Warren Buffett is perhaps the greatest investor of all time.
His company, Berkshire Hathaway, has one of the best-performing stocks in the history of the world.
Berkshire shares have returned more than 2,000,000% since the company went public in 1964. That’s enough to turn every $1 invested into $20,000.
If you’ve read books or articles on Buffett, then you know the conventional wisdom is that Buffett makes his fortune by buying great companies trading at great prices… and then holding them for years—a strategy called value investing.
That’s one of our favorite strategies at Palm Beach Research Group, too. It’s a safe and proven way to build wealth over the long haul.
But what a lot of people don’t know is that Buffett didn’t make billions just through value investing. He used alternate strategies to generate immediate income while his long-term investments played out.
He used this strategy in 1993 to make $7.5 million in upfront cash in one day.
And Berkshire Hathaway’s 2008 annual report showed Buffett used it again to collect over $4.9 billion in premium payments.
Regular investors often misunderstand this strategy… But it’s potentially very profitable.
I’ll show you what it is and—more importantly—how to use it to generate immediate income.
Selling Market Insurance
To truly build long-lasting wealth, you need to generate multiple reliable streams of income. That’s what Buffett did by sometimes selling put options.
A put option gives the buyer the option to sell the stock at a certain price on a certain date. Think of buying a put as the same as buying crash insurance.
When you sell a put, you are selling this insurance (and selling insurance is one of the most profitable businesses in the world).
Here at Palm Beach Research Group, we don’t want to insure just any company, though. We only sell puts on the highest quality companies.
Johnson & Johnson is one of our “untouchable” stocks. Today, JNJ trades at $139 per share. (See the August 29 Daily, “The No. 1 Rule for Protecting Your Wealth.”)
“Untouchables” are companies with stable earnings and cash flows. They’re great stocks to insure. However, like any company, untouchables will have price drops.
The cause could be some temporary bad news… or regulatory problems… or just a downturn in the overall market.
No matter, they’re still great companies you want to own—even more so if you can get them at a cheaper price.
But here’s the thing…
You can generate immediate income from untouchables like JNJ while you wait for their prices to come down to levels you’re comfortable with.
Let me walk you through an example…
Traders are paying $1.50 per share for JNJ puts with an expiration date of October 19, 2018 and a strike price of $135.
Each put contract covers 100 shares. So if you sold one contract, you’d generate $150 in immediate upfront cash.
Now, there are two likely outcomes from this trade when the put expires on October 19.
If the stock is above $135, the contract expires worthless, and you keep the $150 in upfront cash. You don’t need to do anything else. And you can sell another put to keep bringing in money.
If JNJ falls under $135, you will be “put” the stock. Now, that’s not a big deal because JNJ is an “untouchable” business. Plus, you still get to keep that $150 premium.
The cost basis is the adjusted price of an asset, factoring in your discount. So your cost basis on this trade is $133.50 per share… That’s $5.50 cheaper than what you would have paid for JNJ just a couple of months earlier when it was $139—a 4% discount.
So the worst-case scenario is you buy shares of a high-quality business you wanted to own anyway… at a discount.
(Note: We used this trade just as an example of how put-selling works. As always, do your homework before making any trade or investment.)
Buffett used this same strategy in April 1993 when he sold puts on Coca-Cola (KO). At the time, KO traded at $39. Buffett thought a fair price would be $35.
KO eventually dropped to $35… and Buffett was “put” the stock. So he received $7.5 million upfront to buy a stock he already loved anyway.
Today, KO shares trade around $46. So not only did Buffett receive a premium to buy the stock, he also profited from the price appreciation.
(He did the same thing with Burlington Northern Santa Fe in 2008, generating $4.9 billion in premiums over the life of that trade.)
Starting Your Own Insurance Operation
Many investors consider options to be risky. And the way most people use them can be incredibly risky.
But as I showed you above, options can be a safe, conservative strategy to make extra money in the markets.
Now, we understand that options may be new to you.
That’s why former hedge fund manager and PBRG guru Teeka Tiwari has put together a training video to get you familiar with them.
Teeka has used his vast experience of how markets work to show ordinary people how to trade new asset classes. He’s even succeeded in teaching even 75-year-old grandmothers how to make life-changing gains by trading cryptocurrencies.
Now, he’s using that same expertise to show ordinary investors how to generate immediate income by selling market insurance.
As a bonus, Teeka will show you another strategy you can use to make immediate income if you end up owning shares of these great companies.
Analyst, The Palm Beach Daily
Nick’s Note: Each morning, Palm Beach Trader editor Jason Bodner runs his proprietary “early detection system” to find quality stocks pushed higher by unusually high levels of institutional buying. Today, his system is signaling buying in this sector…
Big Money Moving Into Large-Cap Dow Jones Stocks
By Jason Bodner
Today, my system is zeroing in on the Dow Jones Industrial Average. The Dow holds 30 of America’s largest companies, including Johnson & Johnson, JPMorgan Chase, and Apple.
These blue chips have lagged the broader market. While the S&P 500 and small-cap Russell 2000 have surpassed their January highs, the Dow hasn’t, as you can see in the chart of the SPDR Dow Jones Industrial Average ETF (DIA)…
But we think the Dow is next up for a big move. Here’s why…
Companies in the Dow Jones get about half of their revenues from overseas. So they’re disproportionately affected by trade war anxiety. As we’ve written in the past, the trade war fears are mainly hype.
As soon as new trade deals are passed, the anxiety will pass… and these companies should soar.
I’m looking for DIA to break above its January high of $266. If institutions can push the price past that level, we should see another move higher.
In 2008, mega-banks misused billions in taxpayer funds. After a review of the banking industry, President Trump signed Bill S.2155 into law.