The Secret Trick Buffett Uses To Boost His Income

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It goes without saying that Warren Buffett is one of the greatest investors of all time. His net worth jumped to $59 billion in 2013, ranking him as one of the very richest people in the world.

His average annual return of 20% in the past 55 years doesn't just put him ahead of all peers... it means he doesn't even have any peers.

Buffett's success in the stock market has been driven by an ultra-conservative investment style.

Like many of us, Buffett loves a great deal. He only puts his money into undervalued businesses. Buffett is so famously risk-averse that he refuses to own technology companies.

But Buffett doesn't just sit around and wait for a great deal on a stock he wants to own. In fact, one of his favorite investment strategies allows for him to buy a stock at the exact low price he wants, all while generating huge streams of income.

#-ad_banner-#You don't have to be a billionaire to do this either. Any investor can use this trick.

Buffett's passion for value and a great deal was on display in the financial crisis of 2008.

He lent Goldman Sachs $5 billion at the height of the panic. He landed amazing terms on the deal as the financial sector scrambled for cash. And after Goldman secured its footing, Warren Buffett walked away with a capital gain of $2 billion in addition to lucrative dividend payments.

Not long after, in 2009, Buffett and Berkshire Hathaway went "all in on America's future" with a $34 billion investment in rail shipper Burlington Northern Santa Fe (BNSF). Once again Buffett bought at the exact right time after prices had swung lower and shareholders were nervous. The value of Berkshire's investment in BNSF has since more than doubled.

The list of Buffett's big wins goes on. It's obvious Buffett knows a thing or two about a great deal. The man doesn't like to lose money.

But great deals don't come along often. In fact, they're downright hard to find.

That's why Buffett employs a little-used strategy to not only help him find his next great deal, but also generate substantial amounts of income while he waits . This is the same strategy my subscribers and I use in my newsletter, Income Multiplier .

I'm talking about selling options. Warren Buffett is a known options seller. Yes, the same man who warned against the use of derivatives as "weapons of mass destruction."

Warren Buffett doesn't take investing or making money lightly. His interest in selling options is purely profit-driven. He recognizes the incredible benefits of selling options.

When Buffett sells an option, he is aiming to achieve one of two desirable outcomes.

1.) Generate income: Selling an option produces income that is immediately deposited into the option seller's brokerage account.

2.) Chance to buy shares on a pullback: If shares fall below a certain level, the option seller will have a chance to buy shares at a big discount to recent prices.

Buffett has used option-selling strategies on many occasions to help him boost his income and give him an opportunity to buy shares on a pullback. (In this issue of StreetAuthority Daily , we told you how he used this strategy with Coca-Cola.)

For example, when Buffett was in the process of buying BNSF in 2008, he was also executing a low-risk option-selling strategy to boost his income and give him a shot at buying more shares on a dip.

On October 6, Buffett sold more than 750,000 puts on BNSF. Two days later, Buffett sold another 1.19 million puts.

Both transactions accomplished the same two goals. If shares took a nosedive before the options expired in December, Buffett would get a chance to buy more shares at a big discount.

But if BNSF kept rallying, Buffett would simply get paid... for basically doing nothing.

In this case, that's what happened. BNSF continued higher, the options expired worthless, and Buffett pocketed upfront income of $13 million without buying a single share and tying up his valuable capital.

I'm using this strategy with my Income Multiplier readers. We're generating income upfront, with the chance to buy well-known, trusted companies at huge discounts if prices should fall.

In fact, we've been using this trick on stocks like Verizon (NYSE: VZ ), Microsoft (Nasdaq: MSFT ) and Exxon Mobil (NYSE: XOM ).

Again, these are companies I wouldn't mind owning. But instead of buying them outright, I use the same options strategy Buffett uses.

Let's look at a recent trade we did with Microsoft.

Microsoft is a highly regarded company, but the $36 share price was a bit higher than I would have liked to pay for it. So instead of buying it, I sold put options on the stock.

That way if the stock fell to the lower price I wanted, I could buy the stock at that low price. If it didn't fall that much, I'd simply get to keep the money I got upfront from selling the option in the first place.

After 39 days, my Microsoft trade expired because the stock price didn't fall low enough. I simply pocketed the money I made upfront for a 5% return in 39 days .

To put that in perspective, if I had bought Microsoft shares , I'd have to wait all year just to get a 2.7% return from Microsoft's dividend. This way, I was able to earn double the income yield in just over a month. And again, I was able to do it without having to tie up my money in shares of Microsoft, which were at a five-year high of $36 at the time.

There's plenty more to share about the conservative options strategy that we use in Income Multiplier , but I don't have enough room to share it all here. If you want to learn more about this easy way to buy high-quality stocks at a huge discount and generate income while you wait, you'll want to see this .




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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