No. of Recommendations: 13
Here's some back of the envelope.
Mr Buffett was buying Berkshire B shares at an average price of $357.22 in September.
With an inflation adjustment, that's like $357.71 in today's money.
The value of a share goes up at a rate of inflation + 7%/year, so if the intervening time has been typical, the value is up another 2.7% or so since September, so maybe he might be a buyer at $367.60 today?
A further thought just to mess with people who like to overcomplicate things.
Say a person is somewhat cash heavy today. My situation, as it happens. I'd like to deploy that cash into Berkshire, but the stock is just expensive enough that I don't want to do it today. A screaming deal is pretty rare, but I at least want to buy at a below-average level, not an above average one. So let's say that entry prices lower than that number above would be OK, but not current prices.
The obvious option: I can sit on cash until Berkshire is below a threshold like that, earning interest, then buy the stock. My cash pile is currently earning 4.83% at my broker. That's the obvious and relatively sensible strategy.
But as I already know at what price I'd be a buyer, there are people willing to pay me to commit in advance to that plan of action. For example, June $370 put options are bid $4.55 right now. If a cash-heavy person were to write those options, there are two possible outcomes:
(1) The stock is assigned. BRK shares are bought at a net entry price of $365.45, somewhat below the notional target mentioned above. Compared to a good-till-cancelled buy order, you're better off. And of course much cheaper than buying the stock today. You also made interest on the cash until the day of assignment.
(2) The option expires worthless. You have been making interest on the cash pile, plus a 3.34%/year rate on the erosion of the time value in the option, total 8.17%/year rate. That's a pretty good rate to earn while waiting to get your stock. A somewhat lower target price gives a lower rate of return while you wait, but a better entry price on the Berkshire--they can be balanced to get numbers you like.
Note, writing puts is a bullish move. As with all new bullish moves, this would be a good position to enter on a price dip rather than with the stock at an all time high (as I type), so it should be possible to do quite a bit better selling that same option with just a little patience. Prices tend to fluctuate.
Jim
