Stockcoach's Corner

Although my portfolio declined about $1,300 today, I finished the week up $5,565 (0.9 percent), slightly better than the S&P 500 (up 0.6 percent), but considerably better than the NASDAQ (down 0.2 percent) and Russell 2000 (down 0.8 percent). This is also the first week that my portfolio has closed above the $600 K level.

Occasionally I get emails that mention that my style of investing suffers from a major problem: I tend to invest in very illiquid stocks, which implies that if the market tumbles, I would have difficulty liquidating my positions.

I must admit, I don't quite buy this argument. First of all, I am not sure why I would want to liquidate my positions if the market tumbles (wouldn't my shares be cheaper and more undervalued then?). The liquidity argument is perfectly valid for daytraders and market-timers, but I'm neither. Second, even though I do invest in illiquid stocks, they are not that illiquid. Although it's true that sometimes it takes me days if not weeks to build a position, that's largely because I tend to set limit orders at or below the bid price, hoping that someone will catch the bait. Third, illiquidity can be a good thing since it often spawns volatility, and volatility allows you to buy low when the stock is temporarily depressed and sell high when the stock temporarily surges. As long as you have a well diversified portfolio (as I do), volatility is nothing to fear. Fourth, there is a substantial academic literature showing that over time, the rate of appreciation of illiquid stocks exceeds those of their liquid cousins. This is true even if one conditions on market capitalization, so this premium exists above and beyond the familiar premium that the market rewards to small cap stocks. As always, your comments on my observations are very welcome.