Understanding and Managing Leverage    • 185
Berkshire Hathaway (BRK.A). In a recent academic paper written by re-
searchers at AQR Capital titled, “Buffett’s Alpha, ”4 the researchers found 
that a significant proportion of Buffett’s legendary returns can be attributed 
to finding firms that have low valuation risk and investing in them using a 
leverage ratio of roughly 1.8. The leverage comes from the float from his in-
surance companies (the monies paid in premium by clients over and above 
that required to pay out claims). As individual investors, we do not have a 
captive insurance company from which we can receive continual float, but 
by buying options and using leverage prudently, it is possible to invest in a 
manner similar to a master investor.
In this section, we have only discussed leverage considerations when 
we gain exposure by buying options. There is a good reason to ignore the 
case where we are accepting exposure by selling options that we will dis-
cuss when we talk about margining in Chapter 10. We now continue with 
chapters on gaining, accepting, and mixing exposure. In these chapters, we 
will use all of what we have learned about option pricing, valuation, and 
leverage to discuss practical option investment strategies.