Warren Buffett and the profits he made on warrants

Warren Buffett and the profits he made on warrants

For some reason, warrants do not enjoy the same level of popularity as equities; investors tend to shy away from trading warrants. Perhaps it’s a fear of the unknown or perhaps it’s just a misunderstood financial instrument. Interestingly, investing guru Warren Buffett embraces warrants.

He made USD3.1 billion on Goldman Sachs warrants, a whopping returns of 62% on an initial investment of USD5 billion over five years – and that’s not the only one. According to CNBC, Buffett received ‘only’ USD260 million from GE warrants.

So, if a maestro like Buffett displays a penchant for warrants, what’s stopping the average trader from following in Buffett’s footsteps? What is the attraction that warrants hold?

What are warrants? It’s a derivative, which means that its value is derived from the underlying security/share. It provides a cheaper way of investing in a listed company’s shares without having to pay the full amount.

There are two types of structured warrants – call and put.

The owner of a call warrant has a right but not the obligation to purchase an underlying security/share at a certain price, quantity and date. The owner of a put warrant has a right but not the obligation to sell an underlying security at a certain price, quantity and date.

Essentially, when investing in a call warrant, the investor is making a “reservation” to buy a predetermined number of shares at a certain price in the future.

On Bursa Malaysia, only company warrants (prefixed with ‘w’, e.g. WA, WB, WC etc.) issued by companies and structured warrants (prefixed with a ‘c’, e.g. CA, CB, CC or ‘h’, e.g. HA, HB, HC etc.) issued by financial institutions are available.

Warrants are attractive because of the amplification of profits enjoyed in a rising market. Understandably the value of a warrant will increase exponentially riding on the underlying stock of the same company. To learn more about warrants, read our previous article HERE.

To cater to traders’ interest in warrants listed on Bursa Malaysia, the OSK188 trading portal has a dedicated warrants website where pertinent, comprehensive information on warrants can be obtained. The website contains a comprehensive one-stop search page for all warrants listed on Bursa Malaysia Stock Exchange. At the same time it also has a warrants calculator to determine or price the value of your warrant and a statistical analysis of warrant performance. Check out the warrants website today.

References:

  1. http://www.cnbc.com/id/101118959 accessed on 27 March 2014
  2. http://qz.com/67052/heres-how-warren-buffett-made-3-1-billion-on-his-crisis-era-bet-on-goldman-sachs/ accessed on 27 March 2014