Returns to illiquidityJanuary 11, 2013 | Access and use are subject to your User Service Agreement.
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RETURNS TO ILLIQUIDITY In this Fed-centric world, people are spending less time reading corporate filings and more time parsing the deliberations of their monetary masters in Washington, D.C. So much the better for the inefficiency of markets, we say. Now unspooling is an exercise in security analysis. We focus here, as we did in the issue of Grant's dated Nov. 30, on stocks so small as to be invisible to the naked institutional eye. To anticipate objections, we point out that most everyone has a P.A., or failing that, a stock-hobbyist brother-in-law, and besides, Apple Inc. started small, too. One would suppose that even without the work of Roger G. Ibbotson et al., tiny stocks would deliver outsize returns. To own shares in a company valued at $152 million or less--the Ibbotson-defined demarcation point between small cap and micro, i.e., between the third and fourth quartiles in equity market capitalization--is really to own them. Selling is problematical, especially when everyone else is selling. Common sense would suggest that those who sacrifice the ability to turn on a dime should get something--an investment consolation prize--in return. IMAGE1 And this supposition the Ibbotson data, contained in a periodically updated study entitled "Liquidity as an Investment Style," tend to support. For example, between 1971 and 2010, "low-liquidity" micro caps produced an annual return of 17.9%, whereas low-liquidity large caps produced an annual return of 12.8%. Past performance is beguiling, not predictive, of course, and especially so with shifting samples. In 1971, relates Daniel ...
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