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