|
December 2009
You should consider the investment objectives, risks, charges and
expenses of the fund carefully before investing. For a free copy of a
prospectus, which contains this and other information, visit our website at
www.kineticsfunds.com or call 1-800-930-3828. You should read the
prospectus carefully before you invest. Please read the important
disclosure at the end of this portfolio commentary.
(Click here for most recent and complete performance information)
(Click here for the most recent portfolio holdings)
Dear Fellow Shareholders,
For the three-month period ended December 31, 2009, the Kinetics Paradigm Fund (No-Load Class) appreciated by 2.98%, compared with gains of 6.04% and 2.18% for the S&P 500 Index and MSCI EAFE, respectively. Year-to-date, the Fund returned 41.02% as of December 31, 2009, compared with 26.46% and 31.78% for the S&P 500 Index and MSCI EAFE, respectively, for the same period.
Recently, my nine-year-old son expressed an interest in money, particularly, the accumulation of money. Through a schoolmate he became cognizant of Bill Gates’ fortune. This new awareness of wealth coincided with a family trip to Philadelphia to see the Liberty Bell, Independence Hall and Benjamin Franklin’s former home site. While in the Philadelphia Visitor Center he happened upon Ben Franklin’s booklet, “The Way to Wealth” and asked if I would get him a copy. Having read much by and about Franklin, I was only too happy to oblige. Like any parent, I wish for financially responsible children. This led to a broader discussion about Warren Buffett and John D. Rockefeller and to my research into other ways to teach him about the accumulation of wealth.
For this reason, I acquired Andrew Carnegie’s autobiography and his booklet “The Gospel of Wealth”. Adjusting for inflation, it is believed that Andrew Carnegie was the second richest man to have ever lived, with Rockefeller being the richest. Carnegie, to his great credit, is now known less for his wealth than he is for giving it away later in life. It is believed that he set the model for Warren Buffet’s decision to divest his vast fortune, which, relative to that of Carnegie, is a small sum.
In reading Carnegie’s autobiography, I came across this passage: “Nothing tells in the long run like good judgment, and no sound judgment can remain with the man whose mind is disturbed by the mercurial changes of the Stock Exchange. It places him under an influence akin to intoxication. What is not, he sees, and what he sees, is not. He cannot judge of relative values or get the true perspective of things. The molehill seems to him a mountain and the mountain a molehill, and he jumps at conclusions which he should arrive at by reason. His mind is upon the stock quotations and not upon the points that require calm thought. Speculation is a parasite feeding upon values, creating none.”
Anyone who has ever read our materials or listened to us over the years knows that our model of investing has a strong resemblance to that of Warren Buffett. We focus upon the underlying business returns; we try not to let emotions cloud our judgment; we own companies, in most circumstances, with very long product lifecycles; we usually avoid companies with substantial leverage; and we try to exercise patience. While the accumulation of wealth by Carnegie and Buffet was achieved through dissimilar activities, their underlying models bear a striking resemblance. Their long-term results speak for themselves and demonstrate that their models were sensible.
The recent financial crisis, which still looms large in investors’ minds, has temporarily called in to question very sound investment strategies, such as those which we believe we practice. This emotional response appears to be dissipating, as there has been a return to a more rational pricing of equity assets.
The notion that one can trade continuously and somehow produce superior after-tax returns is, to us, specious. First, for U.S. investors, short-term gains are taxed at ordinary income tax rates. In the highest tax bracket, including federal, state and local taxes, individuals pay not far from 50%. Thus, in order to produce a 10% after-tax return one would need to generate a nearly 20% pre-tax return. Warren Buffett has compounded Berkshire Hathaway’s book value at approximately 22% per annum over a long period of time, but he has done this through a low turnover strategy, which does not allow the Government to become his (or your) partner until the end of the ride, thereby mitigating the impact of taxes on Berkshire’s returns. Under that trading strategy, to achieve a 22% after-tax return, you would have to obtain a 40%+ pre-tax return. This may be possible, but it cannot be done by many investors, since long-term equity returns have only provided a return of approximately 11% and, as a group, investors will obtain the average returns of the stock market. Second, in point of fact, the cost of continuous trading will most certainly detract from the long-term average returns of investors. This point, while obvious to us, is lost upon the vast majority of investors. Despite the disastrous events of 2008, our long term results, we believe, are still appealing and will likely be more appealing as the fundamentals of the businesses we own unfold.
We thank you for your confidence and believe you will be rewarded for it.
The Kinetics Investment Team
Disclosure
You should consider the investment objectives, risks, charges and expenses of the Funds before investing. For a free copy of the Funds' prospectus, which contains this and other information, visit our website at www.kineticsfunds.com or call 1-800-930-3828. You should read the prospectus carefully before you invest.
The opinions expressed are not intended to be a forecast of future events, or a guarantee of future results, or investment advice. Additionally, the views expressed herein may change at any time subsequent to the date of issue hereof.
Past performance and does not guarantee future results. Due to market volatility, current performance may be more or less than for the rankings shown. Investment return and principal value will vary, and an investment can lose money.
Because the Funds [other than The Paradigm Fund, The Tactical Paradigm Fund and The Small Cap Opportunities Fund] invest in a single industry, their shares do not represent a complete investment program. Internet and biotechnology stocks are subject to a rate of change in technology, obsolescence and competition that is generally higher than that of other industries, and have experienced extreme price and volume fluctuations. International investing presents special risks including currency exchange fluctuation, government regulations, and the potential for political and economic instability. Because smaller companies [for The Global and Small Cap Opportunities Fund] often have narrower markets and limited financial resources, they present more risk than larger, more well established companies.
Non-investment grade debt securities (i.e., junk bonds) are subject to greater credit risk, price volatility and risk of loss than investment grade securities. Further, options contain special risks including the imperfect correlation between the value of the option and the value of the underlying asset.
Unlike other investment companies that directly acquire and manage their own portfolios of securities, the Funds (except the Tactical Paradigm Fund) pursue their investment objectives by investing all of their investable assets in a corresponding portfolio series of Kinetics Portfolios Trust.
You will be charged a redemption fee of 2.0% of the net amount of the redemption if you redeem or exchange your shares 30 days or less after you purchase them.
Distributor: Kinetics Funds Distributor, Inc. is an affiliate of Kinetics Asset Management, Inc., and is not an affiliate of Kinetics Mutual Funds, Inc.
|
