4th Quarter 2016 Commentary

Conference Call Replay

This past year was interesting on so many more fronts than 2015. And this coming year could be more interesting still. In 2016, the financial markets saw all sorts of records and precedents – and not in a good way. We have been taking some time to prepare our client portfolios for advantage. Advantage hinges on the ability to make opportunistic investments, to take what the market gives, not what it doesn’t. Opportunism has a field of play when prices have declined. Sometimes they decline suddenly, other times slowly, sometimes the whole market together, other times just pieces of it. But entry to that field of opportunity itself hinges on having sufficient liquidity; without liquidity, the opportunities are just an idea of what might have been.

Money flows into ETFs and similar funds have not only pushed up the prices of the major index-centric companies, but also created an artificial downdraft among the thousands of non-indexation securities. That is where the companies with less systemic risk will be found. There will be more in the way of idiosyncratic investments with the opportunity for true optionality. Perhaps our portfolios will have to have fewer, but more selective securities with perhaps larger weightings in those companies with truly discounted valuations and a truly superior business position.

So, the watch words are preparedness, and sobriety. Dr. Louis Pasteur said, “fortune favors the well-prepared mind.”

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3rd Quarter 2016 Commentary

Conference Call Replay

Cash. One of the most misunderstood terms in investing (except lately, alongside “defensive” or “low volatility” sector investing, perhaps now one of the most dangerous places to be). The accepted modern approach to investing is to be all allocated all the time. How odd, since the greatest investors for their own accounts, ranging, alphabetically, from Warren Buffett and Carl Icahn through Wilbur Ross and Sam Zell, make generous use of cash. Cash is put at risk not any ol’ time, but only when they believe it will earn a suitable return. And they have plenty of it now. As do we. Having 25% or 35% in cash is a wonderful feeling when you see everyone else is ‘all in’, and it hasn’t had any noticeable negative impact on our performance this year. We believe when you’re in that position, you have a special advantage the market doesn’t.

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2nd Quarter 2016 Commentary

Conference Call Replay

If it has ever been advisable to own idiosyncratic securities – which will rise or fall based on factors specific to each company’s circumstances – as opposed to widely-held stocks that will react primarily relative to systematic risks, now is the time. Many of our portfolios benefited from idiosyncratic exposures this quarter: positions in precious metals royalty companies, a content company that will soon be acquired, and a self-liquidating land trust all appreciated significantly, and none is a significant holding in a major index. As we look to introduce new “orphan” securities to the portfolios, we are finding extremely attractive investment candidates in out of favor sectors and outside the indexation vortex – accept some trading liquidity risk and the market provides a whole range of margin-of-safety opportunities. While their success as investments is not assured, at least their propensity for success or failure will be based more on their own fundamental financial attributes than on rising interest rates or other macroeconomic events.

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1st Quarter 2016 Commentary

Conference Call Replay

Following years of steady flows into the major index funds, coupled with systemic supports for stock prices of the largest, most liquid companies, valuations in the broad stock market are excessively inflated. Yet, most sectors contain companies outside of the major indexes, which are creating shareholder value but which are relatively invisible to institutional investors. Accordingly, they can trade at deep discounts. Those are the stocks we choose to buy, and several are reviewed herein. The broader investing community, however, continues to allocate assets to index products, using descriptive data and backward-looking metrics such as market capitalization and beta (which is simply a measure of past stock price volatility) to make decisions, while ETF providers use beta as a guide when creating new products. But beta is merely a statistic – without context, it is not only uninformative, but potentially misleading, really misleading.

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4th Quarter 2015 Commentary

Conference Call Replay

Why does one invest in an index? Surely one goal is diversified exposure to the market. It might come as a surprise, then, that without the 10 top contributors, the S&P 500’s return in 2015 would have been negative instead of positive. Those 10 stocks, out of the 500, which together amount to a 10% weight in the Index, had an average return (weighted by index position size) of 44%. What does that mean for Horizon Kinetics? Well, those stocks are not found in our strategies, as they trade at extremely high valuations. Meanwhile, the ETF providers are facing fee compression, which is forcing them to market new, differentiated, higher fee products. While the ETF providers move on to new products, we continue to position our strategies for the long-term.

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3rd Quarter 2015 Commentary

Conference Call Replay

After years of writing about the flow of assets out of actively managed funds and into index funds, there are signs that the inevitable reversal may be near. This quarter witnessed the highest ETF trading volume on record, and the pricing anomalies resulting from flows into index products, both in equity and in fixed income ETFs, are ever more numerous and obvious. How else can one explain that, for several years, a biotechnology ETF had a beta well below that of the S&P 500, or that the Republic of Lebanon’s bonds trade at lower yields than bonds issued by Wendy’s?

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2nd Quarter 2015 Commentary

This quarter, we return to our previous inflammatory statement that the standard macroeconomic variables considered critical to the portfolio management process – GDP growth expectations, interest rates, etc. – probably detract from performance more than they help. Also, why, even if we gave you today’s World Bank results for the last decade of GDP growth for all the major emerging market nations, as well as for the U.S., – but gave them to you 10 years ago, a private crystal ball –and gave you the pick of which emerging markets ETFs to buy, you would still probably have made the wrong decision.

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1st Quarter 2015 Commentary

This quarter, we question what it means to take a long term view, discuss the holding periods for some of the Core Value strategy’s holdings, and compare valuation characteristics, both descriptive and predictive, for selected Horizon Kinetics holdings as compared to well-known major index constituents.

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4th Quarter 2014 Commentary

This quarter’s commentary discusses the anomalies we observe in the current market, and the risks we see for investors following the current prevailing trends. In particular, we discuss the continued and growing prevalence of indexation, and the risks to sectors such as real estate investment trusts, which have been sought out for their high dividends in a low interest rate environment. Finally, on the occasion of the new year, profiles of the larger holdings in a number of our strategies are available on our website.

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3rd Quarter 2014 Commentary

This quarter, we continue to examine the fallacies embedded in some widely held assumptions regarding asset allocation. We discuss the surprising correlations among what one might assume are unrelated asset classes and the impact of indexation on stock prices, factors impacting the utilities sector, and the benefit of idiosyncratic, diversifying securities. In addition, we review a new position in the Core Value strategy: Royal Gold, Inc.

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2nd Quarter 2014 Commentary

Understanding the basic presumptions of asset allocation can hardly be more critical, since we all invest based on these foundational assumptions. This quarter, we examine the historical returns from investing in private equity, revisit the topic of slowing revenue expansion at the largest companies, identify some common attributes of companies that do not appear to be suffering from a lack of growth opportunities, and discuss the potential diversification and inflation hedge benefits of land.

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1st Quarter 2014 Commentary

This quarter, we question some widely held views on investing, focusing on the nearly universally accepted assumption that emerging markets investing provides higher returns than investing in the developed markets. In addition, we review two positions in the Core Value strategy: The Wendy’s Company and Platform Specialty Products Corp.

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4th Quarter 2013 Commentary

As we enter the 20th year since the founding of Horizon Kinetics, we take a look back at recent commentary themes, revisit the sway of the media on investment decisions, and discuss selected current positions.

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3rd Quarter 2013 Commentary

This quarter, we review the important and often surprising ways in which indexation is impacting security valuations, risk, and returns, and point out the merits of the antithesis of indexation: active management and individual security selection.

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2nd Quarter 2013 Commentary

While the S&P 500 Index level has appreciated significantly over the past year, revenues at the 20 largest constituents of the Index have increased only modestly. This quarter’s commentary considers the impact of indexation methodology on the representation of entrepreneurial companies that are likely to generate expanding revenues, many of which have significant insider ownership, by looking at the historical insider holdings and performance of two famous owner-operators: Wal-Mart and Microsoft.

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1st Quarter 2013 Commentary

This quarter’s commentary addresses some tax reduction techniques utilized by owner-operators, continues our review of owner-operator actions, and discusses master limited partnerships as part of our series on the challenges faced by investors seeking yield in the current low-interest rate environment.

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4th Quarter 2012 Commentary

This quarter, we examine the pitfalls of using standard valuation metrics as a substitute for thorough analysis. We consider a different valuation metric: management actions, which we believe is more predictive of future performance than most standard metrics.

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3rd Quarter 2012 Commentary

Following strong performance by several of our larger holdings, we take this opportunity to highlight some of the companies that contributed little to performance for the year. We also address the many challenges facing equity investors, including the prevailing low interest rate environment.

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2nd Quarter 2012 Commentary

We review the current bond market environment and discuss the implications of an extended low-interest rate environment. We also offer a discussion of the predictive qualitative and quantitative attributes we consider in assessing investment opportunities.

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