The Practical Way

Bearish Spreads

Fool.com
By Jeff Fischer
February 11, 2010

Why use bearish spreads?

• To profit on a falling stock or index while capping your risk.
• To earn strong percentage returns on a moderate move in an underlying investment.
• To lower the cost of bearish put option purchases.[...]

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Bull Call Spreads

Fool.com
By Jim Gillies
August 25, 2009

Why use bull call spreads?

• Capital gains: To profit on a stock you feel relatively bullish on.
• Defense: To limit your capital at risk and lower your break-even point compared with just buying calls alone.
• Leverage: To land an oversized potential return on your net cost, although you sacrifice additional upside.[...]

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An Introduction to Spreads

Fool.com
By Jeff Fischer
February 11, 2010

Why use spreads:

• To profit on the movement in a stock while capping your potential loss at a pre-determined amount — though you cap your potential profit as well.
• To purchase options with less cash up-front, which in turn helps leverage your potential returns.
• To earn sizable percentage gains even on modest moves in the underlying stock.[...]

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Writing Straddles

Fool.com
By Jeff Fischer
November 18, 2009

Why write a straddle?

• You believe a stock or index is going to hold steady or stay in a tight range.
• You believe a stock that was recently volatile will settle down considerably.
• You believe the market’s overall volatility is going to decrease.[...]

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Buying Straddles

Fool.com
By Jeff Fischer
October 7, 2009

Why buy a straddle?

• You believe a stock or index will move dramatically, but you don’t know which way.
• You believe volatility will increase in general, so the value of the options you’re buying will increase.
• You want to leverage potential returns when the underlying investment moves meaningfully in either direction, but limit your risk.[...]

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Strangles

Fool.com
By Jeff Fischer
March 12, 2010

Why use strangles?

• You buy (“buy to open”) a strangle to profit on a sharp move in a stock, whether up or down.
• You write (“sell to open”) a covered strangle to profit when a stock stays within a wide range — or, if it doesn’t, to get a better buy price on new shares or a higher sell price on existing shares.[...]

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Diagonal Calls

Fool.com
By Jim Gillies
September 28, 2009

Why use diagonal calls?

1. If you’re mildly bullish on a stock and want to generate income from a leveraged investment.
2. To profit from a range-bound stock.
3. If your underlying stock is chosen well, and you’re handed a little market luck, you can wake up a year or two hence with a significantly in-the-money call option that effectively costs you nothing.[...]

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Stock Repair

Fool.com
By Jeff Fischer
August 10, 2009

Who should use the stock repair strategy? Someone who is:

• Down 15% to 25% on a stock and willing to forego profits to sell at breakeven.
• Not interested in averaging down or holding for the long haul.
• Using a margin-approved account and can write call options.[...]

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Synthetic Shorts

Fool.com By Jeff Fischer August 10, 2009 Feeling bearish? If you’re looking to profit when stock prices slip, there’s a way to use options to mimic shorting a stock — but with distinct advantages. To set up this “synthetic short” position, you sell a call option and simultaneously buy a put option, using the same [...]

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Synthetic Longs

Fool.com
By Jeff Fischer
August 10, 2009

Are you confident about a stock, but reluctant to pony up the cash to buy it today? A synthetic long may be just the ticket.

This option strategy works nearly the same as owning the underlying stock outright — except you don’t need to pay up front. Usually, you’ll set up a synthetic long on a stock if you foresee a strong catalyst for appreciation in the next 18 months or so. As the stock price goes up, your options gain value along with it, sometimes to a much greater degree.[...]

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Protective Collars

Fool.com
By Jeff Fischer
August 10, 2009

Protective collars are useful in bear markets or when you’re uncertain about a stock’s valuation risk. They can also be a prudent way to protect your gains on stocks that have recently leaped in price, nearing your estimate of fair value. Let’s explain how collars work, starting from the beginning.[...]

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Writing Covered Calls

Fool.com
By Jeff Fischer
August 10, 2009

Why use covered calls?

• Income: To generate cash on a stable stock.
• Defense: To profit if a stock you own slips in price.
• A better sell price: To obtain a higher price when you’re ready to sell.[...]

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Writing Puts

Fool.com
By Jeff Fischer
August 10, 2009

Why write puts?

• Income: To make money while waiting for your preferred buy price on a stock.
• Advantage: To buy stocks at a lower net cost.
• Profit: To earn income from stocks you believe will hold steady or increase modestly.[...]

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Buying Calls

Fool.com
By Nick Crow
August 12, 2009

Why buy calls:

• You believe a stock has a strong catalyst for appreciation over the coming months or few years.
• You want to benefit from a stock’s upside, but put less capital at risk than buying the stock outright.
• You want to leverage your bullish expectations on a stock you already own.[...]

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Learn from Warren Buffett’s personal portfolio

I read an article the other day by Robert Miles on the website of Morningstar that talked about the personal portfolio of Warren Buffett. That is the stocks that Warren has in his name and not under Berkshire Hathaway. I include here the major points from this article:

Buffett’s private portfolio represents less than five percent of his net worth, but that five percent is substantial by anyone’s measure–with a recent value of $1.8 billion. Certainly worth paying attention to.

This also answers the question often asked, “How does Warren Buffett live on a salary of $100,000 per year, with one of the lowest CEO compensation packages among the Fortune 500 companies?”[...]

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How We Can Restore Confidence

The Washington Post
By Charles T. Munger
February 11, 2009

Our situation is dire. Moderate booms and busts are inevitable in free-market capitalism. But a boom-bust cycle as gross as the one that caused our present misery is dangerous, and recurrences should be prevented. The country is understandably depressed — mired in issues involving fiscal stimulus, which is needed, and improvements in bank strength. A key question: Should we opt for even more pain now to gain a better future? For instance, should we create new controls to stamp out much sin and folly and thus dampen future booms? The answer is yes.[...]

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Basically, It’s Over

Slate
By Charles Munger
Sunday, Feb. 21, 2010

In the early 1700s, Europeans discovered in the Pacific Ocean a large, unpopulated island with a temperate climate, rich in all nature’s bounty except coal, oil, and natural gas. Reflecting its lack of civilization, they named this island “Basicland.”

The Europeans rapidly repopulated Basicland, creating a new nation. They installed a system of government like that of the early United States. There was much encouragement of trade, and no internal tariff or other impediment to such trade. Property rights were greatly respected and strongly enforced. The banking system was simple. It adapted to a national ethos that sought to provide a sound currency, efficient trade, and ample loans for credit-worthy businesses while strongly discouraging loans to the incompetent or for ordinary daily purchases.[...]

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Mr. Buffett on the Stock Market

Fortune
By Warren Buffett
November 22, 1999

The most celebrated of investors says stocks can’t possibly meet the public’s expectations. As for the Internet? He notes how few people got rich from two other transforming industries, auto and aviation.

Warren Buffett, chairman of Berkshire Hathaway, almost never talks publicly about the general level of stock prices–neither in his famed annual report nor at Berkshire’s thronged annual meetings nor in the rare speeches he gives. But in the past few months, on four occasions, Buffett did step up to that subject, laying out his opinions, in ways both analytical and creative, about the long-term future for stocks. FORTUNE’s Carol Loomis heard the last of those talks, given in September to a group of Buffett’s friends (of whom she is one), and also watched a videotape of the first speech, given in July at Allen & Co.’s Sun Valley, Idaho, bash for business leaders. From those extemporaneous talks (the first made with the Dow Jones industrial average at 11,194), Loomis distilled the following account of what Buffett said. Buffett reviewed it and weighed in with some clarifications.[...]

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Who Really Cooks the Books?

The New York Times
By Warren E. Buffett
Published: July 24, 2002

OMAHA— There is a crisis of confidence today about corporate earnings reports and the credibility of chief executives. And it’s justified.

For many years, I’ve had little confidence in the earnings numbers reported by most corporations. I’m not talking about Enron and WorldCom — examples of outright crookedness. Rather, I am referring to the legal, but improper, accounting methods used by chief executives to inflate reported earnings.

The most flagrant deceptions have occurred in stock-option accounting and in assumptions about pension-fund returns. The aggregate misrepresentation in these two areas dwarfs the lies of Enron and WorldCom.[...]

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Fuzzy Math And Stock Options

The Washington Post
By Warren Buffett
Tuesday, July 6, 2004

Until now the record for mathematical lunacy by a legislative body has been held by the Indiana House of Representatives, which in 1897 decreed by a vote of 67 to 0 that pi — the ratio of the circumference of a circle to its diameter — would no longer be 3.14159 but instead be 3.2. Indiana schoolchildren momentarily rejoiced over this simplification of their lives. But the Indiana Senate, composed of cooler heads, referred the bill to the Committee for Temperance, and it eventually died.

What brings this episode to mind is that the U.S. House of Representatives is about to consider a bill that, if passed, could cause the mathematical lunacy record to move east from Indiana. First, the bill decrees that a coveted form of corporate pay — stock options — be counted as an expense when these go to the chief executive and the other four highest-paid officers in a company, but be disregarded as an expense when they are issued to other employees in the company. Second, the bill says that when a company is calculating the expense of the options issued to the mighty five, it shall assume that stock prices never fluctuate.[...]

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10 Ways To Get Rich

Parade
By Warren Buffett
published: 09/07/2008

With an estimated fortune of $62 billion, Warren Buffett is the richest man in the entire world. In 1962, when he began buying stock in Berkshire Hathaway, a share cost $7.50. Today, Buffett, 78, is Berkshire’s chairman and CEO, and one share of the company’s class A stock is worth close to $119,000. He credits his astonishing success to several key strategies, which he has shared with writer Alice Schroeder. She spent hundreds of hours interviewing the Sage of Omaha for the new authorized biography The Snowball. Here are some of Buffett’s money-making secrets—and how they could work for you.

1. Reinvest your profits
When you first make money, you may be tempted to spend it. Don’t. Instead, reinvest the profits. Buffett learned this early on. In high school, he and a pal bought a pinball machine to put in a barbershop. With the money they earned, they bought more machines until they had eight in different shops. When the friends sold the venture, Buffett used the proceeds to buy stocks and to start another small business. By age 26, he’d amassed $174,000—or $1.4 million in today’s money. Even a small sum can turn into great wealth.[...]

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Buy American. I Am.

New York Times
By WARREN E. BUFFETT
Published: October 16, 2008

The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So … I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.[...]

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The Greenback Effect

New York Times
By WARREN E. BUFFETT
Published: August 18, 2009

In nature, every action has consequences, a phenomenon called the butterfly effect. These consequences, moreover, are not necessarily proportional. For example, doubling the carbon dioxide we belch into the atmosphere may far more than double the subsequent problems for society. Realizing this, the world properly worries about greenhouse emissions.

The butterfly effect reaches into the financial world as well. Here, the United States is spewing a potentially damaging substance into our economy — greenback emissions.[...]

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Has Warren Buffett lost his touch?

It is always useful to see both sides in an argument. This increases your understanding of the situation and hopefully will help you to make better decisions. I have been following Warren Buffett very closely in the last 3 years and I have been reading articles written about him and his investment and management style. Everyone is praising him for being a very good investor and being able to attract great companies.

There is one person though who is betting against him. Who tells that his time is over and he has lost his charm. This person is Doug Kass and the last few months he wrote articles on why Warren is wrong and why his style does not work any more. His articles and reasoning are very interesting. His main point is that his style is not applicable to this new age and following it will cause you to lose money.[...]

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