Collection: Warren Buffett - #70 | Investing in Long Term Call Options or Stocks



[Transcript]

AUDIENCE MEMBER

My name is Stanley Watkins and — from Manhattan, Kansas. And I’m a shareholder. And I have two questions. And the first one, I know the answer. So you can just say yes or no. (Laughs) Would you consider investing in indexes such as OEX? Pure speculation, you’re going to say yes. And number two, would you encourage investors to, if they were trying to get a lot of their investment, to use LEAPS on investments such as Coca-Cola instead of buying the stock? WARREN BUFFETT

Use what on? I missed that — CHARLIE MUNGER

LEAPS. WARREN BUFFETT

Leak? CHARLIE MUNGER

LEAPS, L-E-A-P-S. WARREN BUFFETT

Oh, I see. We’re still on options. CHARLIE MUNGER

(Inaudible) WARREN BUFFETT

Oh yeah. WARREN BUFFETT

Both the questions relate to futures of one sort, calls, or whatever they may be, and — I think that investors should stick to buying ownership in businesses. It’s not that you can’t come up with a theoretical argument for buying, say, a — I mean, if you think Coca-Cola’s attractive, you can say, well, I’d rather buy a five-year option on Coke than buy the stock directly because it introduces leverage without the risk of going broke. But I think that that’s a dangerous path to start down, because it — If it works well, it’s so — it’s dynamite to start playing with things that can expire and become worthless, or can be bought with very low margin, as the OEX options you were talking about. Borrowed money usually — or frequently — leads to trouble. And it’s not necessary. I mean, if you had some compelling reason — if you’re going — if you had to double your money by the end of the year or be shot, you know, then, I would head for the futures market because, you know, you need to do it. I mean, you have to introduce borrowed money. But you really ought to figure out how you can be happy with the present amount of money you’ve got and, then, figure that everything else is, you know, all to the good as you go along, and — I don’t think people — once they start focusing on short-term price behavior, which is the nature of buying calls, or LEAPS, or speculating in index futures, once you start concentrating on that, I think you’re very likely to take your eye off the main ball, which is just valuing businesses. I don’t recommend it. Charlie? CHARLIE MUNGER

Well, this is a group of affluent investors. I don’t think many of them did it in LEAPS. (Laughter) WARREN BUFFETT

Yeah. It’s certainly true. If we’d operate Berkshire with considerable borrowed money over the years, you know, it would’ve done very much better than it has. But nobody knew what that amount of borrowed money would have — the appropriate level would have been. And it wouldn’t have made any difference to us. I mean, we have just as much fun doing what we’ve done than if we’d owned it on leverage and had it been twice as much. I mean, it just — it’s just — it’s not the way we approach it. If you have X and you think you’re going to be way happier when you’ve got 2X, it’s probably not true. You really ought to enjoy where you are at a point. And if you can make, you know, if you can make 12 or 15 percent a year, and you desire to save, and you like piling it up, you know, it’ll all come in time. And why, you know, why risk losing what you need, you know, and have, for what you don’t need and don’t have? It’s never made a lot of sense to us. CHARLIE MUNGER

Warren wrote a letter when they were developing the security options businesses. And he urged the civilization not to allow the new exchanges. And you can see how much attention they paid to him. (Buffett laughs) WARREN BUFFETT

The usual amount. CHARLIE MUNGER

Yeah, right.

WARREN BUFFETT

Area 3?


(Source: https://buffett.cnbc.com/1997-berkshire-hathaway-annual-meeting/)

~ Please visit the site above for full video of Berkshire Hathaway Annual Meeting.

 

[YAPSS Takeaway]

"Why risk losing what you need and have, for what you don't need and don't have?" ~Warren Buffett


[What is LEAPS?]

"Long-term equity anticipation securities (LEAPS) are publicly traded options contracts with expiration dates that are longer than one year. As with all options contracts, a LEAPS grant a buyer the advantage, but not the necessity, to purchase or sell—depending on if the option is a call or a put—the underlying asset at the predetermined price on or before its expiration date." ~Investopedia