I recall reading some years ago, probably in one of John Sooner's excellent novels on Wall Street and the brokerage industry, about an interaction between a broker and his client.
The client was day trading the hot stocks of the day back in the 1970s. He was not really making or really losing any money -- just piling up commissions and going nowhere. He asked the client why he was doing this when the way to make money was to buy dividend-paying stocks and hold them for a long time. "Do you want to make money," the broker asked, "or are you just messing around?"
The client thought about it for a minute and answered that he was really just messing around. The boardroom and the ticker tape (it is an old book) was closer and better appointed than the racetrack and the company was better.
All his real money was in real estate, the family manufacturing business and municipal bonds. Trading stocks was something he did just for fun and to stay out of his wife's hair now that he was retired. If that describes you, feel free to stop reading now. If your intent is to make money in the equity markets, however, allow me to climb atop my soapbox.
Each time I chat with folks about the opportunity in community bank stocks they will inevitably ask for a name or two and then pull up the chart. Inevitably, you get a little gasp and then hear some variation of the phrase: "I could never trade that. It is illiquid."
Individual profit-conscious investors worrying about liquidity is like Clayton Kershaw worrying about his inability to kick a field goal. Kershaw is one of the best pitchers, if not the best, in baseball right now, and does not need to ever kick a field goal.
Individual investors with the proper time horizon and thought process when approaching the market do not need liquidity. They should seek illiquid, inefficient markets and exploit the size-and-time advantage they enjoy over institutional investors and most other market participants.
Don't take my word for it. Charlie Munger, The co-chairman of Berkshire Hathaway (BRK.A, BRK.B) is a billionaire and generally acknowledged to be a pretty smart guy. Munger is also the chairman of the Daily Journal (DJCO) and at this year's annual meeting he told investors:
"In my life lime success in investing was easier. If you were rational and disciplined you had a tailwind of 10% per annum. Now, I doubt that the world will be able to get 10%, so it will be more difficult; and it is impossible if you are staying in big stocks.
"If I had to manage $200 billion and were expected to beat the index, I would not welcome the job. I think people who have a good chance of performing well are those who are willing to work in less efficient markets."
I have a hard time thinking of a less efficient market available to public investors than the community bank stocks.
Professor Roger Ibbotson of Yale is one of the better-known academics who studied the stock market. He did a fantastic study that showed that illiquid stocks beat the more liquid stocks.
His study Liquidity as an Investment Style found the following:
"Among the high growth stocks, the low-liquidity stock portfolio had an annualized geometric mean (compound) return of 9.99% whereas the high-liquidity stock portfolio had a return of 2.24%.
"Among the high-value stocks, low-liquidity stocks had an 18.43% return whereas high-turnover stocks had a return of 9.98%. Value and liquidity are distinctly different ways of picking stocks. The best return comes from combining high-value stocks with low-liquidity stocks, the worst return comes from combining high-growth stocks with high-turnover stocks."
I would venture a guess that the majority of the people who read this statement have a portfolio stuffed full of high-growth, highly-liquid stocks. They have those stocks rather than a bunch of community bank stocks with strong balance sheets trading below book value that fit the definition of a high-value illiquid stock.
If you approach buying a stock like you would a piece of property, or an operating business, you realize that you do not need massive liquidity to make an investment. Would you expect to be able to sell a commercial lot in a millisecond? Would you back out of buying a profitable, interesting business because the seller would not guarantee that you could sell it with the push of a button anytime you felt like it?
If you are serious about making money you need to approach buying stocks with the same thought process and time frame you would use when buying any other asset.
If you are just messing around, however, please continue to try and guess where the indexes will close today. Make some futile predictions about how many Apple Watches might sell this quarter, and try to guess when the squiggly line will cross the wiggly one on the price chart.