======Coal Tar======
Coal tar is a thick, dark liquid byproduct created when coal is heated in the absence of air to produce [[coke]] (a fuel for steelmaking) and coal gas. Think of it as the "gunk" left over from the industrial process. For much of the 19th and 20th centuries, this seemingly worthless sludge was the foundation of the modern organic chemical industry. It was a treasure trove of molecules used to create everything from the first synthetic dyes and aspirin to explosives and perfumes. For investors, coal tar is less about the substance itself and more about the powerful investment story it represents. Companies in this industry became a textbook example of what [[Benjamin Graham]], the father of [[value investing]], called a "[[cigar butt]]"—an unloved, discarded business that still has a few profitable puffs left in it. While you're unlikely to invest in a pure-play coal tar company today, its history offers timeless lessons on finding value in the most unexpected and unfashionable corners of the market.
===== The Coal Tar Business Model: A Historical Snapshot =====
Imagine you're running a business that makes high-quality fuel for the steel industry. Your primary product is coke. But the process also creates a massive amount of smelly, black tar. Initially, getting rid of this tar is a costly headache. Then, chemists discover that this "waste" is actually a goldmine of valuable chemicals. Suddenly, your waste disposal problem transforms into a highly profitable second business. This was the magic of the coal tar industry. Companies that coked coal for steel mills could sell the resulting tar to chemical companies, which would distill it into valuable compounds like benzene, toluene, and naphthalene. This created an incredibly efficient business model where a cost center became a profit center, generating cash flow from a product that was essentially free. It's a classic case of turning lemons into lemonade, or more accurately, sludge into stock market profits.
===== A Classic "Cigar Butt" Investment =====
The story of coal tar is the perfect illustration of cigar butt investing. The concept, famously described by [[Warren Buffett]] (crediting his mentor Graham), is simple: "A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the 'buy' was a bargain." As the chemical industry evolved and began sourcing raw materials from petroleum, the traditional coal tar business went into a long, slow decline. The market, always obsessed with growth, wrote these companies off as dinosaurs and priced their stocks for extinction.
This is where sharp value investors stepped in. They saw that even in decline, these companies possessed remarkable assets the market was ignoring:
  * **Hidden Cash:** Many had years of accumulated profits sitting on their [[balance sheet]]s.
  * **Valuable Real Estate:** They often owned the land their industrial plants sat on, which was sometimes worth more than the entire company's [[market capitalization]].
  * **Rock-Bottom Valuation:** The key was that these companies often traded for far less than their [[net current asset value]] (NCAV)—essentially, you could buy the company for less than the value of its cash and easily sellable assets after paying off all its debts. For Graham, this was the ultimate [[margin of safety]]. You were buying a dollar for 50 cents, and the struggling business was thrown in for free.
===== Lessons for the Modern Value Investor =====
While the glory days of coal tar are over, the principles behind its investment case are as relevant as ever. Here’s how to apply them today.
==== Look for Value in Unfashionable Industries ====
The market loves shiny new things—tech, AI, green energy. It often overlooks boring, old-economy businesses. This is where you can find bargains. Look for companies in industries that are mature, out of favor, or in a slow, predictable decline. These "dinosaurs" are often neglected by analysts, creating opportunities for diligent investors who are willing to do the homework. The key is to distinguish a cheap business from a business that is cheap for a good reason.
==== Turn Over the Rocks ====
The real value in coal tar companies wasn't their declining primary business; it was the hidden assets on their balance sheets. Modern investors must adopt the same forensic mindset.
  - **Read the footnotes:** Don't just look at the income statement. Dig into the annual report. Does the company own valuable real estate carried at a historical cost from decades ago?
  - **Analyze subsidiaries:** Does a struggling parent company own a small but highly profitable and growing subsidiary that the market is ignoring?
  - **Consider intellectual property:** Does the company hold valuable patents, brands, or licenses that aren't fully reflected in its stock price?
==== Be Wary of Value Traps ====
The "cigar butt" approach is not without its risks. A cheap stock can always get cheaper. A company in decline might burn through its cash and assets before you see a return. This is what's known as a [[value trap]]. To avoid this, always insist on a deep margin of safety. You aren't just looking for a cheap company; you're looking for a company so cheap that even if the business continues to deteriorate, the underlying assets provide a floor for your investment. As Graham taught, the goal is not to predict the future but to buy so cheaply that you don't need to.