A chief cause of crises, panics, runs on banks, etc., is that risks are not independently reckoned, but are a mere matter of imitation. A crisis is a time of general and forced
liquidation.
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We have three criteria. If it’s publicly traded, liquid and amenable to modeling, we trade it.
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No investment vehicle should offer more liquidity than is afforded by the underlying assets.
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Liquidity does not exist unless someone else is willing to give you cash in exchange for the piece of paper you want to sell.
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Volatility matters, because it defines the uncertainty of the price at which an asset will be liquidated.
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Liquidity is a concern of the short-term investor and a minor matter for the long-term investor.
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The whole institutional structure of the marketplace rests on the assumption that the other side of the trade will always be there; without that assumption, even the gutsiest of market-makers would refuse to stay in business.
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Rational investors will part with their cash only when they believe they are properly compensated for the loss of liquidity and the pain of disquietude.
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My experience is that when people want to give something away at a ridiculous price because they have to, not because they want to, that’s a good time to buy.
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Money flows, in effect, can render fundamental analysis futile in the short run, even while creating a compelling longer-term opportunity.
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At times of shock, converting illiquid assets to cash to build flexibility is very expensive. Finding an umbrella in a rain storm might be impossible or very costly.Back to top. Source: Link