With all that’s happening in the current market and so many conflicting opinions in the news everyday, how do you recommend people approach investing today?

The most important thing is to NOT invest emotionally, but rather objectively. The average investor is panicking now and piling into low yielding investments like CDs, savings and money market accounts – the equivalent of socking cash under the mattress. For some wealthy individuals, late in retirement, this may be prudent. However, for most investors, significant future damage may be occurring from this seemingly comfortable, short-term, benign strategy. The problem is that life expectancies are stretching; boomers/retirees are more active, and inflation (i.e. healthcare, food, vacation, etc.) will eat away at these so-called safe investments. The fact of the matter is there are a lot of opportunities now – especially as fear levels have risen so dramatically. And the opportunities do not only lie in the stock market. There are a lot of excellent investment prospects in the fixed income market as well.

Is it true that people haven’t actually lost their money if they don’t sell their stocks for a lower price?

Stocks in some respect are no different than other asset classes. You can think about stocks in the same way you think about the value of your house. If you are in the process of selling your home and the house price craters, you will experience a loss in home value. The prospective buyer will encounter a simultaneous gain, in the form of a lower price (the buyer gets to keep more money in his/her pocket). It is true that lower stock prices on unsold positions are only “paper losses,” and if prices rebound above the prices purchased then there will be “paper gains.” True gains or losses will not occur until the stock positions are sold.

The media buzz is that this is a great time for people to make a lot of money; can you explain that?

The old adage of “buy low, sell high” rings true during volatile periods like now. Most domestic equity indexes corrected by more than -40% from the peak levels experienced in late 2007. Historically these terrifying periods have been the best times to buy. For example, take the 1974 bear market, which experienced a price correction of about 50%. During that period we were in a deep recession with 9% unemployment, we had just come out of the Vietnam War, and President Nixon resigned after impeachment hearings. At the time, the S&P 500 index bottomed out at a level of approximately 61. Last Friday (2/6/09), the same index closed around 868, a 1,300%+ increase over that period (excluding dividends). Not too shabby.

The economic environment wasn’t pretty either if we fast forward to the 1990-91 period when we were knee-deep in the first Iraqi war, going through a recession (8% unemployment), and digging our way out of the S&L Crisis (Savings & Loan). Yet again, this was a great opportunity to invest as the markets have about tripled over that period, excluding the benefit of dividends (S&P 500 bottomed at around 295 in late 1990).

After the 2008 mark downturn, many people are afraid to invest. What do you suggest for them?

Unfortunately, there is no silver bullet. Everybody’s situation is different. My suggestion for a 29 year old in the wealth accumulation phase of his career would be dramatically different from a 79 year old retiree that is in the distribution phase of her investing cycle.

The best thing people can do is to educate themselves about investments. There are a lot of aggressive sharks out in the investment waters and to survive in the long run investors need to equip themselves with relevant questions to ask financial advisors and institutions in order to protect their investments. There are some great low cost tax efficient products (e.g. index funds and exchange traded funds) and strategies that I discuss in more detail in my book.

In light of current events, how can investors improve investment performance over the long run?

The low hanging fruit for investors is to drive down excessive fees and transaction costs charged by brokers and financial institutions. John Bogle, the very successful founder of The Vanguard Group, did an eighteen year study (1984-2002) showing that individual investors underperformed the “do-nothing” index strategy by more than 10%…PER YEAR. The cause, a standard fee structure of approximately 2.5% (1% load, 1% management fee, .5% transaction costs) that many investors pay, which doesn’t even account for additional tax expenses. The annual -10% underperformance is not only due to fat fees, but also from poor emotional decisions tied to the “herd” trading mentality. A sensible, unemotional approach to investing should also incorporate a “dollar-cost-averaging” strategy that purchases additional shares for each dollar invested as prices decline.

What should people do that have stocks that took a nose dive?

It really depends on the particular investment. Each stock should be thoroughly reviewed on a case by case basis. If fundamental investing is the driving force behind your investments, then I believe individuals need a systematic strategy to buy securities and sell securities. As part of this disciplined approach, I urge investors to have a thesis (basis) for ownership and if that thesis changes you can use that dynamic as a foundation for your sell signal. There will be winners and losers as we work our way through this financial crisis and recession, but with each recession and bear market there is a renewal of leadership that builds for the ensuing bull market. Tax loss considerations can play a role in the sale decision of underperforming stocks, but should not be the key determinant.

Lastly, do you have any tips for someone who may be considering investing for the first time in the current economic climate?

Now is a great time to start investing relative to a year ago. Don’t get discouraged by the market volatility. First time investors have extremely long investment horizons, therefore heightened volatility can be viewed in a beneficial light. Diversification through fund investing is another important principle that new investors should embrace. As experience levels expand for newbie investors, expanding exposure to individual stocks can become a larger priority. Until then, my advice to first-timers is to take a more conservative stance.

NOTE:

Wade is also offering a free ebook which shares excerpts from his book, for a limited time. Be sure to stop by his website to get a copy www.Sidoxia.com. This is your chance to take a look inside the book and to learn additional information about Wade Slome and his business.

For more information about Wade Slome and his virtual tour, check the schedule at http://virtualblogtour.blogspot.com/2008/12/how-i-managed-20000000000-by-age-32-by.html

• Apple Computer Inc. and Oracle Corporation incorporated.
• Elvis Presley died at age 42.
• Egyptian President Anwar Sadat becomes the first Arab leader to officially visit Isreal when he meets with Israeli Prime Minister Menachem Begin, seeking a permanent peace settlement.

I decided to get this written after reading a quote from Whitney Tilson , manager of T2 Partners LLC. He said “Read all of Warren Buffett’s Berkshire-Hathaway shareholder letters . That’s all you need to know.” If you would like to see more summaries like this, let us know !

Long Term vs. Short Term Outlook

While operating earnings were “moderately better” than anticipated the report represents a mixed bag of financial information to stockholders. The actual numbers are not as important as the underlying messages contained within the report. More than once, a reference to keeping a long term outlook vs. short term is plied as a way to deflect possible criticism towards under-performing business units and numbers that are not as favorable.

Of note, textile operations are under-performing, banking is performing as expected and insurance is surging although there are signs of a slowdown in profitability.

Much is made of the way earnings per share and equity capital are viewed when addressing “record” earnings as a new high mark. Taking a more realistic approach in how it is compared to annual equity growth gives credibility to the report in not over-stating the equity position. But this is a double-edged sword. Because of this methodology, the point is made that the current fiscal year does not appear to be in a position to deliver as strong of a financial performance as 1977.

Textile Unit

As for the textile unit, an admission is made to the ineffectiveness of forecasting and with a lack of understanding of the nature of the industry as a whole. The problems appear to be both market driven as well as based on poor management overall. The report does not mince words and makes certain that shareholders know that while profitability is important, so too are the livelihoods of thousands of workers, and the apparently strong efforts by all to bring the division to a profitable position. While this is a nice gesture in keeping the business afloat during this time, it is not a good long term strategy. Sooner or later, the business will have to produce profits, or be faced with the prospect of being sold or dissolved. The problems of marketing and manufacturing are areas of focus in order to turn this unit towards a profitable state.

Insurance Unit

The insurance unit contains the greatest up and down trends among all of the units. While growth and profits are strong, an admission of specific failures over-shadows an otherwise stellar performance. These failures are apparent in certain products and personnel issues. Only one of these is given a possible solution, and that is the personnel issue which is being remedied through a re-organization. The others are not addressed as to their resolution. One is left to assume that a certain amount of ’sins’ are admissible since the P&L sheet is strong.

Tough Times?

The underwriting portion of the insurance unit will be experiencing rough waters because greater than expected costs of operations will impair future profits. This coupled with the fact that rate increases are not keeping abreast with cost increases of 1% per month, portends a foundering outlook. The two areas that are forcing upward pressure on cost are monetary inflation (“the cost of repairing humans and property”) and social inflation (the cost increases realized by an erosion of the boundaries which contain what is covered by insurance policies). These specific increases are a result of liberal societal views backed by jury decisions which affect the insurance industry as a whole.

Again, a stark contrast to good profit news is presented by the realization that a reduction in volume in underwriting will force pressure on the unit to compete in an area that it is not familiar with at this time – price. The goal of which is to keep competition at bay. The wisdom of such a move will play out on its own, but it is has always been very difficult to pull back from a price centric marketing model once a business begins to play in that field.

The homestate operations are well within tolerable limits by producing low loss ratios. The trend is strong and shows that it is a profitable and well-run unit.

A statement is made to the sameness of insurance operations at all companies, but with the difference being the positive effect of the individual managers on the business unit and how fortunate they are to have their current management team in place. This is a powerful testimony to the contributions that individuals make in a given organization.

Investment Principles.

Insurance investments are a large growth area that should be expanded upon. The admission of the stance of keeping long-term strategies when looking at investments will prove wise for overall positive performance in the future.

Then, the report digresses into a history of Berkshire years which illustrates that one financial year does not a company make (or break). Not lost on business savvy persons, this illustration is more an attempt to prevent knee-jerk reactions to short-term trends and to stay the course in order to ultimately get to the point of realizing a favorable return on investment.

Equity holdings are listed for 1977, and much is made of the selection process for marketable equity securities. The report stresses that desirable business are 1) ones which are understood, 2) have favorable long-term prospects, 3) are operated by honest and competent people, 4) are available at attractive prices. These points can and should be applied to the other business units as well. This should make up an overall strategy in obtaining successful businesses in the future.

A distinction is made between corporate acquisition and large stock positions in companies with the understanding that long-term outlook drives these decisions based on excellent market value and dividend returns. The report speaks to ownership of a corporation vs. allowing it to thrive under its present management and how, while somewhat unorthodox, this view results in a better return. It emphasizes up-side potential without the operational costs associated with ownership.

Banking Unit

The banking holdings perform strongly and the outlook is expected to remain so. Finally, equity interest in Blue Chip Stamps was increased. This unit showed solid growth.

The $22.54 earnings per share helps in keeping shareholders content. It is not a great report, but not bad either especially given the economic climate at the time.

About Berkshire Hathaway

Berkshire Hathaway (NYSE: BRK.A, NYSE: BRK.B) is a conglomerate holding company headquartered in Omaha, Nebraska, U.S., that oversees and manages a number of subsidiary companies. Berkshire Hathaway’s core business is insurance, including property and casualty insurance, reinsurance and specialty nonstandard insurance. The Company averaged an annual return in excess of 21% to its shareholders for the last 42 years while employing large amounts of capital and minimal debt.

I know where Minimum Wage is coming from. I grew up in a household with a far below average income, and while we may have done all right for ourselves, I grew up around people who existed in true poverty. Thankfully, I was able to take advantage of the great opportunities that life offered me – and the great foundation that my parents gave me as a person – and was able to find a better, financially healthy life where I could raise my children without a regular sense of necessity underlying day to day life.

But what can a person do if they’re in Minimum Wage’s situation? Here are the ten things I would do if I found myself only able to earn minimum wage.

1. Go rural.
It is far, far easier to make a living on minimum wage in a rural situation. There are many small towns where you can find a room to rent for $100 a month and a small apartment to rent for $200 a month. Yes, these really exist – I see them fairly regularly when I get out in the more rural areas of Iowa. Even better, these areas often have lots of jobs for minimum wage workers – I see lots of help wanted signs around these towns and notices inside of town halls and gas stations looking for workers.

2. Don’t drive.
A car is a giant money suck. There’s no ifs, ands, or buts about it, if you’re working minimum wage, your car is killing you. Ditch the car – get whatever cash you can from it. Then choose a place to live where you can get to work by foot or by bicycle. In a small town, it’s pretty easy to reach any other place in the town (and many places in the nearby countryside) on foot or by bicycle, and it’s something that people often do to cut corners.

3. Find the free stuff.
In towns of any size, there are resources available for the impoverished, from free dinners at churches to food giveaways to soup kitchens. The library provides free entertainment in the forms of books, music, and internet access. There are parks, recreational activities, and countless other things even in the smallest of rural towns. Look around for the free stuff and use it – it’s there for everyone to utilize. When you must spend money, be as frugal as possible. Ramen is very cheap, filling, and full of carbs, for example.

4. Don’t be proud.
Pride often keeps people from walking into a soup kitchen. Don’t let it. That kind of pride is an obstacle ground into you by a life in a consumerist society. People who are there to help you want to help you stand on your own two feet – give them that opportunity. Look for every opportunity to help you with your situation, from consulting to WIC to Medicaid to welfare (regardless of my political feelings on it, it’s definitely a resource someone in that position should use). If you don’t know where to start, start off by asking a pastor or a clergyman for help.

5. Minimize your required commitments.
Repaying debts? Call the debtors and explain your situation and ask for an abatement. This won’t get rid of your debt, but it can minimize your requirements for the time being. If you have children that you simply can’t support, look for opportunities to help you with that burden – your family is a great place to start, for example. Don’t saddle yourself with burdens heavier than you can carry or you’ll do nothing but collapse. You don’t become strong by carrying 500 pounds of weight on your back – you become strong by learning how to carry ten pounds, then adding more as you go along.

6. Take every side opportunity you can.
There are all sorts of little opportunities to make more money if you pay attention. Doing things like helping someone shingle a roof for $10 an hour cash is an opportunity you can’t let pass by. Free meals? Take them. Twenty bucks for helping an old man clean out his garage? Do it. Ask around for odd jobs and other small-scale moneymaking opportunities – perhaps even get started on your own “handyman” business.

7. Minimize your possessions.
There are a lot of reasons for doing this. The biggest one is that the more stuff you have, the more money you’ve wasted. Also, fewer possessions mean that you need less room to live. For a while, all of my worldly possessions (clothes included) fit in a single Rubbermaid tub – and that made it extremely easy to actually live in someone’s living room for a while.

8. Make a steely commitment to succeed.
Even after you’ve done all of this, it still takes some serious commitment to make all of this work. You can get yourself in a position where you’re not spending more than you make, but it takes commitment to stay there. Remind yourself every day that you’re not going to waste money and that you’re going to spend less than you earn this week – and this month – and this year. That’s the one way you can get ahead.

9. Save automatically.
So what do you do when you are making more than you’re spending? Take that extra money and put it into a savings account. But just doing that every once in a while won’t cut it. Keep most of your money in a checking account, then go to the library and use the internet access there to set up an online savings account with a big bank, like ING or HSBC. Set up an automatic savings plan there to withdraw $10 a week from your main checking – or maybe even more. Then walk away and forget about it. What will happen? After a year, you’ll have $530 or so in the account. If you’ve put in more weekly, you’ll have even more.

10. Educate yourself.
While you’re putting yourself in a better financial place, spend your spare time educating yourself. Take classes at the nearest community college and work towards some kind of degree. If you need to, transfer to a state university – if you’ve been working on minimum wage for a long time and are actually making strong progress towards a degree, they will help you big time with paying for it. The key is getting started – see what your local community college has to offer.

One final tip: don’t give up the dream.
If you’re working a minimum wage job, either you’re very young, very lazy, or very unlucky. All of these can be overcome, but they take time and commitment and a lot of hard work. It’s very easy to give up the dream of a better life when you’re doing this. Don’t. You can succeed and you will succeed if you spend every day taking steps in the right direction. Surround yourself with people who are also fighting to go in the right direction. Don’t be resentful of people in a better situation than you – instead, use them as inspiration and realize that if you keep on the path, you’ll get there too.

Thanks to thesimpledollar.com

After all, your health is closely related to your wealth.

The Simple Dollar
Everything You Ever Really Needed to Know About Personal Finance on the Back of Five Business Cards

The Digerati Life
8 Lessons I Learned From The Cheapest Family In The Nation

We will be hosting a number of Guest Bloggers very soon. Stay tuned. Contact me if you would llike to write for us.

1. Make a meal list

If you know exactly what you’re going to make for the next week, you can do shopping for only those meals (and snacks). Make a meal list, deciding what your family will have for breakfasts, lunches and dinners. When you buy only for what you need you don’t spend more than you have to and you don’t buy too little and have to go back again.

2. Use what you already have

If you have a family, you are probably well stocked when it comes to food. But except for emergency food (which you won’t use until an emergency occurs anyway), you really don’t need loads of food stocked up for regular use. Many people stock up on foods and seem to never use them. They get pushed to the back of the shelves and hidden behind the new, good stuff you want to use. So this week, pull all of those items into the forefront. Canned foods, cereals, freezer foods etc. Examine it all and work them all into your meal list. If you are really over-stocked, this could go on for a number of weeks, meaning you save money!

3. Buy less junk

If you buy a lot of chips, cookies and the like for snacks, buy less. You’ll not only save money, but calories too. Start only buying one of these kinds of snacks for the week and more fruit. If you and your family really enjoy the sugary snacks, make them yourself. Making things from scratch is often cheaper in the long run. You can buy large bags of flour and sugar for not much money at all in fact and buy the rest of the ingredients as you need them.

4. Apply quantities to your list

Writing a meal and grocery list is part one, but part two is also important. Beside each item on your grocery list, write how much of that item you need. How many times have you picked something up, wondered how many you needed and now you have them still sitting in your pantry? Exactly. This goes for everything, canned foods, meat, fruits and vegetables etc. If something is on sale that you know for absolute sure you are going to use again soon, pick up an extra one or two, not six. The item will be on sale again sometime, there is no need to be overzealous.

5. Buy Store Brands

Store brands are usually cheaper

It looks like I may need a new furnace in the near future. The current furnace, and air conditioning for that matter, have done well and lasted over twenty years. Given that the manufacturers estimated 7-10 years, I am very happy. To get an educated opinion on the matter, we have scheduled an appointment with a professional that will evaluate the future of the furnace.

As my wife and I discussed the matter today, she mentioned that our budget for October would be a bust if we counted the entire estimated purchase price of approximately $8,000 in the month. However, I think there is a better way to account for this purchase that makes a lot more sense.

My suggestion to her was to take the price of the furnace divided by the shorter of the estimated life of the furnace, let’s say 600 months, and the estimated remaining time we planned to stay in this house, let’s say 60 months, and use that as a monthly expense in our budget for the specified time period. This is a more business-like way of doing the accounting, but one I think can be applied to personal budgeting.

Why did I choose those time periods?

If we were to use the furnace for its entire life, the value we receive from the furnace would be spread over the life of the furnace – not just the month in which it is purchased. If we move out before the estimated life is over, I want to make sure the entire purchase price is captured. Taking the smaller of these two time periods makes sure you are not underestimating your expenses.

But it won’t match your actual cash flow…

In short, I think that’s ok. Budgeting is not necessarily only meant to make sure you have money in your bank account at the end of the month, although it can be used for that. Instead, we use budgeting to keep ourselves disciplined in our monthly spending. In the example I gave, $8,000 over 60 months, we will have to reduce our monthly spending by $133 over the next 60 months to even out this large expense.

This approach is not for everyone. As I mentioned, for those of you that use budgeting to make sure there is a certain dollar amount left in your checking account at the end of the month to avoid overdraft fees, this will likely require debt to purchase. You would then deduct the monthly payment from your budget.

One thing we didn’t finalize is whether we should have a more efficient air conditioner installed at the same time to cut our cooling costs.

Photo: VentureWeek.com

There are several recurring expenses that people have the option of paying by the month or paying in one lump sum every year. There is usually a fee associated with the monthly payment option, so it would seem on the surface that paying once a year would make the most financial sense. Although as a general rule this is true, it may not always be the case. The answer depends on many factors including what the total amount per year due is, what the fee is (calculated for the entire year) and also, what purposes that money would be serving over the course of the year if not paid in a lump sum.

To illustrate some real life scenarios for this I am going to take two such recurring payments in my own life – my life insurance premium and my auto insurance premium, and why, for us, it makes more sense to pay one of them on a yearly basis and one on a monthly basis, even though they both have the same yearly fee for monthly payments. And then illustrate a completely different scenario (the no fee for monthly payment type) with my son’s preschool tuition. It’s all about scope and scale and what other factors come into play.

First, my life insurance payment, the straightforward example. I pay $300/year for term life coverage for my spouse and I (number slightly rounded for simplicity) and if we choose to pay by the month instead we incur a $3.50 fee every month, so $42/year in fees. So if you look at that from an interest perspective, that is like charging 14% interest (42/300 x 100 = 14%) for the privilege of paying by the month. So if you can budget for it, pay the $300 once a year! Save yourself $42. There is no way you can safely and comfortably beat 14% year after year in any kind of short term investment. (Unless you owe high interest credit card debt. More on that below.)

Now, for my auto insurance payment. I have the option of paying $1000 at once annually (number slightly rounded again for simplicity) or about $84 per month, plus again a $3.50 fee per month for the latter option ($42/year, as before). Since my total due per year is $1000, you could, if looking at the fee in terms of “interest” charged on your total premium, treat this as if you are paying 4.2% in interest for the convenience of paying in monthly installments. Now…. what are you doing with the money if not paying it all at once to your insurance company? Assuming you have the money up front to pay, choosing to pay monthly instead and investing that money in a high yield online savings account at we’ll say 5% interest, you’d earn about $22 in interest (and it is taxable, so really, depending on your tax bracket, more like $15) because you have to pay a 12th of it out to the auto insurance company every month. So clearly, pay it all at once! But…. let’s deconstruct this issue a bit further before we move on. Because right now, that’s not what we are doing.

We are pretty significantly in debt. Instead of paying our auto insurance in one lump sum, but instead paying it month to month because this method frees up more money faster for us for debt reduction. Because our credit card debt has been at 9.9% interest, every dollar we put towards debt reduction is in effect giving us an instant 9.9% return. It is not the clear cut case of saving the money in a savings account and paying it out little by little, because the money we put towards debt reduction is then not available for our auto insurance premium at all. But allowing us to pay a smaller amount monthly vs one big lump payment allows us to put more money faster towards the credit card debt. So for now, it makes more sense for us to in effect pay a 4.2% interest rate on the auto insurance to pay down another 9.9% interest rate. It is all about the numbers.

Another case in which it may make sense to pay monthly vs yearly is when the total amount due yearly is very high and/or the fee is very small (or nonexistent). If there is no fee involved in stretching out the payments (like my son’s preschool tuition bill) there is no real reason to pay in advance at once. I sit his tuition money in our ING savings account at 4.5% interest and make the required payment every two months and earn interest on the balance since his school does not charge a fee for this payment structure. And in my above insurance scenarios, if you pay a $42/year fee for monthly vs yearly payments, there will be a tipping point where the amount you could sit in an interest-bearing savings account would earn more interest (minus taxes) than the fee assesed for paying monthly. This number may be rather high and it might not happen often in a practical sense, but it can happen. My insurance company for example, that monthly $3.50 service charge is the standard charge no matter what the total amount is, and many states have much higher insurance premiums than my state does. Insuring 2 cars in a no-fault state with high rates…. you may be looking at many thousands of dollars a year in payments and it may end up making financial sense to pay monthly, or at least, be a wash as far as interest paid vs interest earned.

So a simple on the face of it problem may actually be more complicated than you’d think. But in general, make sure you’re aware of what consequences your payment choices for your recurring bills hold, and choose wisely. We’d all like to save some money in the process.