3 Ways Warren Buffet Gets Free Money
Would you like to know 3 Ways Warren Buffet Gets Free Money?
When I learned these strategies he used it BLEW MY MIND.
There’s a reason that Billionaires are Billionaires, they have a certain financial genius that can help them create money almost out of thin air!
This article is based in information found in the article titled Naked Short Put Options – Warren Buffett’s Little Secret.
To get a thorough explanation of how he calculates his risk in selling naked puts, check out this Forbes article.
COCA COLA – Give me a discount and money too!
Let’s say you wanted to buy stock in Coca Cola, and you thought the price was too high?
Let’s say the price was $39.00/share and you wanted to buy it at $35.00/share.
Well, before last month I would have put in a limit order and hoped one day the price would fall to $35/share and I would get my stock.
However, now that I’ve learned what Warren Buffett does, my eyes have been opened.
Now, the article that I learned this from says he followed the following strategy in April of 1993, which isn’t correct, since Coca Cola shares were trading around $9 – $10 back then.
That being said, let’s assume for argument sake that Warren Buffett did execute this strategy at a later date when share prices were at $39/share.
Here it is:
He sold what are termed PUTS, which are options that obligate you to buy a particular stock if it reaches a certain price.
What the buyer gets is the assurance that if his stock which is worth $39/share now, goes down in value to $30/share or lower, then the person who sold me the PUT contracts has to buy my shares for $35/share.
What the seller gets is the premium, the price the buyer pays to have this assurance (It’s kind of like owning insurance for your stock).
In the case of Warren Buffett, he sold each option for $1.50, and since he sold 50,000 contracts, where each contract covered 100 shares, he made $1.50 x 100 shares x 50,000 contracts = $7,500,000!!!
Now, he had to have the cash ready to buy the shares, which he did.
So if when the option contract expires, shares are worth more than $35, he keeps the $7,500,000!!!
If they are worth $35 or less, he has to buy the shares (NOTE, he still keeps the premium!!!).
So in effect, he guarantees he gets the price he wants to pay per share and $7,500,000!!!!!!!!!
Ok, that blows my mind. What about you?
Burlington Northern Santa Fe
“Buffett did the same thing for Burlington Northern Santa Fe. During the third quarter of 2008, National Indemnity Company, which is a subsidiary of Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B), sold almost 5.5 million shares of put options on Burlington Northern Santa Fe exercisable before Dec. 8, 2008, with a strike price of $80 a share. It was a lot of trouble tracking down the SEC filing for those options, but I was able to find the following document evidencing the exercise of BNI options.”
S&P
Below is an excerpt from Berkshire’s 2008 Letter to shareholders:
“We have added modestly to the “equity put” portfolio I described in last year’s report. Some of our contracts come due in 15 years, others in 20. We must make a payment to our counterparty at maturity if the reference index to which the put is tied is then below what it was at the inception of the contract. Neither party can elect to settle early; it’s only the price on the final day that counts.
To illustrate, we might sell a $1 billion 15-year put contract on the S&P 500 when that index is at, say, 1300. If the index is at 1170 – down 10% – on the day of maturity, we would pay $100 million. If it is above 1300, we owe nothing. For us to lose $1 billion, the index would have to go to zero. In the meantime, the sale of the put would have delivered us a premium – perhaps $100 million to $150 million – that we would be free to invest as we wish.
Our put contracts total $37.1 billion (at current exchange rates) and are spread among four major indices: the S&P 500 in the U.S., the FTSE 100 in the U.K., the Euro Stoxx 50 in Europe, and the Nikkei 225 in Japan. Our first contract comes due on September 9, 2019 and our last on January 24, 2028. We have received premiums of $4.9 billion, money we have invested. We, meanwhile, have paid nothing, since all expiration dates are far in the future. Nonetheless, we have used Black- Scholes valuation methods to record a yearend liability of $10 billion, an amount that will change on every reporting date. The two financial items – this estimated loss of $10 billion minus the $4.9 billion in premiums we have received – means that we have so far reported a mark-to-market loss of $5.1 billion from these contracts.
One point about our contracts that is sometimes not understood: For us to lose the full $37.1 billion we have at risk, all stocks in all four indices would have to go to zero on their various termination dates. If, however – as an example – all indices fell 25% from their value at the inception of each contract, and foreign-exchange rates remained as they are today, we would owe about $9 billion, payable between 2019 and 2028. Between the inception of the contract and those dates, we would have held the $4.9 billion premium and earned investment income on it.”
Conclusion
Back in 2011 I had over $30,000 in credit card and line of credit debt, was living paycheck to paycheck and was stressed out over my lack of success in my financial life.
In April of 2016, I became debt free and had a monthly passive income stream. I quit my job on December 23, 2016, and started doing my dream work of mentoring others on what I did to create the freedom to quit my job.
In 2017 we bought our first condo in Waikiki, and we went on 5 weeks of vacation (including a 7 day cruise to the Mexican Riviera)!!!
I spend most of my time doing what I dreamed of for years, spending my days with my son Jordan and my husband Jomel, enjoying motherhood and being a wife. I also enjoy researching Financial Freedom, investing and growing our passive income, and sharing what I learn with my clients and on my blog.
If you want to learn more about how I can help take back control of your money and your time, then CLICK HERE, watch the free video and get started!