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Buffett and Munger on Options

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In the annual shareholder meeting of Berkshire Hathaway, Buffett and Munger took on a series of questions from audience as usual. Although I did not go, I found some of those Q&A both interesting and educational. Thanks to gurufocus, the full transcript is here (WB: Warren Buffett, CM: Charlie Munger).

Q5: Would you use stock options to enter a position in a public co?

WB: If you want to buy or sell a stock, you should buy or sell a stock. We sold puts on Coca-cola once, but usually it is best to just buy stock. Using option technique is an idea where you get to buy a stock cheap. 4 out of 5 times you get it right and one time you may miss the opportunity to buy. We virtually have never used options to enter or exit a position. We have sold long term equity put options described in press report. We don’t get involved in fancy techniques.

CM: If I remember right, a public authority was wondering if they should set up an option exchange market. Warren was alone in the opinion (against it). You wrote a letter saying it wouldn’t do any good to throw out margin rules in this fashion. It doesn’t serve the country. I always thought Warren was totally right. Turning financial markets into gambling markets to enrich the croupiers doesn’t make sense.

WB: A University of Chicago Graduate student asked me once, what are we being taught that is wrong? In business school the amount of time spent teaching option pricing is total nonsense. You only need 2 courses, how to value a business and how to think about stock market fluctuations. The thing is that instructors know the formulas and you don’t, so they have something to fill the time. It has nothing to do with investment success – what matters is buying businesses at the right price. If you were teaching Biblical studies and you could read the Bible forward, backward and in four different languages, you would find it hard to tell everyone that it comes down to the Ten Commandments. The priests want to spend a lot of time preaching. You must have attitude where you aren’t influenced by market. You need a mindset, and you need to have the attitude to divorce yourself from letting the market influence you.

My thoughts:
“Turning financial markets into gambling markets to enrich the croupiers doesn’t make sense.” This is happening exactly in some part of the Chinese stock market, isn’t it? Think the excessive issuance of new warrants at SSE last year. Those warrants trading enriched many brokage firms, at the expense of many small investors/speculators 🙁

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