When looking at stock market history, one of the best investment decisions possible would have been to buy Berkshire Hathaway (NYSE: BRK-A) in 1965.

One problem with this is that many of us were not investing back then. Even if we were, the stock of a New England textile manufacturer run by some guy in Nebraska might not have sounded all that appealing.

[ad#Google Adsense 336×280-IA]Of course, the guy from Nebraska turned out to be Warren Buffett, one of the greatest investors of all time.

From 1965 through the end of 2012, Berkshire shares gained 586,817% while the S&P 500 gained 7,433%.

Berkshire has long traded as the highest-priced listed stock.

The company’s “A” class of shares has traded above $166,000.

To make the stock more accessible, Buffett introduced a “B” class of shares, Berkshire Hathaway (NYSE: BRK-B), which trade for a fraction (1/1,500th) of the price of the “A” shares.

Most individual investors will find the “B” shares to be more accessible.

While buying Berkshire years ago would have been a great investment, investors no longer have that option. They must decide whether it makes sense to buy now.

Bulls will argue the stock has a great long-term track record. Bears will note it seems unlikely the gains of the past 47 years can be duplicated in the next 47 years.

Buffett’s partner, Charlie Munger, has warned investors not to expect the remarkable returns seen in the past. Munger takes a long-term view: “I don’t pay attention to five years, three years in terms of annual gains because our past returns were almost unbelievable. We are slowing down a little bit but still pleasant.”

Investors thinking about buying Berkshire must also think about what the company will be like after Buffett is gone. No investment manager will live forever, and Berkshire’s performance is largely due to Buffett’s unique skills.

Buffett recognizes that he is not immortal and created a company that should be able to deliver profits long after he is gone. Berkshire consists of a number of independent companies in diversified businesses run by professionals with a proven record of success. These managers focus on their specialty, whether it is selling jewelry or operating a reinsurance company. They generate profits, which are invested by Buffett and a team of investment managers. This business structure is designed to survive Buffett, and with the right managers in place could deliver above-average gains for years to come.

Under Buffett, Berkshire Hathaway never paid a dividend. That fact eliminates the stock from consideration by income investors. However, a covered call strategy can create an income stream from Berkshire.

Covered calls are call option contracts sold on a stock that you already own. Options are not traded on the “A” shares of Berkshire, so this can only be done with the “B” shares. If you own 100 shares, you can sell a call and receive immediate income. If the shares are below the option’s strike price when the option expires, you keep the shares and the income. You are then free to sell another call option and generate additional income. If the shares are above the call’s expiration price, you will have to sell and accept the profit that you agreed to when you sold the call.

Berkshire Hathaway is generally considered to be a low-volatility stock. Options prices will be low because the volatility is low, but covered calls could still generate income of 3% or more a year. Traders could sell out-of-the-money options that expire in one to two months for a small premium and receive income six or more times a year.

For example, say you bought 100 shares of BRK-B for about $111 and sold one June $115 call, currently trading at about $0.60 with six weeks to expiration. You’d bring in $60 worth of income immediately, and there are two possible outcomes:

1. If BRK-B is trading above $115 on June 21, you will be required to sell your shares at this price. Given that your cost basis was $110.40 ($111 minus $0.60 premium collected), you would see a total return of 4.2%.

2. If BRK-B remains below $115 through June 21, you keep your shares and your premium, essentially creating your own dividend of 0.54%. If you repeated a similar trade six times a year, you could create an annual “dividend” of 3.24%.

Covered calls can transform many non-dividend-paying stocks into income investments. Berkshire Hathaway may not deliver large gains in the future like it did in the past, but it can deliver “pleasant” gains, in the words of Charlie Munger, and income for those who sell options on it.

— Amber Hestla-Barnhart

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Source: ProfitableTrading