Q: The complexity of funds at Kinetics is certainly interesting. Why are you more comfortable talking about the New Paradigm fund instead of the Internet fund?

A: It's actually been renamed the Paradigm Fund. The reason I feel more comfortable is because it's not a sector fund. It's not limiting its exposure to medical, the Internet or something like that. We can look wherever we see opportunities. We can look across all sectors and across all market caps.

Q: A review of the top 10 holdings tells me the strategy of the fund allows it to go anywhere in the market, including foreign securities. What is the overall strategy?

A: The overall investment strategy is to acquire companies that have a high degree of predictability from their operational standpoint that trade at a discount to their intrinsic value; that trade with a margin of safety and also have returns on invested capital.

Q: The Berkshire Hathaway B Class shares would be a good example of a company delivering a high return on invested capital.

A: That's right. We have some utility holdings. They trade at a substantial discount to their book value.

Q: Something tells me you examined Warren Buffett's holdings and examined why you wanted to own them, too.

A: There's a little bit of that. And a little bit of it we actually got positions before he had. We've written reports where six months later, on three different occasions, he's come in and bid for the entire company. He's a smart, disciplined investor.

Q: Also, these particular stocks dividends.

A: That's right. You'll see some other names that show up. Centerpoint, the second company, is actually an incredibly interesting company. It is the electric and gas utility monopoly of the Houston, Texas area. The stock owns 81% of another publicly traded company called Texas Genco. When you back out Texas Genco, you're buying Centerpoint, the local monopoly business I just mentioned, for about $3.50. We believe that it will become very obvious that this business has earnings capability starting in 2005 of two dollars per share. So, you're buying a business for basically less than one and a half times earnings, or a little less than two times earnings. It is ridiculously priced. The company is actually going to receive over $5 billion in 2004 as a result of the deregulation program that went on in Houston. When they get that money, it will completely deleverage their balance sheet. The earnings that I just mentioned will start to be very obvious to the vast majority of the world. I think that a very conservative investment like that will have a legitimate shot over the next two to three years of making four or five times your money. At that point, Centerpoint would be a good, well-run utility, but it's not the high return on equity business that we want. But, if you're buying at such a discount, when they get that additional $5 billion next year, the book value is going up tremendously.

Q: You own White Mountain Insurance in which Berkshire Hathaway has also invested.

A: What you don't see on the screen, but will be in our top holdings, they own a 21% stake in a company called Montpellier Re. White Mountain brought it public. It's the same management team. If you look at the earnings, Montpellier Re trades at about nine times earnings, ridiculous for an insurance company. And the earnings are growing dramatically. Johns Burns who runs White Mountain and also oversees Montpellier writes insurance to make a profit. He's been doing it for his whole career. He's like Berkshire Hathaway, like Warren Buffett. They don't write bad insurance. If you write good insurance, and you take reasonable reserves and you're reasonable with your investments, it's a great business. They're smart and they're disciplined. They don't get caught up in the hype. That's really what this fund is all about. It's the same thing. Boring is what makes you money.

Q: Aside from the top holdings, is there is anything else?

A: We also bought some Finova bonds at 33 cents on the dollar. These are the bonds that Berkshire Hathaway owns. They are 7.5% coupons. The current yield when we were buying them was 22%. If it stays in business and you actually got paid off in par, your annualized yield would be about 42%.

Q: That is difficult to do with a bond. Looking at the typical stocks that I follow, large-cap stocks like IBM or General Electric hardly ever return 40% a year. That is asking a lot of a big company stock.

A: That is asking a lot. I personally believe that the typical large-cap company is not going to provide you with any type of real return for the next decade. I say that based on the valuation and what the economics of the businesses are. I'm not suggesting that Pfizer is going out of business, but Pfizer is just not a cheap stock. You buy a great company at the wrong price and you're not going to do that well as an investor.

Q: And you're saying that you do?

A: You can't uncouple your expected return with the valuation that you buy in at. Warren Buffett can buy Washington Post at $18 and you buy it at $220, you're going to have a different return. There is no question that you cannot uncouple price and expected return. And I think that is what people think. People will say that stocks give you 11% annually, but if the market is now at four times book value and 25 times trailing earnings, it's not the same thing as buying it at 10 times earnings and one times book value. You're not going to get the same return.

Q: You've told me a bit of how you conduct your research and how you determine your valuations.

A: That's right. We're looking to buy at margin of safety where we're buying below intrinsic value of the companies.