Stock Liquidity: A Two-Edged Sword

The great 20th-century playwright Tennessee Williams once remarked, “If I got rid of my demons, I’d lose my angels.” For those not keen on literary bromides, the translation in 21st-century vernacular might be: The good news is also the bad news. Either sums up the double-edged sword of stock liquidity. The good news is that investors can obtain an instantaneous stock quote and sell their shares with the click of a mouse. That is also the bad news.

Ben Graham was the first to write about the antithetical characteristics of liquidity in his classic “The Intelligent Investor.” He compared the benefits of owning non-liquid investments to those of liquid securities during the worst of the 1931-33 depression. Graham observed that there was a kind of “psychological advantage in owning business interests which had no quoted market.” He argued that those with illiquid investments could convince themselves that their investments had kept their full value — since there were no daily market quotations to prove otherwise. On the other hand, owners of stocks and bonds subject to daily quotations obtained a sense that they were “growing distinctly poorer” each day. For those of us who still feel the sting of the 2008 decline, Graham’s words resonate.

Warren Buffett, a student of Graham’s and his eventual collaborator on the fourth edition of “The Intelligent Investor,” is the modern-day personification of the intelligent investor. In his 2013 annual letter to shareholders, Buffett provides an example of two very successful illiquid investments he made in real estate. “Those people who can sit quietly for decades when they own a farm or apartment house … often become frenetic” when exposed to daily stock quotes and commentary. He concludes, “For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.”  Click here for more:

The Arizona Republic

Independent thinkers earn enviable investment returns

Urban legend suggests lemmings are so committed to their herd they will stick together even if they march right off a cliff to their inevitable death.

It is easy to understand why many find the adorable lemming’s behavior analogous to investor behavior at market tops.

Those of us who have run a race understand just how important it is to pace ourselves, removed from the pack, running our race — not the race of the person to the right or the left. In investing, we refer to this as a goals-based approach: a strategy that focuses more on personal, long-term goals than beating an arbitrary benchmark or owning the latest and greatest growth stocks. It is an approach that, by definition, removes investors from the lemming crowd.

Jeremy Siegel, author of “Stocks for the Long Run,” has conducted comprehensive research on stock performance over the past 100-plus years; as a result, he is a diehard proponent of value investing. The primary reason is the power of dividend reinvestment.

Siegel’s classic and most-cited example of why value stocks outperform growth stock analyzes an investment of $1,000 in (then) growth stock IBM compared with value stock Exxon (XOM) from 1950-2012.  For the rest of the article, click here:  The Arizona Republic

Friendly insights on commodity prices, undervalued stocks

My friend Kenny Polcari, a floor broker on the NYSE, he writes a daily market commentary. It is lively and direct and always insightful. At the end of each piece, he provides a recipe du jour. The guy is not only investment savvy — he can cook (his Fava Bean Risotto is a masterpiece). Last week Kenny provided a unique and erudite explanation of the decline in commodity prices: “Hey look! Commodities and the dollar have an inverse relationship…when one goes up, the other goes down.”

Because commodities are priced in dollars, investors in other currencies have to purchase the dollars to purchase the commodity, which becomes more expensive when the dollar rises. Got it? Higher prices reduce demand. And when demand declines, so does the price of the underlying commodity. Economics 101: supply and demand.

RELATED: Checking back on our 2014 stocks to watch

Why does this matter?  Read on:  The Arizona Republic