At the 1997 Berkshire Hathaway Shareholders’ Meeting, Warren Buffett and Charlie Munger were asked what they thought of the then-growing trend of speculative activity among small investors. At that time, the Dotcom bubble had just begun to grow, and it was then that many novice traders began to engage in financial developments such as options and futures.
Here’s what the duo had to say on the subject:
The standard thinking behind using leverage is to use it to act faster in the market. If you are sure that stocks are rising, then you are trying to make more money by buying options and futures, then they will rise more than the corresponding share price, but there are no sure things on the market. According to Buffett, if we want to double our money by the end of the year, it’s good to use the futures market – if you really have to. When people focus on the short-term price behavior that underlies buying calls or speculating on index futures – strongly you are likely to withdraw your money from the main “ball” that values business.
Another problem with options is that they expire over time – the closer we are to the expiration, the lower the price of the put or call position. This time, the breakup introduces another problem that ordinary shareholders don’t have to worry about – you may be right about a company’s prospects, but you may still lose money if you’re wrong with the timing of the deal.
If you start investing early and conservatively, you’re less likely to end up in a situation where you “have to” double your money in a year. Investing this way isn’t necessarily easy, but by keeping a wide margin of error and finding cheap businesses with tools like stock screening with GuruFocus, you can build a portfolio that will combine your savings over time and provide good pension “pool”.
Junior Trader Kameliya Ivanova