Tuesday, 29 September 2015

Liquidity (and What Will You Do if You Wake Up and There is No Bid)

This will be a quick post on Liquidity and Howard Marks (again).

Marks published a memo to Oaktree clients earlier this year on Liquidity.  The memo is here.

The memo was pretty timely in that it was published in March of this year as the market was humming along and the institutional / momentum imperative was to keep dumping money into biotech, on demand internet streaming, rechargeable cars, social media, and any number of ETFs meant to track the above (I won't name any individual company names).

Now, I know that none of the above themes should affect DGI's, heck, I've jumped around the DGI blogosphere enough to notice that for the most part, DGI's seem to have developed well structured plans to only buy certain types of dividend stocks: real companies, producing real goods and services which should be around producing the same or similar goods or services in the future, paying dividends out of real free cash flow, and which have a history of paying and raising dividends.

But the funny thing is, everything is related, even if we can't (or don't want to) see it.  If institutions are overweight garbage (let's use biotech for example) in their portfolios in order to generate alpha, and at the same time hold the same stocks that DGI's hold in market weight proportions, and if the market rolls, my guess is that everything gets sold in priority of liquidity in order to meet redemptions.  It's probably easier to sell a block of blue chip large cap Procter & Gamble with a market cap of $195B and a float of 2.7B shares, trading 10M shares per day, than it is to sell a block of Regeneron with a market cap of $47B and a float of 76M shares, trading 778K shares per day.

So for any investor out there looking to construct a portfolio over time, a series of hypothetical questions to consider in the context of liquidity:

What will you do if you woke up tomorrow and there was no bid?

Would you panic and sell everything?

Would you buy more of what you already owned?





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