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