The concept of liquidity is critical in investing but often misunderstood.

Liquidity describes the degree to which an asset or security can be quickly bought or sold in the market at a price reflecting its intrinsic value. In other words: the ease of converting it to cash.

In the Oaktree Capital memo, Howard Marks explains that investors often forget the latter aspect of liquidity - the ability to sell at a price close to intrinsic value.

In particular:

The liquidity of an asset often depends on which way you want to go … and which way everyone else wants to go.

He also lists several principles, which I've abridged here:

- In times of crisis, liquidity often goes to zero

- Usually the market wants to either sell or buy and liquidity exists in the opposite direction

- However, when everyone is confused and intimidated, the market freezes up and it can be hard to do both.

- No investment vehicle should promise greater liquidity than promised by its underlying assets

- Taking on large amounts of illiquidity is neither a winning or losing strategy per se


Liquidity by Howard Marks to Oaktree Capital clients

Understanding Liquidity, Investopedia

Liquidity, Investopedia