In the good old days of fairs, carnivals and the traveling circus many of the games of chance and skill found there were played for gifts or prizes. One of the more popular prizes for the gentlemen was cigars. When a man played a game of skill such as shooting moving ducks or tossing a ring around an item in hopes of wining it for tier bride and they missed or lost the barker would often say “Close, but no cigar”
Today the term is still used and is meant to imply that you missed a reward or you received nothing for your efforts.
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