Illiquidity and Stock Investment Strategies for Individual Investors
Posted on Thu, Nov 10, 2011
Wall Street always seems to have the advantage over self-directed investors when it comes to equity investing; teams of analysts, insider information, “channel checking”, and high frequency stock trading to name a few. Most self-directed stock investors feel they simply cannot compete.
Individual Investors with the right stock investment strategies have one huge advantage over the institutional money managers...your account size. Doesn't seem like an advantage, right? If the goal is to grow your account, then why is it an advantage to have a relatively small account? The answer is: because illiquidity is relative. To them, illiquidity presents such a significant risk that most mandate a minimum average daily volume for potential investments. To the informed investor it is a real opportunity.
Take, for example, a recent top 10 stock in one of our conservative investment strategies, Landauer Inc (NYSE: LDR). Investors should be drooling over a company with healthy margins, a low debt-to-equity ratio, a nearly 5% dividend yield and a 20 year track record of consistant dividends. However, with an average daily volume of under 40,000 shares no institution would ever look twice at this stock. Hedge funds and mutual funds managing millions of dollars could never buy a large enough position to influence their returns. You as an independent investor with the right stock strategy can.
Illiquid stocks can provide great opportunities for small investors to add alpha. The Bloodhound System doesn’t stick to the same small group of stocks that are covered by research analysts. Bloodhound looks for value in every corner of the equity market and often finds it where institutions are forbidden.
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