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September 2008
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)
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Dear Fellow Shareholders,
For most of September 2008 and as of this writing on October 6, 2008, one could take the decline in any major market index, calculate how long it would take the index to arrive at zero, and then arrive at some number of days equivalent to between two and three weeks. On the day this commentary was written, the S&P 500 at one point had plunged by 8.88%, suggesting a mere 11.26 days before the zero bound arrives as a permanent and immovable obstruction to further declines.
While the causes of today's problems are increasingly well understood, solutions to the current crisis are still in the early stages of being thought out and being implemented. In our opinion, there is no single action or solution that will solve the current crisis. What was once a crisis of liquidity and confidence has morphed into a complete shutdown of credit markets, which in turn has become an economic crisis of a serious nature. Exactly how serious an economic crisis the current problem will become will be determined by how quickly we can find solutions to ameliorate the pernicious lack of liquidity in the critical commercial paper and short-term money markets.
Despite the recently passed bailout plan, the stimulus package, the Federal Reserve's interest rate cuts, the spate of mergers, recapitalizations and rescues of financial companies, and the active engagement of numerous government and regulatory agencies, the underlying environment of extreme risk aversion continues unabated.
World stock markets have joined the U.S. in pricing in extreme risk aversion, as investors worry that the U.S. crisis will cause a global recession of significant magnitude. Psychology rather than finance is dictating market movements, as investors refuse to accept any risk, fearing that what is cheap today will be cheaper tomorrow, inducing an incessant supply of increasingly cheaper stocks.
Among this uncertainty, there are some things of which we can be certain. First, the market will eventually reach bottom. Second, the stocks of companies with good prospects have gotten significantly cheaper as their prices have declined. Third, as fear replaces greed as the prevailing emotion underlying any investment, a platform is being created for what we believe will be extraordinary returns for the companies that have the capability to grow in the years ahead. Finally, as disastrous as the current market declines are, the age-old saying still applies: "this too shall pass," and we hope we will be the wiser for it.
As a capital allocator, we must look forward, even amid the detritus of this disastrous market, and make determinations as to when cheap is cheap enough, and when the upside potential dwarfs the downside potential of investments. Further, we have to accept that our timing might be wrong and begin to allocate capital to companies and businesses that we believe can grow and generate good returns in the years ahead, even as the markets factor in dire predicaments.
The Dow Jones Industrial average has declined by nearly 30% since marking a new high in October 2007. The S&P 500 has declined by over 32%, and the Nasdaq Composite index has declined by nearly 40% in the same time frame. Many stocks have declined by 80% or 90% or more, and these include companies with little or no debt, no need to access capital markets on an ongoing basis for their business operations, and those not related to finance or real estate or the crisis elements in the market. Some of these are trading at a 50% plus discount to their net asset value. Is it possible that such companies will decline more? Absolutely. Nonetheless, at some point, a capital allocator must stop looking down at the declining stock price and start looking up at the enormous potential accruing to those who will hold the current security when markets stabilize and such discounts are eliminated.
While we are unwilling to speculate as to when the current downtrend will end, our "days to zero" measure suggests that we are near to at least a temporary respite in selling. The late John Templeton said that "History shows that time, not timing, is the key to investment success," and our investment philosophy and strategy is based on the very premise that real wealth, represented by sustainable returns, is generated over time by the business operations of companies. Our experience informs us that historically, periods of crisis generally resolve themselves to the benefit of investors that stay invested. As Warren Buffett said, "If the business does well, the stock eventually follows." During this period of crisis and its attendant volatility, we are focused on ensuring that the companies owned in the portfolio continue to meet our expectations with respect to their long-term returns on capital. Further, as opportunities present themselves, we are being opportunistic and making changes that we believe will enhance the Fund’s potential return on capital.
We thank you for your confidence and believe you will be rewarded for it.
The Kinetics Investment Team
Disclosure
Past performance 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 in the fund can lose money.
Because the Funds [other than The Paradigm Fund and The Small Cap Opportunities Fund] invest in a single industry, their shares do not represent a complete investment program. Internet, biotechnology and water related stocks are subject to a rate of change in technology, obsolescence, regulation 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. The Fund's share price is expected to be more volatile than that of a U.S.-only fund. Because smaller companies [for The Global Fund 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 [for all Funds], 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. Small and medium-size companies often have narrower markets and more limited managerial and financial resources than do larger, more established companies. As a result, their performance can be more volatile and they may face a greater risk of business failure.
As non-diversified and single industry funds, the value of their shares may fluctuate more than shares invested in a broader range of industries and companies.
Unlike other investment companies that directly acquire and manage their own portfolios of securities, the Funds pursue their investment objectives by investing all of their investable assets in a corresponding portfolio series of Kinetics Portfolios Trust.
Distributor: Kinetics Funds Distributor, Inc. is an affiliate of Kinetics Asset Management, Inc., and is not an affiliate of Kinetics Mutual Funds, Inc.
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