Is Liquidity Important, After All?
I’m an avid reader of Sanjay Bakshi he writes elegantly and profoundly on value investing. This piece is on the concept liquidity, which given our current environment I would say is a must read. Click Here To Read The Full Article On Liquidity
Article Introduction (Via Sanjay Bakshi)
Real-estate markets all over the world have one common characteristic; they are highly illiquid. It takes, on average, many weeks to buy or sell a piece of real estate and in many cases several months. Yet, the illiquidity of real-estate markets world-wide has not prevented long-term investors from becoming very wealthy. If illiquid, but sound, real-estate investments have made people rich, should the same rule not apply to the stock market? Why is it that when it comes to investing in the stockmarket, most investors give undue importance to liquidity?
Article Excerpts (Via Sanjay Bakshi)
“Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investors to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole…. The actual, private object of the most skilled investment today is “to beat the gun”, as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half crown to the other fellow.”
“As Keynes said, there is no such thing as liquidity for the community as a whole. When everyone lines up on the same side of a trade, the liquidity that many had relied upon in making their investments proves to be an illusion.”
“The specific question is whether the investor should avoid an otherwise attractive issue because it is relatively illiquid. The logical answer is no. Extraordinary bargains are more likely to arise in relatively illiquid stocks than in highly liquid stocks. If, at any given point of time, millions of investors and speculators are focusing their attention on a handful of heavily traded securities, chances are low that an investor with a long-term focus will find value.”
