Quote of the month:
“It takes twenty years to build a reputation, and five minutes to ruin it.”

"Make more-Save less"

Recently the Bureau of Labor Statistics reported that consumer spending increased 0.8% in July, versus that of June, while personal income is up just 0.1%. That’s good news in the short term because that means that the economy was continuing to grow. It’s bad news for the long run, however, because consumers were saving less.

Consumers can’t indefinitely continue to spend more than they earn, piling up debt. At some point, the debt must be paid.

In fact, consumer debt trend is particularly worse now that the baby boomer generation is well into middle age, and the first boomers are approaching 60.

"Let’s spend it. Mom and Pop can’t last forever!"

Economists and other experts find it difficult to determine exactly why individuals aren’t saving more. One of the reasons people are not saving as much as they should be is they expect to inherit assets from their parents. But the problem is that parents are living longer than expected as a recent revision of the life insurance actuarial table’s show. You’ve heard of the bumper sticker that says “I’m spending my children’s inheritance”? That’s truer than funny.

Another reason that individuals are saving less is that they expect their investments to do most of the heavy lifting. According to Investment News, if you anticipate earning 15-20% a year on your equity investments, you don’t need to save anywhere near as much as if you expect to earn 7% or 8% annually.

As our Opinions and Facts has repeated over and over again: most people who know what’s going on do not expect the stock market to return high double digit numbers over the next decade.

While it may be tough on families, especially young ones, to save more, the fact is they are going to have to be more concerned about future income at retirement or in later years rather than expecting instant gratification.

According to Mike Clowes, Editorial Director of Investment News, “Saving isn’t easy, and it’s never fun, but most of us have no choice if we want to retire and live reasonably comfortable.”

"The Times-they are a’ changing-or are they?"

The growth of mutual funds over the last 20 years has been inevitable. In 1969 there were 347 mutual funds. By 2004 that figure grew to 16,977. During August of 1993 to the April of 2000 running of the bull, stocks pretty much just went up. During the 60’s and 70’s, Vanguard and Fidelity, two major direct marketed fund groups wouldn’t have dared to attempt to sell their mutual funds on a direct basis (1-800-NO-HELP). However, when that bull started its run, everybody made money. Fidelity, Vanguard, T. Rowe, Janus, et al, figured they’d do it either by phone or on the web. And if you remember the capital out there in pension plans and 401(k)’s, not being stupid, flowed to managers that could perform. And as an individual investor, if you could make a phone call, buy a “no load” fund and then use the internet to trade and swap, why would you need an advisor as a broker? And then: along came the bursting bubble and suddenly the pension managers and heart broken investors began to realize they needed help. So rather than being patient, they now seek out their white knight hero to turn their fortunes overnight. How? Read on, dear friend.

"Look Mario, I’ll show you how to beat the system."

According to the Wall Street Journal, in 1949 Alfred Winslow Jones figured out he could improve his investment returns by borrowing money to buy stocks with one hand and simultaneously selling stocks he didn’t actually own with the other. If he constructed the right transaction, according to the Journal, he could make money in a rising or falling market. That’s how he discovered a “hedge”. So as time has gone by, the hedge fund business has grown. Since the expenses in hedge funds are quite high, it is much more lucrative for the managers to take extreme risks and in many cases, get higher returns than typical mutual funds.

"Come in young man…, and be sure to bring your crystal ball."

A 20% of profit bonus to the managers is an excellent magnet to pull smart, young money managers to the hedge fund market. Hedge funds can both buy and short stocks. According to certain experts the bad ones use too much leverage, borrowing money to amplify bigger returns, or are chocked full of derivatives; however, since the spectacular collapse of one of the major hedge funds, the bad ones are weeding themselves out. Many believe that another bubble is expanding and it’s not being blown by a kid taking a soapy bath. While institutions such as pension plans and large endowments have embraced the Hedge Fund approach, how long do think it will take the funds to pull in smaller individual investors? Read Internet bubble.

We’re happy that we have stayed out of that game. We believe that the story of “this time it’s different” is not a story at all. It’s a dream.

"Yes, Joe, but your story is old and frankly, pretty boring."

Our managers believe in long term investing by doing extensive research on the companies whose stocks they hope to purchase. And if a buy is made, they develop a continuing relationship with the management of the companies these stocks represent. No one ever said that consistently positive investment results are easily produced with zero risk. However, we think the idea of risking unwary shareholders’ money in unchecked illusions is a train wreck waiting to happen. We believe investors need to be aware of all the possibilities of future investments-good and bad.

We think that over the long haul, the hard working serious money managers will minimize risks and consistently produce excellent results rather than flashing performance in a bull market.

Our Opinion

Looking at some old clippings during the week of celebration of Ronald Reagan’s life, we spotted comments which reflected bitter resentment of our 40th president. For example, we learned in a June 6, 2004, Fort Worth Star-Telegram article, that the “national debt rocketed from $995 billion to $2.9 trillion while he was in charge.” Even worse: “In 1989 the richest 40% of American families received 67.8% of the national income, the largest share in the 40 years since the Census Bureau has kept such statistics.”

Don Erler, guest columnist for the Star Telegram, points out that nobody denies that the national debt nearly tripled during the economic boom of the 80’s. Just as it is true that “the rich” got richer. Often overlooked is the fact that the poor got richer too.

We’ve listened to this for too long.

This persistent emphasis on income variations among citizens is silly. Nearly all families did better during the Reagan years. All five quintiles of income became wealthier as they did during the Clinton years. We need to remind our friends and ourselves that sometimes the poor and the rich, as far as strata is concerned is not static. The beautiful thing about a free market system and a capitalistic society is that it’s possible to move from one bracket to another with freedom (if taxes are kept low). Mr. Erler points out that the poorest fifth of earners of 1975 have become part of the richest quintile at some point since then. Yes, you heard it right. The majority of low earners have become high earners over time. In addition, the economist, Thomas Sowell, pointed out last year that “people who are generally poor all their lives still exist, but only 3% of the population remains in the bottom 20% for as long as a decade.”

Freedom works. The high priests of Egalitarian economics who are willing to sacrifice prosperity for all on the alter of steeply progressive taxation are wrong.

We like what Larry Gatlin, entertainer, in a recent Wall Street Journal OpEd column, commented on one presidential candidate whose plans include the roll back of tax cuts “on the rich”: “I’ve never had a poor man give me a job!”

It’s quite easy to spend public money (taxes). It’s another thing to explain how, why, and where that money is spent: that goes for both sides of the political aisle. We’ve always believed that the only way to get bloat out of our government, is to cut its income.

That’s our take. Yours is welcomed.