Warren Buffets’ little trick for buying stocks he wants at lower prices and getting paid for placing the trade
With any stock you would like to own, getting it at favorable prices is a definite goal. In our portfolios, we realize there could still be more risk in the market, but also believe that we are not far from having a great buying opportunity. One of Warren Buffets’ methods for purchasing stocks is called Selling Puts. For example, several years ago, Mr. Buffet wanted to increase his position at Coca-Cola (KO). He sold 30,000 contracts which is the equivalent of 3 million shares and sold them with an exercise price below where KO was selling, at the time. He took in $1.5 per share or $7.5 million. If KO started above $35, his exercise price, he never bought the stock and got to keep the $7.5. If it dropped below $35, he was assigned 3 million shares at $35, a price he was happy to pay.
Obviously, we aren’t trading in that size, but this strategy would work the same even if you just wanted 100 shares. Before I give you the nuts and bolts of this strategy, one thing to note, Options are like power tools—used correctly with knowledge and care, they can be great tools. If used carelessly, one can get hurt.
For purpose of example, I’ll give you an example. We decided we would like to buy AAPL and for example, it’s trading for $143 today. We could use a Put Sell in two ways. If we sold a 30-day contract with an exercise price of $140 we may receive $6.05 per share for being willing to buy AAPL at $140 for the next 30 days even if it drops below $140. If we were required to buy it, we would keep the $6.05 giving us a net buy-in of $133.95, a price we would love to pay. If we wanted more margin of error, we could extend our contract period until September 2023. We would then receive $15.35 per share. That’s more than 10% of the value of the stock so if we didn’t have to buy the stock, we had a very attractive return, if we did have to buy it, our net cost would be around $125, both good outcomes.
We give you this example as a strategy used by one of the great investors of all time and if interested, learn the nuances, don’t just dive in. If you want more information on strategies like this one, go to www.gaadvisorygroup.com and subscribe or contact us directly.
How Much Money Do I need for retirement?
Over the years, I’ve heard “experts” claim that an investor needs $1 million to retire comfortably. In our 40 years in the investment world, we would wholeheartedly disagree with that comment. Retirement comfort has much more to do with income than it does with total assets.
If you watched our YouTube video about “Sequence of Returns”, you can see how a $1 million portfolio can fail to work well if your timing is bad and the market drops plus pulling income will erode your account at an accelerating rate. In order to live comfortably during retirement takes some planning to make sure that no one economic event will create a massive drawdown.
No matter how much you have as you start retirement, you need to calculate how much income you will need to live the lifestyle you wish and try to be realistic. Once you have a reasonable number, find out how much income you need to be guaranteed and how much you can safely withdraw from your account.
Done correctly, you can make sure you never run out of cash and grow your investments along the way. A $1 million retirement savings should allow you to live the rest of your life with adequate income, but you may be able to retire on less if you structure your account properly.
For more information on how to do this, If you would like to continue receiving these market updates, make sure to signup for our newsletters and YouTube videos.
