Forgive Me Father Buffett For I Have Sinned
Why does buying options make you feel like a dirty investor? Because generally, it should.
Using option contracts is not investing. You are price speculating, betting on if a particular asset price will go up (call) or down (put) over a defined period of time. That’s betting - not investing. As self-proclaimed Buffett and Munger nerds, we know this, yet Mitch and I currently hold an option position totalling nearly 40% of our portfolio (details here). So we should feel really dirty - yet we don’t. Why?
It’s not buying options that matter, it’s how you use them and why.
We use options as insurance against what we perceive to be future dangerous market events. Unfortunately, events requiring this type of insurance are occurring more frequently than we could have ever imagined. In a healthy market, an early Buffett world perhaps, we would be safe to invest organically. Investing in businesses we believe in and holding them as they (hopefully) prove our valuation over time.
We no longer have this luxury of simplicity and quite frankly, no one really does. The sad reality is that if you invest in public markets, your portfolio is open to being impacted by central banking policies more than any other time in history. The flow on effects of which could devastate good businesses you believe in which hibernate for decades, at no fault of their own.
We use options when its the only way to protect our portfolio against big market swings which could affect the companies we are invested in and restrict our ability to hold these companies for as long as we’d like to. Options have meant that we can protect our portfolio instead of liquidating our portfolio.
Previously we’ve felt the future was so uncertain (and our portfolio was small enough) to both liquidate and hold options with our option insurance replacing our returns for the period, e.g our covid hedge (details here).
We don’t enjoy this. It’s not investing. We shouldn’t need to do this. And we wouldn’t need to do this if markets didn’t contain such extreme tail risks due to poor management of the global economy - but they do.
To us, option hedging is short term protection whilst we contemplate long term solutions. It seems quite a few have hung their hats on Bitcoin/crypto as that long term solution, which befuddles me even more today than it did when I wrote my first article. Debasement is only half the battle! Intrinsic value is what we’re missing and Bitcoin doesn’t get us there.
My next article is a long one but an important one, revisiting what intrinsic value means and what money itself really is: “Money: How It Started & How Its Going” coming soon…