Warren Buffett is undoubtedly the greatest investor of our lifetime. He’s now worth roughly $80 billion.
There’s a reason for his success. He has two rules of investing:
- Never lose money.
- Never forget rule No.1.
You can’t have an $80 billion net worth without knowing how to play the game.
He’s been at it for decades, running the Berkshire Hathaway holding company and I’m sure each and every one of us would like to emulate his successes. Surprisingly, his methods are simple: invest in things you know and hold on forever.
His holdings are no secret either, and open for public viewing. Click here to see what’s in his current portfolio.
To us mortals, we can easily invest in those same companies by buying all the same shares on our own.
Or, an easier way would be to buy into either the Berkshire Hathaway Class A (BRK.A) or Class B (BRK.B) shares.
These shares are a fund of sorts that hold all the same investments, but are broken down into Class A or Class B.
Since the Class A shares cost a whopping $300,700 a piece (as of March 25), we will focus on the Class B shares, which are a tad more reasonable at $200.60 per.
Still, buying 100 shares of the Class Bs will cost a tidy $20,600 – a layout that could be tough for any investor to swallow. So. here’s how to get those same shares for a 78.5% discount.
Your Buffett Trade Starts Right Now
I’ve written to you about Buffett before (click here), but in the vein of using put-option selling as a go-to strategy. This system is the core of my Instant Income Alert newsletter.
Today we’ll focus on how to get a direct and immediate stake in the BRK.B shares for a fraction of the cost. I will lay out how to use my one and only option-buying strategy to get four times the returns as Buffett does, while lopping off 78.5% of the cost and risk. We’ll use my DITM (deep-in-the-money) call-option buying strategy to grab a stake. (Before we get started, if you need a refresher on this strategy, you can read previous discussions here and here.)
Now, a traditional (and uninformed) investor would grab a stake the old-fashioned way – by buying 100 shares of BRK.B for $200.60 each, which would require a $20,600 outlay of cash. Or, you could be much smarter and buy one BRK.B September 2019 $160 call option for $44.20 per contract.
Since option contracts trade in $100 multiples, the purchase of this option would require an outlay of just $4,420 ($44.20 per contract x $100 multiplier).
By purchasing this call option, you’re spending $15,580 less than buying the shares outright, which equates to a fat 78.5% discount.
If Berkshire goes belly-up (God forbid!), you’ll be losing $15,580 less than every other shareholder who owns 100 shares of stock. This cuts down your risk by 78.5%, as well.
It’s a great deal!
Let’s look at the details…
This option chain is a sampling of call option contracts for BRK.B that expire in roughly six months from now.
So, for six months, you can control 100 shares of BRK.B for just $4,420.
I’ve circled the $160 strike row, which is our investment of choice.
With a bid/ask market of $43.10 bid and $45.30 ask, we can expect to buy in the middle at $44.20 per contract.
But why the $160 call options?
Delta Is the Magic Indicator
Notice in the option chain that the “Delta” column shows “.9104” for the $160 strike call option.
Delta is our secret weapon when choosing the appropriate strike to buy.
“.9104” equates to 91.04%, which means the option price will move in near lockstep with the stock price. In other words, if BRK.B moves up $1 per share, then the $160 call option should go up by roughly $0.91 per contract, and vice versa.
This is my “90% Rule” when buying call options – stick to strikes that have at least a 90% Delta or higher. This gives you bang for your buck. You’ll get 90% movement from your option purchase while still reaping the 78.5% cash outlay discount.
It’s a helluva deal!
And, the return on investment (ROI) with the call option purchase can offer quadruple what the return on the shares would be.
Let’s say BRK.B moves back up to all-time highs near $225 per share by September. The stock shares would offer a dollar gain of $24.40 per share ($225 – $200.60), and a ROI of 11.8% ($2,440/$20,600). Respectable for six months.
With BRK.B at $225, the $160 call option would be worth $65.00 per contract in September ($225 – $160). That gives a dollar gain on the call option of $20.80 per contract ($65 – $44.20) and a ROI of 47.1% ($2,080/$4,420).
That’s roughly four times better than the return on the shares.
With the call option purchase, you get:
- 78.5% cash discount.
- 78.5% less risk.
- Quadruple the returns.
Talk about having your cake and eating it too!
Buying DITM call options is extremely simple, and with the cost savings, it can allow you to spread your investable dollars over many different stocks.
Talk with your broker to see if the strategy is right for you.
Look… if you want an opportunity to succeed in the stock market, you might as well piggyback the master, for 78.5% discount to boot.
Until next time…
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