Want A Piece Of Warren Buffett? Here's Your Best Shot...
Warren Buffett is undoubtedly the greatest investor of our lifetime, as he is now worth roughly $80 billion.
There's a reason for his success, as his two rules of investing are:
1. Never lose money
2. Never forget Rule #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 success.
But his methods are surprisingly 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 $309,217 a piece (as of July 19), we will focus on the Class B shares which are a tad more reasonable at $205.97 per.
Here's a current chart.
Still, buying 100 shares of the Class B's will cost a tidy $20,597 - a layout that could be tough for any investor to swallow.
Here's how to get those same shares for 81% off.
Your Buffett Trade Starts Right Now
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 81% of the cost and risk.
My DITM (deep-in-the-money) call-option buying strategy is the key to this trade, as it takes a bullish bias and offers something amazing.
Now, a traditional (and uninformed) investor would grab a stake the old fashioned way - by buying 100 shares of BRK.B for $205.97 each, which would require a $20,597 outlay of cash.
Or, one could be much smarter and look at buying 1 BRK.B January 2020 $170 call option for $39.35 per contract (example only!).
Since option contracts trade in $100 multiples, the purchase of this option would require an outlay of just $3,935 ($39.35 per contract x $100 multiplier).
By purchasing this call option, an investor is spending $16,662 less than buying the shares outright, which equates to a fat 81% discount.
If Berkshire goes belly-up (god forbid!), the loss would be $16,662 smaller than every shareholder who owns 100 shares of stock. This cuts down your risk by 81%.
It's a great deal!
If you want to read an even more in-depth discussion of the DITM strategy and how it pertains to Warren Buffett, click here for the 30-page report.
The option chain above is a sampling of call option contracts for BRK.B that expire in roughly six months from now (1/17/2020).
Buying call options can be used as a surrogate for buying the stock shares. Using my DITM strategy is much smarter though, because for the next six months, you can control 100 shares of BRK.B for just $3,935.
I've circled the $170 strike row which is our investment of choice.
With a bid/ask market of $39.00 bid and $39.65 ask, an investor can expect to buy in the middle at $39.35 per contract.
As mentioned above, with the $100 option multiplier, the cash outlay to buy this call option would be $3,935.
But why the $170 call options?
Delta Is The Magic Indicator
You'll also notice in the option chain that the "Delta" column is showing .9036 for the $170 strike call option.
Delta is our secret weapon when choosing the appropriate strike to buy.
.9036 equates to 90.36%, which means the option price will move in lockstep with the stock price to the tune of 90.36% correlation.
In other words, if BRK.B moves up $1 per share in price, then the $170 call option should go up by roughly $.90 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 knowing that when the stock moves, so will the option.
You'll get 90% movement from the option purchase while still reaping the 81% 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.
Quadruple Your Money
Let's say BRK.B moves back up to all-time highs near $225 per share by January 2020.
The stock shares would see a dollar gain of $19.03 per share ($225 - $205.97), and a ROI of
9.2% ($1,903/$20,597). Respectable for six months.
With BRK.B at $225, the $170 call option would be worth $55.00 per contract in January ($225 - $170).
Subtracting out the call option's initial cost, the trade would yield a dollar gain of $15.65 per contract ($55 - $39.35) and a ROI of 39.8% ($1,565/$3,935). That's an annualized gain of 79.6%!
That's over four times better than the return of outright buying the shares. Quadruple!
With the call option purchase, you get:
1. 81% cash discount
2. 81% less risk
3. 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 the spreading of investable dollars over many different stocks.