'My pal Warren' is no doubt looking long term, and for most of the past two years has been up on Berkshire Hathaway's (NYSE: BRK.A) BNI investment. However that is not the case today as his most recent purchase at $75.00 per share (not bought in the open market) is under water; the shares closed at $66.04, down 12%. He is losing even more on his average purchase price.
That brings me to my recent activity, trading naked puts, which I discussed earlier today. These puts pay me cash on the trading day to accept an obligation to buy the stock at a given strike price. This secures someone's 'stop loss' or hedge, limiting their downside.
What intrigued me about this particular trade is that I have had BNI on my watchlist for two years now, but I haven't acquired any because I was not able to get the value I wanted. Rising oil prices and news of Buffett pushed the price up beyond a reasonable entry point. Now things have changed.
I was looking to get into BNI at $60, which it has not been except for a fleeting moment, for three and half years. The stock closed last Friday at 66.04. What I did instead last week is 'sell open orders to buy' (naked puts) April $60 puts, getting paid $2.70 per share, and I took a second position for April $55's receiving $1.50 per share. That makes my breakeven points $57.30 and $53.50 if both were 'put to me.'
If both transactions happen, my average purchase price will be $55.40 or 26% below Buffett's last purchase. If you figure that the average price paid for his 22% stake in Burlington was closer to $85, then I would be achieving a 35% discount! Now that would be amazing!
It is my expectation that Buffett has some limit to how much of the Burlington Northern Railroad he wants to own, but it would not surprise me if he bought more stock, dollar cost averaging down, perhaps jealous that I got mine for less. Hey Warren, lets do lunch -- on me!
The trades discussed here are not open to most investors. You must be preapproved at the highest level in advance by your brokerage house. My earlier story on naked puts discusses Johnson and Johnson (NYSE: JNJ) and United Parcel Service (NYSE: UPS), two other stocks that Buffett also owns. The three together, acquired at today's depressed prices, would be a fantastic foundation for a new long-term portfolio or to add stability to an existing one.
The combination of BNI and UPS may counter-balance each other in a very opportune way. High oil prices drive up the stock of BNI, as it has a competitive advantage over trucking, and hurt the bottom line of UPS, which owns the largest fleet of trucks and planes in the world.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of BRK.B, JNJ, UPS and have open options in BNI, JNJ, and UPS as stated .