• 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.

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These are strange times for would-be homeowners. On one hand, property prices have dropped, bringing the dream of homeownership within the grasp of many who couldn’t afford prices at their peak. On the other hand, no-one knows how much further they’ll fall, so buying property does take a certain amount of courage - assuming you can get a mortgage.

At a time like this, in other words, ‘knowing your stuff’ is more important than ever.

You might feel there’s no way you can keep on top of all the news in the housing market, but the good news is you don’t have to. Get a handle on just four areas and you should be able to make an informed choice.

1. The housing market’s future

2. Your future

3. Renting vs. buying

4. Interest rates

1. The housing market’s future

The house price speculation you hear in the news every day is largely that - speculation. No-one can really know where prices are headed, partly because prices depend partly on confidence, so the very act of publishing predictions (as long as they’re from credible sources) can have a positive or negative effect on them.

Anyone can see trends in prices once they’re underway, but spotting a high or low is a different matter altogether - and that’s what everyone really wants to know, as selling property in a slump or buying in a boom can cost you a frightening amount of money.

Anyway, even owning a crystal ball wouldn’t necessarily mean you’d benefit from house price changes. Even if you knew when prices would bottom out, you might be unable to get the right mortgage at the right time at the right price. (The same is true when you’re selling a house - even if you knew when prices were going to peak, there’s no guarantee you’d be able to find a buyer at the right time.)

Your future

In all probability, you’ll have a clearer idea about your own future than the housing market’s. If you’re thinking about buying, maybe you should pay less attention to housing market hearsay and more attention to your own finances:

Income

• Work. Is your job secure? Are you expecting a promotion / pay-rise?

• Benefits. Do you receive anything from the government? Could you? Is this likely to change for any reason?

• Windfalls. Any one-off sums of money coming your way (inheritance, sale of assets, insurance pay-outs, etc.)?

Expenditure

• Debts. Do you owe money? How soon will it be repaid - and how much extra will you have to spend when it is? Could you do it any faster?

• Spending. Is there anywhere you could cut back? Could you cut back enough to save up for a deposit and / or create a buffer against negative equity and fluctuations in mortgage costs?

• Change. Any major lifestyle changes coming up? Marriage, divorce, starting a family… Would it make sense to assess their impact before you think about buying?

You can’t know what’ll happen to your finances in the next year, but your own future’s probably more predictable than the housing market’s. It’ll probably have more of an impact on you, too: losing $15,000 on a house might be bad news, but losing your job / having a baby / getting married could have a much larger impact on your lifestyle - and your finances. Plus, that $15,000 wouldn’t really be ‘lost’ unless you were forced to sell before the housing market picks up again.

Renting vs. buying

You might be worried about losing money by buying property in a slump. It’s a valid concern, but these two questions could help you make your mind up:

1. How much am I paying in rent per month?

2. How much are house prices in my area going down per month?

There’s no guarantee that prices won’t start dropping faster, but if you keep on renting, you know you’ll be losing money. Property slumps don’t last forever, so house prices will go up again - it’s just a question of when. On the other hand, a mortgage is a big commitment, so if your own future’s looking uncertain it might make more sense to rent for a while longer.

Interest rates

If you do decide to buy, understanding interest rates is absolutely crucial, as your mortgage’s interest rate determines how much your monthly payments will cost you.

Never underestimate the difference 1% can make. Remember that 6% is actually 20% higher than 5% - not 1%. Given the size of most mortgages, and the sheer number of years you’ll be paying interest, that extra 20% can make a huge difference.

Say you take out a $200,000, 20-year mortgage*. The interest on:

1. a 5% mortgage deal might be around $117,000

2. a 6% mortgage deal might be around $144,000

In other words, that 1% makes a difference of around $27,000 - over $100 per month.

* You probably won’t take out a single 20-year mortgage. Most homeowners sign up to a succession of shorter deals (often two or five years), which lets them reassess the situation when economic conditions change. But sometimes, when interest rates are really low, it can make sense to sign up to a 20-year fixed-rate mortgage - guaranteeing yourself 20 years of (relatively) low payments!

Guest post by Melanie Taylor of Loan specialists Think Money

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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

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What is Kiva ? I took the liberty of quoting them wholesale:

See Kiva

” We Let You Loan to the Working Poor

Kiva’s mission is to connect people through lending for the sake of alleviating poverty.

Kiva is the world’s first person-to-person micro-lending website, empowering individuals to lend directly to unique entrepreneurs in the developing world.

The people you see on Kiva’s site are real individuals in need of funding - not marketing material. When you browse entrepreneurs’ profiles on the site, choose someone to lend to, and then make a loan, you are helping a real person make great strides towards economic independence and improve life for themselves, their family, and their community. Throughout the course of the loan (usually 6-12 months), you can receive email journal updates and track repayments. Then, when you get your loan money back, you can relend to someone else in need.

Kiva partners with existing expert microfinance institutions. In doing so, we gain access to outstanding entrepreneurs from impoverished communities world-wide. Our partners are experts in choosing qualified entrepreneurs. That said, they are usually short on funds. Through Kiva, our partners upload their entrepreneur profiles directly to the site so you can lend to them. When you do, not only do you get a unique experience connecting to a specific entreprenuer on the other side of the planet, but our microfinance partners can do more of what they do, more efficiently.

Kiva provides a data-rich, transparent lending platform. We are constantly working to make the system more transparent to show how money flows throughout the entire cycle, and what effect it has on the people and institutions lending it, borrowing it, and managing it along the way. To do this, we are using the power of the internet to facilitate one-to-one connections that were previously prohibitively expensive. Child sponsorship has always been a high overhead business. Kiva creates a similar interpersonal connection at much lower costs due to the instant, inexpensive nature of internet delivery. The individuals featured on our website are real people who need a loan and are waiting for socially-minded individuals like you to lend them money.”

There you have it.

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