The New Grain Of Salt Index

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During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed The New Grain Of Salt Index. Here’s an excerpt from the episode:

Tobias Carlisle:
Jake, do you want to do the Taylor rule, the new Taylor rule?

Jake Taylor:
That’s not the name. The name of this new metric is the grain of salt index and probably should give a shout out to Ian Cassel, because I’m sure that he’s already thought about this one a million times given his approach, but where this came from was I noticed in one of the positions that I own that’s very, speaking of illiquidity, it moved, it changed market cap by $60 million based on the most recent tick for that day.

Jake Taylor:
And then on that was the volume that dictated that was $1,400 worth of transactions. So if you imagine the change in market cap divided by the dollar volume, that gives you an idea of what the grain of salt index is. And the idea is like we’re taking every single market price with a grain of salt, so the bigger this number, the more that you should probably take it with a grain of salt.

Jake Taylor:
So in this instance for the thing that I was in, $1 of volume drove $43,000 worth of market cap change. That seems a little bit weird to me. So I don’t know if anyone else can come up with a higher number than that one, but I’m sure that there are some illiquid thing out there that’s changed even crazier than that. But it’s kind of a fun thing to think about of how much should I be taking every up or down tick with a grain of salt.

Tobias Carlisle:
It is funny though, isn’t it, that there are a lot of companies out there and particularly in crashes you see often there’s a lot of volume in a crash, so that I’m not necessarily talking about that, but often there are companies that are taken down on not much volume and the very vast majority of shareholders aren’t going to sell anywhere near that.

Tobias Carlisle:
That why illiquidity is such a great metric, even though it doesn’t really make much sense. Just illiquidity in and of itself is actually a driver, is a reasonable predictor of returns in just about everything. Housing, you can go and look at housing indexes, at the bottom there’s no liquidity. Nobody wants to sell their house when they know that it’s way under value. The only reason they’re selling is because they’re for sellers, they’ve either got to move for work or they’re unfortunately losing their house.

Jake Taylor:
Yeah. Bill, what do you think, you got any of those high grain of salt indexes?

Bill Brewster:
I just think if you’re looking at something that’s thinly traded, be careful about… I mean you can afford to have your price out there and just throw your bid and wait for somebody to come ping it, and if you’re used to getting filled quickly and you start to go into the smaller names, get ready to not get filled right away and it’s totally normal, and sometimes you got to wait for a long time. But I think there’s a reasonable case to be made most the time for the big cab names being priced pretty close to reality, but there’s some weird stuff in small-cap land for sure.

Tobias Carlisle:
It’s tough in debt too. I’ve got some friends liquidated a debt book last year and you’ve got to call people up and get where the market is from them without tipping your hand that you want to sell to them, without tipping your hand you’re trying to liquidate the whole book. So that’s a tough business.

Bill Brewster:
I mean that’s where a real market maker actually is worth their salt, finding blocks and placing them and whatnot.

Jake Taylor:
Do we still have those? I thought it was all machines now.

Bill Brewster:
I think in some things.

Tobias Carlisle:
There are differently market makers in ETFs. There are multiple market makers in ETFs. There are leads and there are others. I assume it’s all automated, I assume they just put a bid in and ask around where they think the NAV is and just trades around there.

Bill Brewster:
I mean what’s been interesting to watch in some of the smaller names that I just look at, is like some of these things just appear at least to be like truly orphaned, and I mean people just don’t want to touch them. So you can get a capital allocator that actually understands what the heck they’re doing, that can turn out pretty well. Who did you interview? Was it Steven Kiel, was that your boy? Is he the one that does the smaller cap activism balance sheet to income statement?

Tobias Carlisle:
Yeah, that’s Steve. He got control of a smaller enterprise and he’s just working that one out. That’s what he does though, yeah, balance sheet to income statement. Shout out to Steve.

Bill Brewster:
Hope you’re one of the 10.

Jake Taylor:
One of the 10.

Bill Brewster:
Hope so.

Tobias Carlisle:
You got any more comments on that one? There’s an interesting comment up on the screen, “End of last year every time the market was making all-time highs on trade talks going well was on minimal volume.”

Bill Brewster:
Hmm.

Tobias Carlisle:
Eric Balchunas got this, but I call it this but I call it the Balchunas indicator. He talks about it’s not a real sell-off until you get a big spike in volume, and I think he says it like 60, I might get this wrong, 60 million shares, maybe it’s $60 billion? I don’t know, it’s one of those two, once it gets over that level, then you know it’s a real sell-off.

Tobias Carlisle:
And he used that in 2018, he was saying there’s not enough volume going through for this to be the real thing, and then this time around he was calling it and saying there’s a lot of volume going through here. This is like going through a spy, so he was talking about the ETF and it looked like the real thing.

Jake Taylor:
Yeah, I wonder how the indexation of the world changes this a little bit? If maybe it’s more of a nothing happening and then all of a sudden everyone wants to sell at one time. Like they all kind of capitulate around each other more than when it was a little bit more independent thinking around it. I don’t know.

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