Horizon Kinetics LLC is a fundamental value, contrarian-oriented (fact-based) investment adviser. Founded on the belief that a short-term investment approach, widely adopted with the modernization of financial markets, ultimately produces sub-optimal returns, we believe that investors are better served not by taking more risk, but by extending their investment time horizon, which affords far wider ranges of opportunity and valuation than are available to time-constrained investors.

While all acknowledge the tremendous power of compounding, practically speaking (and by definition) this benefit simply cannot be harnessed in a short time frame. Our investment strategies – supported entirely by our own independent, fundamental research – typically reflect contrarian views that seek to take advantage of the short-term focus of the marketplace.

Written research has been the cornerstone of our investment process.

We believe that requiring research analysts to frame their investment ideas in writing helps avoid the common behavioral finance error of adjusting one’s investment thesis in response to short-term market price fluctuations. Our research team produces a variety of publications for the institutional investment community covering undervalued and often systematically mispriced classes of securities.

With a long-term, absolute-return mindset, our portfolios tend to be concentrated and avoid tracking or mimicking any benchmark or index. Our investment process produces returns that are generally less correlated with other managers and funds.

The Equity Yield Curve

The Equity Yield Curve, a phrase of our choosing, is one tool – and one of the most powerful – for identifying and visualizing the enormous level of return often available from securities that have been ‘discarded’ or ignored by conventional investment practices.

The Equity Yield Curve, a phrase of our choosing, is one tool – and one of the most powerful – for identifying and visualizing the enormous level of return often available from securities that have been ‘discarded’ or ignored by conventional investment practices.

It is all about a seemingly insubstantial thing: time or, more accurately, time risk. Much like the more familiar bond yield curve, which has a positive slope most of the time – that is, higher yields for the risk of longer maturities – the equity yield curve also has a positive slope. But the equity yield curve is decidedly steeper; go out to 3-plus years and you may find expected rates of return of 30% or more.
The equity yield curve is simply a visual depiction of the degree of disinterest by most investors in returns that seem too far away; phrased alternatively, it is a depiction of time risk as those investors see it.

Put into security selection terms, stocks that have the possibility of outperforming the market in the coming year or so, with the obvious hallmarks of rapid sales growth or an exciting new product or increasing analyst coverage, are in great demand. Crucially, though, securities not perceived as likely to perform within that time period are typically avoided, even if their long-term potential may be extraordinarily attractive. They are considered very risky – not because the stocks might fall, but because they might not go up when the market does! To a manager, that represents time risk, which must be avoided. Such a security, even with tremendous potential, even if acknowledged by the manager, is of little use or, in investment-speak, has very little utility.

This is what creates the discount for securities that might do very well, but either well beyond the artificial and abbreviated time horizon of the professional manager or with significant uncertainty about when such performance might occur. Our approach therefore capitalizes on the overwhelming need by investors, predominantly professional investors, to achieve short-term and relative-return-based results. This collective, short-term focus can create long-term price inefficiencies, because rewarding events and outcomes, even if visible and of large magnitude, which are 3 to 5 years in the future, are of little use (negative value, actually) to the average manager. This is one mechanism by which ignored and under-analyzed securities are created. We seek to exploit the resulting long-term pricing anomalies and unique opportunities in order to generate above average returns with less valuation risk.

Idiosyncratic vs Systemic Risk

Our focus is on companies and instruments whose financial results and returns will be specific to their own circumstances – idiosyncratic, in industry jargon – rather than tied to the systemic variables that govern the major stock market indexes.

Absolute vs Relative Return

Our research is based on a long-horizon approach and focuses on absolute rather than relative returns. This allows us to make use of the opportunities created by – or ignored by – the short-term and trading liquidity needs of institutional investors and ETFs. The goal is to identify securities and construct portfolios with functional – as opposed to merely semantic – diversification.

Predictive Attributes

Most conventional statistics about stocks are descriptive in nature – they characterize what is or has been, such as size, industry sector, price volatility, trading volumes and so forth – but say very little about how a security will do. We focus on predictive attributes of a security or sector, qualities that are suggestive of rewarding future returns.

Most conventional statistics about stocks are descriptive in nature – they characterize what is or has been, such as size, industry sector, price volatility, trading volumes and so forth – but say very little about how a security will do. We focus on predictive attributes of a security or sector, qualities that are suggestive of rewarding future returns. Perhaps the most obvious predictive attribute is undervaluation – something that is far too cheap relative to a relevant measure of its worth, such as net asset value or earnings. There are others, perhaps the most powerful one being an owner-operated company, in which the controlling party is also the largest shareholder and has substantial capital at risk. A relatively small portion of publicly-traded companies fit this category; the vast majority are agency-operated, in which the CEO is the standard employee whose wealth is built through a compensation package as opposed to a major equity stake in the company.

Another predictive attribute is a hidden or dormant asset, one that is not currently producing much or any revenue. Because they do not manifest themselves on the income statement, dormant assets may be accorded little or no value in the stock price. Yet they might have substantial economic value. Another attribute predictive of excess long-term return is corporate spin-offs, which for a variety of reasons are persistently under-followed by Wall Street analysts and are often rejected from various portfolios and indexes.