Playbook #081: Stock Warrants

🖼️ The Big Picture

Stock warrants are a fancy term for a stock option that’s issued by the company itself instead of stock traders (as normal “options” are.) They allow you to make long term bets on individual companies with the potential for very high returns.

For instance, Warren Buffett made a quick $12 billion dollar profit on a Bank of America 10 year stock warrant that he bought in 2011 in the aftermath of the great recession and waited 6 years to exercise. Not a bad day at the office.

Stock warrants give you the right, but not the obligation, to buy a certain amount of stock at a specified price before an expiration date that can be 5, 10, or even 15 years out in the future (instead of 1 - 3 years or less with normal options.)

The proceeds of warrant sales go straight to the company, and allow them to issue new stock when holders exercise their warrant.

Thus, companies use warrants as a tool to raise capital by selling them to investors, sometimes alongside bonds with a lower-than-market rate (so investors sacrifice returns for upside with the warrants.) They’ll also use warrants to attract (and retain) key team members by granting them as part of a compensation package.

If your Investor DNA includes the ability to deeply understand the workings of individual companies and predict their future - and if you’re stocked up on cash and are comfortable with earning no cash flow while you wait for your bet to pay off - then stock warrants might be for you.

🔢 By The Numbers

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