Warren buffett cash call option

This page was added to your Bookmark. Please Sign Up or Log In first. I came across an article that is near and dear to my heart. The article discusses the option value of holding cash. Like most investors I vividly recall late and early when I had little cash available to invest in opportunities that were dramatically better than anything I had ever seen previously. During that time my admiration for Warren Buffett increased to another level because I knew that he was sitting on billions of dollars in cash and for him the stock market crash was an opportunity.

After going through that experience I promised myself that going forward I would be more like Buffett, and less like me. Partly, that heap of greenbacks is a safety blanket. As with most matters Buffett, the strategy is more complicated than it looks, Alice Schroeder says. The former Wall Street analyst may know more about Mr.

Buffett than anyone outside his family and inner circle: She spent more than 2, hours with him while writing The Snowball: Warren Buffett and the Business of Life. Schroeder argues that to Mr. Buffett, cash is not just an asset class that is returning next to nothing. It is a call option that can be priced.

When he thinks that option is cheap, relative to the ability of cash to buy assets, he is willing to put up with super-low interest rates, said Ms. Schroeder, who followed Mr.

Buffett for years before she became his biographer. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price. Because once an investor looks at cash as an option — in essence, the price of being able to scoop up a bargain when it becomes available — it is less tempting to be bothered by the fact that in the short term, it earns almost nothing.

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Subscribe via Email Subscribe RSS. For instance, if there were a disaster and Berkshire needed the cash to pay out on insurance claims, Buffett wouldn't want to be forced to sell a stock at a disadvantageous price just to raise cash. It also makes sense to keep cash when one cannot find a stock to purchase at an attractive valuation.

However, the idea of keeping cash on hand just in case a good value comes along doesn't make a lot of sense to me. In that case, one could sell some other stock that was not priced as favorably to raise cash.

Being fully invested wouldn't prevent one from taking advantage of an opportunity unless the whole market tanked. In which case, keeping cash on hand would be trying to time the market -- something many included Warren Buffett would say is unwise to do. As I understand the article, WEB is willing to hold cash indefinitely as a way of decreasing the risk of losing money, rather than making a larger return.

If your belief is to maximize return and less about risk of capital loss, then I see your point. I went through the period not unscathed. It taught me a lot. After that period, I am much more concerned about risk of loss than about maximizing return.

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