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Horizon Kinetics 1Q18 Presentation: Systemic Risk; False Premise of Passive Investing; Texas Pacific Land Trust

Where Are We?

  • S&P 500 1-year annualized price return of 11.77% and annualized volatility of 8.52%
  • 5-year annualized return of 10.97% and annualized volatility of 9.84%
  • Since year-end 2008, annualized price return of 12.3% and annualized volatility of 13.44%

An Illustration (World War II Ration Book)

  • Set of World War II ration books, stamps and cloth ration book and token holder, with 24 months of stamps, was issued in 1942 to a nurse living in NJ. It may be purchased for $35 on biblio.com
  • That $35 today, converted to 1942 purchasing power after 75 years of inflation, would have been equivalent to $550 to that nurse, about a year’s worth of rent
  • The average rent in NJ in 1940, according to the US Census Bureau was $36 per month. Manhattan was more expensive: although rents in the Lower East Side were less than $30, Washington Square Park rents were as high as $150 or more. Isn’t that always the way?

The False Premise of Large Scale “Passive” Investing

  • Concept of float was originally based on the presumption that any holder could offer to sell shares at any moment at which the price is sufficiently or enticingly high
  • For an index fund, though, there is no such thing as an enticing price. There is only an efficient price – in fact, the price is always presumed to be efficient, and the index and ETF transaction rules are written that way
  • If index funds today hold 37% of Amazon’s shares and the employees hold another 17%, the available float is only 46%, a minority of the market cap; we’ve begun to enter uncharted territory
  • Free-riding phase of indexation is expiring

So What is the Market Weight of Amazon?

  • Classical economic theory states that demand declines as the price increases
  • In the world of investing, demand actually increases in the short run as the price increases – because of everyone who wants to own the shares of what’s going up
  • The active managers might not provide the supply the indexes needed
  • But what if the active managers decided to sell less of Amazon than other holdings, or to make Amazon a larger position?

Texas Pacific Land Trust

  • TPL is at an inflection point in its business development, in its profitability and, as well, in its capital allocation decisions
  • TPL is among the 20-best performing stocks on the NYSE in the past 5 years, the past 10, and the past 20
  • In the past 45 years, it has returned 17.1% annually, versus 10.5% for the S&P 500
  • With fewer than 20,000 shares traded on an average day, it has insufficient liquidity for indexation use, and there is not one published Wall Street earnings estimate
  • Recent developments suggest that the very significant value creation witnessed in the past several years will be persistent for quite some time to come

Horizon Kinetics 1Q18 Presentation, April 18, 2018

Image Source: Federal Reserve Bank of St. Louis

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