1. Selling put options

You’d think that someone like Buffett who seems devoted to blue-chip stocks would steer clear of complicated derivatives, but you’d be wrong.

Throughout his investing career, Buffett has capitalized on the advanced options-trading technique of selling naked put options as a hedging strategy. In fact, in Berkshire Hathaway’s 2007 annual report, the company acknowledged that it had 94 derivative contracts, which over the year generated $7.7 billion in premiums.

This strategy involves selling an option where you promise to buy a stock at a specific strike price below its current value sometime in the future. This immediately gives you money from the sale of the option. If the share price doesn’t fall, you keep the money.

If the price does fall below the strike price, you purchase the stock at a price that’s less than you would have paid at the time you sold the option, with the cash from the option sale further reducing your cost. The buyer of the option profits because they’ll buy the stock at less than your strike price, then force you to buy it.

The option is considered “naked” because you haven’t secured another option to buy the stock, such as shorting shares of that same stock to offset your purchase cost.

But keep in mind that this given the risk involved, this isn’t something a newbie investor should try on their own.

“You will recall that in our catastrophe insurance business, we are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run,” Buffett wrote in his 2007 report. “That is our philosophy in derivatives as well.”

More: Buffett's 3 top stocks to fight inflation

Fine wine is a sweet comfort in any situation — and now it can make your investment portfolio a little more comfortable, too. Now a platform called Vinovest helps everyday buyers invest in fine wines — no sommelier certification required.

Invest Now

2. Investing in small-cap stocks

When you’re throwing around the kind of cash that’s measured in billions, scooping up shares of promising emerging companies won’t work. Shares of small-cap growth stocks of companies typically worth $300 million to $2 billion would simply move too much if the Oracle of Omaha made a purchase that was big enough to make it worth his while.

“I have to look for elephants,” Buffett once said in discussing his investment options. “It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in.”

One reason those so-called “mosquitoes” are attractive is because shares demonstrate the most growth in the early days of a company's operation. But just because those little outfits are off-limits to Buffett doesn’t mean you can’t go after them.

3. Cutting losses when necessary

Buffett’s “buy and hold” approach doesn’t extend to never admitting that even he sometimes gets it wrong. Once losses set in at a well-managed company, that’s a sign that the economics of that business may have changed in a way that’s going to create losses for a long time to come.

As for Buffett, his big misstep was airline companies. Berkshire Hathaway once owned a stake in all four major American airlines: Delta, American Airlines, Southwest and United. While he only added these companies to his roster in 2016, by the end of 2020, he’d dropped them all — at a loss.

Buffett took responsibility for the failed strategy, but was clear he didn’t see a future in airlines and even went so far as to call the industry a “bottomless pit.”

“We will not fund a company that — where we think that it is going to chew up money in the future,” he said at the time.

Get a piece of commercial real estate

Enhance your portfolio with high-return commercial real estate

First National Realty Partners is the #1 option for accredited investors seeking superior risk-adjusted returns in the grocery-anchored necessity-based retail space.

While commercial real estate has always been reserved for a few elite investors, outperforming the S&P 500 over a 25-year period, First National Realty Partners allows you to access institutional-quality commercial real estate investments — without the leg work of finding deals yourself.

Invest with First National Realty Partners now.

What to Read Next

Disclaimer

The content provided on MoneyWise is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.