Pretend You're Warren Buffett:

A Leveraged Investing Application

The Pretend You're Warren Buffett Approach to Leveraged Investing is not a separate option trading strategy. Rather it's a specific application of any number of option strategies and principles spelled out in The Essential Leveraged Investing Guide.

Disclaimer: Before I proceed, I want to make it clear that I'm not a broker or investment advisor and the only license I possess is the one that legally authorizes me to operate a motor vehicle. What follows is not a recommendation related to any specific security, but is included for illustration and education purposes.

Warren Buffett's Background and Investing Style

I've referenced Buffett elsewhere on this site, such as the pages Value Investing and Options, You CAN Invest Like Warren Buffett, and Why is Warren Buffett Successful?

Buffett is, quite simply, the most famous (and most successful) value investor of all time. He and business partner Charlie Munger grew a now defunct textile operator (Berkshire Hathaway) into an enormous cash-generating conglomerate.

Buffett has always focused on strong cash flow operations. From the original textile, Buffett expanded into the high cash flow insurance industry. Investing the float (insurance premium payments received but not yet paid out in claims) to masterful, compounding effect, Berkshire Hathaway is now a cash-producing behemoth.

There are two types of Berkshire Hathaway companies - those Buffett has purchased in their entirety (such as wholly owned subsidiaries GEICO, Sees Candies, and Pampered Chef) and publicly traded companies in which Buffett has taken large equity stakes (such as Coca-Cola, American Express, and Procter and Gamble).

The Pretend You're Warren Buffett Approach, out of necessity, focuses only on the second category of companies. Unfortunately, acquiring wholly owned subsidiaries through the strategic use of options is, at this time, beyond the scope of this website. Alas! were it not so.

Size Matters

The website Motley Fool has correctly and frequently (usually in conjunction with sales pitches for one of their advisory newsletters) noted that the individual investor has one advantage over Warren Buffett - the ability to invest in smaller companies.

Due to Berkshire Hathaway's enormous balance sheet and cash reserves (routinely in the tens of billions of dollars), it's just not practical for Warren Buffett to invest in anything but large scale opportunities. No matter how great the returns on a small cap investment are, they're just not going to have much of a material impact on the Berkshire Hathaway bottom line.

So if you choose to adopt The Pretend YouÂ’re Warren Buffett Approach, be aware that the literal application means you're going to be limiting yourself to investing mostly in large cap stocks.

Of course, as a self-respecting and self-directed investor, you are always free to modify the stock selection process to include other companies in other market capitalization categories (i.e. if you care to speculate on what specific, smaller companies Buffett might consider if he had less money to invest - but be aware that the options on many small cap companies are too thinly traded to be effective Leveraged Investing candidates).

Stock and Option Selection

So where can you find a list of the stocks that Berkshire Hathaway owns?

Berkshire's largest holdings (those with a minimum of $600 million market cap) are itemized in the Shareholder Letter section of the company's annual report.

But the best resource I've come across, by far, is from CNBC. They maintain a live table of all Berkshire holdings based on SEC filings and current share price. This table is more complete (obviously) than the itemized list included in the annual report, not to mention more interesting.

It also enables you to be more flexible by including some of the other smaller holdings. I believe I read somewhere once that approximately 80% of Berkshire Hathaway equity holdings are comprised of only about six companies.

The Approach Spelled Out

The Pretend You're Warren Buffett Approach is very simple. You simply take your favorite strategies from The Essential Leveraged Investing Guide, and you employ them on your favorite stocks from among those that are currently held by Berkshire Hathaway.

As you review Berkshire's current holdings (see links above), it's important that you do your own due diligence, both from a fundamental analysis of a Berkshire company's long term growth and viability as well as its current valuation.

True, this approach relies a great deal on Buffett for an initial basket of stocks from which to select. But when it comes time to the actual selection, this is your decision, and you are the only one who is ultimately accountable for making it.

So conduct further research, do your own due diligence, consider current valuations (i.e. price), and then and only then employ your preferred strategies from the The Essential Leveraged Investing Guide on the Buffett stock(s)you would most like to own.

The principles of Leveraged Investing are as sound as they are powerful. If you can reduce the cost basis on your long term holdings by just 5-10% a year, and if you employ these strategies on solid, long term, superior businesses (e.g. the kind Buffett owns), you're going to do extremely well over the long term.

[Reducing your cost basis? Is it really possible to adjust or lower the cost basis on your long term holdings after you've acquired them? Not only is it possible to lower your cost basis after you've acquired shares, it's also possible to lower your cost basis before and during, too. For more details, check out the related article, Adjusted Cost Basis with Options.]

Final Thoughts

For the Warren Buffett purists out there, I have no doubt that there are plenty of faults to be found with this approach. For one thing, some of Berkshire's holdings were acquired decades earlier, and probably at prices far cheaper than they're currently trading at.

But remember, this strategy is about pretending you're Warren Buffett, not actually becoming Warren Buffett. And pretending, at some level, is supposed to be fun.

That's not to say this is a whimsical approach. On the contrary, part of the fun is that you really are using options to get a lot closer to Buffett's investing style than 95% of the other market participants.

And I should also point out that Buffett has used put writing strategies himself to acquire positions (and very large ones, I might add) in Coca-Cola. So this approach really isn't that much of a stretch.

free exclusive value investing with options report


Warren Buffett Zero Cost Basis Portfolio Current Equity Holdings:

KO - 125 shares
KMI - 100 shares
BP - 100 shares
MCD - 30 shares
JNJ - 25 shares
GIS - 25 shares
PAYX - 25 shares

Open Market Purchase Price: $20,071.83

Less Booked Option Income: $16,341.71

Tot. Discount: 81.42%
Adj. Div. Yield: 19.59%