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#324 - Buffettology Is Missing One Key Investing Concept: Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about why Buffettology is missing one key investing concept. Buffettology is just framework around how Warren Buffett...

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Hey everyone. This is Kirk here again from Option Alpha and welcome back to the daily call. Today, we’re going to be talking about why Buffettology is missing one key investing concept. Buffettology is just framework around how Warren Buffett invests and there's actually a couple of good books on this that are out there. You can just search Buffettology and pick one up at Amazon or wherever you buy your books. But I think that the books and just this whole framework around investing is really interesting and a lot of good stuff that comes out of it naturally and Warren Buffett is probably one of the best investors of all time, if not, arguably the best investor or all time and I think he got a lot of things going for him. Obviously, he started at the right time. He was big on compounding. He was big on intrinsic value. A lot of that stuff worked in Buffett’s favor. One of the things that we talk about at nausea here is why Warren Buffett is actually a big time option seller. Now, he does this not only through actually selling options where he sells out of the money options on the indexes, but he also does this through his insurance companies. And one of the key lessons in there and then we'll talk about the one thing it’s missing. But one of the key lessons in Buffettology is this idea of insurance float and why Warren Buffett holds basically the biggest single person conglomerate of insurance companies in the country and the reason he does that is because of insurance float because he knows he’s taking in premium and then every so often, he might have to pay out a big sum, but it never overshadows the small premium that he takes in from selling insurance policies which is exactly the same business of selling options. But what he doesn't include in there or what this book doesn’t include is… I won’t say it's Warren Buffett, necessarily. But what the book doesn't really include or talk about or any of these Buffettology, like summaries that I see online is the concept of frequency or the number of trades, this large number of law. Everything works really good if everything works out, right? If you invest in a company and it says you have to wait for five or 10 years before you see returns, that's all good if it actually works out. But in many cases, the reality of people who are investing at their kitchen table, meaning they’re talking with their significant other, husbands, wives and deciding where to put their only $10,000 or $15,000, that doesn't work out so well because you not only have to hold for five or 10 years to see if you're right and you waste all that time, but what if immediately, we have this Netflix effect and the company that you thought was safe that had a “moat” around it, that had predictable returns now has completely turned around? And we’re seeing this more and more with disruptive technology and disruptive companies. The company that you think today is totally safe, totally secure could be completely gone in five or six years. And so, that type of black swan event, that risk is really not accounted for it and I think it's a big, big misconception. And so, what I think the book is missing is this idea of frequency or the law of large numbers that all of this stuff works really, really well, but you have to do it on a consistent basis. You can’t just invest all of your money. I’m not saying they suggest doing that, but you can’t just invest all of your money on something that has a positive potential expected return, but that still has really negative downside when you're only doing five or six companies over the course of the next five or 10 years or even 20 companies over the course of five or 10 years. It's not a big enough sample size for these expected returns to actually play out. Why I love options trading more so than long-term buy-and-hold investing on a wild scale (I love it way more than long-term buy-and-hold investing) is because with options, you have the ability to quickly and accurately ge

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