Quotes of the Times

“We lived a very expensive lifestyle. It’s the type of lifestyle that’s very difficult to turn on and off like a spigot.”

Kenneth Lay,
Former CEO of Enron
Explaining his personal finance decisions
(WSJ. May 20-21, 2006)

“Our Take… (One of them!)”

At a recent Investment Company Institute meeting in Washington, we listened to a panel of financial journalists talk about the future of markets, the economy, the media, and of course, the internet. One of the journalists who no longer writes a column pointed out that he stopped writing opinion columns since he found himself repeating everything that he had written in the past: the need for liquidity, research, patience, buying value, and all those things that all of us know we need when we make an investment. Why? It was just too boring for him and his readers. He discovered in order to keep his readership, he had to come up with gimmicky new things. Sound familiar? We have seen this game played by stock brokers for as long as we can remember.

When this gentleman said this, it reminded me of our approach to investing here at Omega. Today, we say the same things we said 20 years ago. Sometimes it becomes tempting to look at new investments (hedge funds, indexed annuities, oil deals, etc.) in order to speed up the increase of wealth of our clientele. Certainly, we can’t leave new things alone and we must do our research and due diligence on any new ideas that come up. The old concept of utilizing well trained, well educated experienced money managers with a company that is strong and powerful and is concerned with the good of its clients and shareholders is necessary for our own continued success. Thanks to our partners in the money management business and our marvelous staff, we have been able to retain our independence, promote stability with our clients and more than anything, keep the confidence of the people who have entrusted their money with us. Sometimes our story becomes boring, but why change something that has proved so successful for our clients for so long?

“Here’s a Problem”

Sitting right there on the front burner is what the media calls the most current “crisis”: immigration. Like us, you probably have quite differing views on the various aspects of the immigration problem. First, we have to protect our borders from possible terrorists. (Interestingly enough, the terrorists who attacked on 9/11 didn’t come from Mexico nor did they come from Canada.) This means we could build a wall much the way the Soviet Union did in East Berlin, (now that’s an idea… a stupid one of course).

“Send ‘Em Home!”

There are all kinds of ideas about ways to send illegal Mexican nationals home. This really would be dumb since our economy would probably come close to falling apart. From this writer’s observation, many companies and individuals rely heavily on the illegal’s work ethic to keep their operations running on a smooth basis.

“Dollars in the Mail”

Then, there’s Mexico’s problem: no one knows what effect the illegals sending money home to their families has on the economy south of the border. And what about the children of these illegals (I hate that word) who were born here and are American citizens?

“Not so fast, Sir. We have other problems”

Don Erler, an industrialist here in Fort Worth in a recent op-ed piece in the Fort Worth Star Telegram says the immediate “crisis” in this country is that senior entitlement programs face insolvency. Don says immigration is secondary. Social Security and Medicare’s fiscal status tells us that the Social Security “trust fund” will be exhausted in 2040; Medicare’s in 2018. (Forgive me, but neither Social Security nor Medicare has a trust fund.) Mr. Erler points out that unfunded promises to pay future pension and health care benefits are growing by nearly $3 trillion each year, while the number of workers supporting each senior continues to shrink from nearly 4 today to 2 by mid-century. By the way, $3 trillion is more than the entire current federal budget.

“So, what’s the answer?”

There are probably several, but one of them will probably be a means testing plan. If a person has outside income (retirement or investment income, or continuing to work, etc.) he would get less Social Security and if after a certain amount of income is realized, he would be cut off from Social Security altogether. That’s an idea that’s been knocked around for a long time. Another answer is maybe Social Security payroll taxes will be levied on all earned income. The Social Security tax is now capped.

“You mean I might have to help myself?”

Almost every year, the government allows individuals to increase their savings for retirement to a great degree by changing tax laws. Baby Boomers may have to do a lot more saving in order to live well in retirement. Surveys now show that a high percentage of future retirees plan to continue to work, even after age 70.

“Long Term… Here to Stay?”

Here at Omega, we’ve always considered ourselves long term investors. However, we’ve uncovered something that could cause almost anyone to change from long term to short term.

“Here it Comes, Folks”

Picture this - a medium furnishing streaming data, indifferential talking heads espousing every conceivable and contradictory short term market opinion and vicious “anti-professional advisor” advertising content. The medium we speak of is the pure electronic essence of the fox in the henhouse. The following describes certain road blocks which can cause us to fail and cause our clients to malfunction.

There are two quietly toxic distractions which investors and investment advisors can allow to underride all their best efforts for success. They are CNBC and the Morningstar Star System. Our old friend, Nick Murray, a long time investment consultant says: “Of CNBC, little more need be said except that if you watch it and it’s on in your home or office, turn it off. CNBC is the mortal enemy of the long term perspective which is the life blood of every successful investor and his advisor. Does any sensible person pay any attention to Wildman Jim Cramer?

“...And there’s...”

Morningstar Stars are the worst possible thing that investors and advisors can study. Many advisors memorize and actually quote star ratings of the mutualfunds they favor. While the data Morningstar produces is quite helpful, trafficking in star ratings perpetuates and reinforces three fictions. A.) That past performance in general is a good guide to future performance, B.) that stars are a good guide to future performance and C.) worst of all, that relative performance is the key variable in a program of successful investing.

“Show me the numbers... but only the long term, please.”

Understand that there’s no statistical evidence for the persistence of performance in the star system. The original Morningstar system, since improved, showed itself a remarkable successful perverse indicator of future performance. We’ve watched as one star portfolios routinely, and by a quite a sickening margin, trounced the five star portfolios.

“So, Omega. What’s your take on this?”

The most important thing that we try to accomplish with our clients and prospective clients is to help them modify their behavior. This means the avoidance of the mistake of short term thinking and “that things are different this time.” Our studies show that consistency of excellent management and in-depth research are the first two pillars on which good portfolio building is
constructed. The natural thing for an investor (and advisor) to do is sell a well managed fund when the market retreats. Then everybody rushes to buy when the market runs high. One problem is the attention paid to month to month price moves in your mutual fund. If you’ve turned over a percentage of assets to a long term professional manager, how can you assist him in his work? Easy. Leave him alone.

Ask most brokers and advisors what the most important ingredient in mutual fund investing is, and most will say “performance”. We found that “performance” is a product of consistent management, low expenses, low turnover, with an eye on risk, and most importantly, patience.

Is it different this time? Don’t bet on it.

Things to Think About...

The Treasury Department benefits when the fruits of economic growth go disproportionately to those at the top… Data from the CBO show that the top 10% of income earners (with incomes above $251,400) will pay 56.2% of all income taxes this year.... If you have accounts with other brokerages, be sure that you understand all the costs of your investments. Full disclosure of commissions and fees on all investment products is a must… If you have questions about your accounts with Omega – just ask.

“…And also…”

… There are now 8.9 million U.S. households with a net worth of more than $1 million, up from 5.5 million in 2002. Average assets available for investments in this group: $1.44 million… surveys say that their most important goal is to ensure a comfortable standard of living in retirement…. Patricia Struck, President of the North American Securities Administrators Association, has identified the most prevalent fraud schemes presented at seminars for senior citizens: selling variable annuity contracts with steep penalties and high commissions; improperly qualified “senior specialists” and selling unregistered securities to seniors… and then a note on sports: what baseball player has hit 3 home runs into 3 different states? Answer: Jim Thorpe. In the same semipro game at a Texas ballpark bordering Oklahoma and Arkansas, he homered over the left field fence in Oklahoma. Then he homered to the right field into Arkansas. Finally, he hit an inside the park homerun that never left Texas…

Our Opinion

Swirling around the Social Security and Medicare dilemma and with immigration problems staring us in the face we see the work force getting smaller, thanks to the retiring Boomers. And what happens? We’re in the process of trying to keep immigrants out of our country! There’s something wrong with this picture.

The big question is who’s going to replace the workers? Who’s going to provide the goods and services that the seniors will consume during their retired years? While US productivity has made great advances in the last 30 years because of technology development, we still haven’t figured out how to do without workers. And somebody will have to continue to feed the insatiable social programs with tax dollars.

A shortage of workers producing these goods and services will bring back the old rule of supply and demand. As we see a short supply of goods and services, we’ll see an increasing demand by the growth in numbers of retirees. And what does this do to our retirement income? Duh! It’ll increase the prices of the products being bought and sold; thus it won’t matter. Your retirement income will have to overcome that age old villain inflation. Remember the good old days, CD’s at 14%, inflation at 15%? It just didn’t fly in the 70’s and it won’t fly today.

What if we had a sensible stable “migration” plan to replace workers and we aggressively stressed education and the improvement of education facilities? And what if our government should encourage more charter and private schools? Add this to the sacrificial financing of more and better trained teachers who have the ability to speak and teach good English, math and science. We think this must happen.

It would also seem that a realignment of public schools is in order. Are they top heavy? Yes. Is it possible to terminate a teacher’s contract for incompetence? No. Is there trust in the financial stability of many of our school systems? No.

Our country (corporations, universities, etc…) is number one in the world in “recruiting”. Why not go for the Blue Chip prospects globally. We’ve got the best economy in the world.

We either must change our educational system to bring orderly migration into our culture, whether from Mexico, Northern Europe, or the Middle and Far East or we will face the cultural and perhaps a political change that would be far different from the democracy we know today.

That’s our opinion. Yours is welcome.

The Omega Financial Group
309 W. 7 th Street, Suite 900
Fort Worth , TX 76102