Ian Cassel: Don’t Worry About Illiquidity, Worry About Being Right!

Johnny HopkinsIan CasselLeave a Comment

During his recent interview with Lead-Lag Live, Ian Cassel explains why investors shouldn’t worry about illiquidity, they should worry about being right. Here’s an excerpt from the interview:

Cassel: I mean you hit the nail on the head. I mean it depends on what your definition of illiquidity is. I kind of think of illiquidity is sort of a personal decision too. I kind of view the definition of illiquidity should be can you yourself buy your entire position in a day or not. And if you can’t then it’s an illiquid stock.

So if you’re managing a billion dollars your definition of illiquidity might be different than somebody managing a hundred dollars. It takes days, weeks, sometimes months to acquire a position in some of these businesses.

But the one thing that’s interesting about small businesses that are executing is there’s sort of this law it’s almost like as defined as gravity to where you know the higher the stock goes the more the liquidity increases.

A stock that trades 20,000 shares a day at a dollar, so twenty thousand dollars in daily volume, when it gets to five it’ll probably trade 200,000 shares a day at five, so that’s a million dollars worth a day.

And so one of my early mentors used to have this saying which I love, he said – don’t worry about illiquidity, worry about being right.

I remember I just loved that line because it’s so true and so you just have to be aware of that and so illiquidity doesn’t scare me away.

But when I first got into micro-caps, when I first started investing, I would buy my position all at once and that works when it works but it doesn’t work when it doesn’t work.

And so now it’s more of laddering in where I buy a position, I wait to see more execution from management and then I’m not afraid to buy more.

And the great thing about microcaps or even small caps is a business that’s small, that’s executing, that keeps on growing and earning more money there’s a lot a lot of room to run to the upside.

So you don’t need to buy all of it at once. You can ladder it in. Quite honestly the best stocks I’ve ever bought were companies I was constantly averaging up in not averaging down.

You can listen to the entire discussion here:

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