Buffett's Income Secret

For most individual investors, there’s just one strategy for making money in the stock market: You buy a stock, and when the price goes up, you make money. Some investors buy dividend stocks for the regular dividend payments.

But there are many other income strategies out there that savvy investors use to make regular income. Some of these strategies can actually be safer than traditional “buy and hold” investing.

Today, I want to tell you about one such income strategy that many of the world’s most famous investors (including Warren Buffett) use regularly. You don’t hear much about this particular strategy, because the big investors would rather keep some of their best strategies secret…

One of Warren Buffett’s biggest secrets is that he gets paid regular cash income for simply agreeing to buy a stock he likes at a price he likes.

He used this strategy when he bought Coca-Cola stock in 1993. What’s more, this strategy paid him a cool $7.5 million in cash that year — before he even bought Coca-Cola shares.

Think about that for a minute: Buffett made $7.5 million for basically doing nothing at all. And the thing is, investors just like you get paid cash income every day without putting any money at risk in the stock market using this income strategy.

Let me explain exactly how Buffett’s secret income strategy works….

It was April of 1993. Coca-Cola was trading around $39 a share. Warren Buffett wanted to own Coca-Cola because he knew it was a great company and that it had a lot of growth ahead. But he thought $39 was too much to pay for the stock.

Buffett determined that fair value for Coca-Cola was $35 a share. And if you know anything about Buffett, you know he’s not going to pay more that what he thinks a company is worth.

But you probably don’t know what he did next to make an easy $7.5 million…

In 1993, Warren Buffett was paid $7.5 million for simply agreeing to buy Coca-Cola at $35 a share.

That’s it. All he had to do to collect a $7.5 million fortune was agree to buy Coca-Cola at the price he wanted.

The $7.5 Million “Buffett Loophole”

It shouldn’t be too much of a surprise that an investor as savvy as Buffett would come up with a way to make a fortune by doing something he already wanted to do anyway. That’s why he’s one of the richest people in the world.

In the years since Buffett used this market loophole to make a quick and easy $7.5 million, thousands of savvy investors have raked in tens of thousands of dollars a year using “Buffett’s Loophole.”

These “Buffett’s Loophole” payments come in cash — deposited directly into your brokerage account. It only takes a few minutes to execute a “Buffett’s Loophole” trade. And once the cash hits your account, it’s yours to keep.

You can do whatever you want with the cash you get — it’s yours.

That’s the beauty of the “Buffett’s Loophole” strategy: You can use it any time you want. All you have to do is log into your brokerage website and execute the transaction. Within minutes, hundreds or thousands of dollars will appear in your brokerage account.

It’s a fully legal and accepted financial transaction that thousands of savvy investors use every day.

You may not even be aware that most online brokerages offer “Buffett’s Loophole” trades. Most investors aren’t. And your broker certainly isn’t going to just offer you such a quick and easy way to make money.

But as I write this article, these “Buffett’s Loophole” payouts are available:

• Apple is trading around $115 a share. If you agree to buy it at $105, you would be paid $1,690 in cash.
• Microsoft is trading around $44. If you agree to buy it at $43, you would be paid $1,280 in cash.
• Facebook is trading around $93. If you agree to buy it at $86, you would be paid $2,450 in cash.
• Netflix is trading around $99. If you agree to buy it at $90, you would be paid a whopping $5,000 in cash!

There are literally thousands of dollars on the table, there for the taking with “Buffett’s Loophole.”

It really is one of the easiest ways to take regular cash income out of the stock market.

Now let’s explore exactly how you can start collecting thousands of dollars in cash from the stock market on a regular basis…

Get Paid to Say Yes

In the examples I showed you above, you may have noticed that “Buffett’s Loophole” involves getting paid cash for simply agreeing to buy a stock at a lower price than it is currently trading.

How can you enter into such an agreement? With a contract between you and the person that owns the stock.

Such a contract would be pretty basic. It would simply state that you agree to buy shares of Company X at a specified price within a certain time frame. You get to choose the stock, you get to set the price at which you’d be willing to buy that stock, and you also get to choose the time frame in which you let the agreement stand.

In other words, as the potential buyer, you’re the one in control. You get to set the terms. The other guy (or gal) just pays you.

Sound pretty good?

Well, what if I told you that millions of these contracts trade every single day the stock market is open? And they trade on an exchange exactly like the ones that stocks trade on?

It’s true. These contracts are called “options contracts.” And options are simply agreements between a buyer and a seller that a stock transaction might take place at a specific price on or before a specific date in the future.

Now, before you throw up your hands and say you’ll never trade options, let me just say a couple things…

First, I know you may have heard that options are incredibly risky because the vast majority of them expire worthless, saddling the buyer with losses. Well, it’s true — if you buy stock options in an attempt to predict a stock’s price movement, chances are you’re going to be wrong.

But the “Buffett’s Loophole” strategy is not about buying stock options; it’s about selling them.

When you sell options instead of buy them, you turn everything you may have heard about options around.

Instead of spending money, when you sell options, you get money. And when the option expires worthless, instead of losing the money you spent, you simply keep the money you’ve already been paid.

Now let’s go back the Warren Buffett/Coca-Cola example I used earlier. You may recall that Coca-Cola was trading at $39 a share. Buffett thought that was too expensive. He only wanted to pay $35 a share. So he sold “put option contracts” that stated he would buy Coca-Cola if the price fell to $35.

The Coca-Cola share price did indeed fall to $35 within the time frame that was specified in those put options contracts, and Buffett gladly bought the stock at $35, just as the contract stated (quite literally, the shares were “put” to him).

And those Coca-Cola shares have become one of the best investments he ever made. He’s never sold one single share.

Please understand that when you sell put option contracts, or “puts” for short, you are agreeing to buy stock. Of course, you’ll be buying the stock at a lower price than when you sold the put option. But the fact remains that you must be willing to buy shares in individual companies to use “Buffett’s Loophole.” (Remember: You get to set the price at which you’re willing to buy.)

In fact, actually buying the stock is the worst thing that can happen when you sell put options. That’s right; the biggest risk you face when selling put options is that you will have to buy the stock.

And of course, you can always turn right around and sell it if you don’t want to keep it. (Though like Buffett, we will only be using companies that are great long-term holds.)

Now is the Time

As you know, stock prices are down a lot over the last month. That means it’s the perfect time for put option selling. Stocks are likely to rally higher, and the moves you make now will put instant cash in your account.

But of course, stocks don’t always do what we expect. So if stocks fall a little further, put options can help you be in position to scoop up some real bargains. Either way — if you just take in some extra cash, or if you buy a quality stock at a steep discount — it’s a win-win.

If you want to learn a little more about this powerful income strategy, you can read all about it here.

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.