IKN

idle and fond bondage

Regarding stock liquidity

While checking round the radar today a subject sprang to mind inspired by previous e-mail conversations with several readers over the course of the year. What follows is nothing earth-shatteringly new but all the same it’s getting written.

First off, a couple of facts: Over the last three months, Troy Resources Australian listing (TRY.ax) has averaged a trading volume of 165,000 shares per trading day. Now for sure that’s not FCX or INTC levels of volume, but that should be enough to get you in and out whenever you want at the price you aim for (give or take a couple of pennies). Meanwhile, the same stock in Canada, ticker TRY.to, has averaged a touch under 27,000 shares and long suffering readers of IKN will know that until a few weeks ago there were plenty of days that passed without a single trade being made.

With that in mind, let’s check the chart of TRY.ax versus TRY.to over the last two months (the recent timeframe in which TRY has made its significant move)….

…and we note that the two lines are basically lockstep. For the record, this also works for longer and shorter periods (e.g. check the 12 month chart and check the 5 day chart at your own leisure).

This harks back to conversations I had earlier this year as I banged on the table about Troy Resources and people would mail and say things to the effect of “Well yes I hear you on Troy, but there’s no liquidity in the Canadian stock”. It also reminds me of the recent analysis from a CFA working in a Canadian brokerage that used the very same argument, i.e. lack of trading volume in the Canadian stock, as one of the reasons to downgrade his recommendation on TRY a touch over two months ago….y’know, timing and all that.

Anyway, the point is that if you’re looking to flip a trade in a couple of hours or a couple of days, then volumes are important. However if you’re looking to park your money in a value investment over a longer period of time (couple of months, couple of years), don’t worry ’bout it so much. The chart above is clear proof that non-liquid tickers rise (and fall) just as well as their liquid siblings over time. Right now I’m trying to fish my way into a couple of low-priced, low liquidity stocks (note subscribers, the one beginning with “R” and the one beginning with “D”) but have already taken a starter position in both. If the value point comes to me then I’ll take a fuller position and until then a bit of patience is needed, but one thing I won’t be worried about is the amount of action or non-action in the stock once I’m bought in. When others work out the reasons for owning they’ll get popular in their own time.

DYODD, dude.

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