investing is it's very expensive and the rates of return are much, much lower. So if it were me and I'm looking between value investing and cigar butt, I think I might wanna go with the cigar butt particularly when you're starting out. Now, cigar butt investing does have its limitations, again, the streams of income are not normally staggering, but of course you can fix that through scale. So if you had 10 billboards and each made $4000 a year, that's 40,000 a year, I think that's a very significant sum to anybody.
So a lot of times it's just what you look in your optics and your perception of what's going on, and for many people, cigar butt investing is the way to go, particularly if you have a limited capital or you're just starting out, just trying to experiment in the space, rather than go ahead and build a giant mono-pole sign and spend $60,000 or $100,000 on it, why not just get to the same ending through cigar butt opportunities? Cases where you can spend just a little bit of money and get a long-lasting return. This is Frank Rolfe, Billboard Mastery Podcast. I hope you enjoyed this. Talk to you again soon.