Comments on: The hunt for illiquidity A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: traducator romana daneza Mon, 29 Sep 2014 14:07:37 +0000 easy, stylish and restrained-to-wear collection for classy women.This year, discover an ultra-functional tote plus a small messenger travelling bag inside a new mocha colorway.

By: topofeatureAM Thu, 31 May 2012 21:03:39 +0000 Its inevitable that VC investing should generate low returns over time. Its exactly the sort of risk taking that behavioral finance teaches us human beings want to take.

Price dominates growth always.

By: TFF Sat, 26 May 2012 14:13:07 +0000 The illiquid investments that I can think of provide income, not capital gains. This is actually a great paradigm for retirement, in which you need to provide an income stream for decades and can’t afford to be eating into your capital.

As income-producing investments, their expected return is likely below that of the Russell 2000. But good luck trying to assure yourself of an income stream when investing in a stock index!

Like realist noted, the best illiquid investments offer the owner the opportunity to profitably monetize their skills and labor. Guaranteeing yourself a good-paying job is at least as valuable as guaranteeing yourself a ROIC.

By: realist50 Sat, 26 May 2012 05:51:32 +0000 @BryanWillman – I think that you make a good point about timing of liquidity and variability of returns/diversification.

After all, a truly illiquid asset won’t suddenly become liquid in 2042 in Felix’s example. Instead, if it is illiquid, maybe it will be monetizable on favorable terms sometime between 2032 and 2052. Tough for him if he has to take a steep discount trying to sell in 2042. If he has a high degree of certainty that he will get his money in 2042, then what Felix has starts to look a lot like a long-term bond, and a secondary market for liquidity will develop. After all, 30-year treasuries and long-term investment grade corporate bonds are only liquid because someone else will buy them – I can’t make the US government or GE redeem the bond tomorrow – and someone else would probably similarly buy Felix’s hypothetical investment if its 2042 value is predictable.

Felix mentions a house, and income-producing real estate – leased-up commercial space, rented housing, or even timberland – could fit the bill for what he’s seeking. The lack of diversification is a dealbreaker for anyone investing a modest sum, however – do I feel safe putting all my retirement savings in 1 or 2 properties? It’s a different story for big pension funds and endowments, who can build a diversified real estate portfolio even with a small percent of their assets.

By: KenG_CA Sat, 26 May 2012 05:25:52 +0000 FifthDecade, you said:

“real growth only comes through real progress in technology or productivity increases (rather than cost cutting or cheap labour) – in other words, from new ideas.”

Yes, but the progress is relative. It can be offset by having your innovations implemented elsewhere (that’s what happens now). We have separated manufacturing from R&D, so if we come up with a great new invention, much of the growth will occur elsewhere.

And for American businesses, productivity increases mainly come from getting less people to do more work. Which is the opposite of growth.

We have been running trade deficits for decades. These deficits have to be financed either by debt or selling assets. Either way, our standard of living declines. However, it’s not in steps, it’s continuous, and people don’t realize it any more than the lobster stuck in a pot of cool water over a stovetop flame knows he’s dying a slow death. Most people have not equated the lower quality and higher cost of education, the lower quality of food, and the increasing cost of housing and medical care with a lower standard of living, but that’s what has happened. They have been anesthetized by an over abundance od media, gadgets, unhealthy food, and tourist traps, so they don’t see that the water is boiling.

But getting back to technology, we are reducing our investment in real technology, as venture capitalists have been deluded into thinking that ad-supported websites create value, and drive more and more capital to those kinds of companies, rather than ones that actually make things. Businesses in general are not investing a whole lot in the U.S., as evidenced by their record cash hoards. Until they actually invest in evolving their technology, and not trading paper to maximize profits, there will be no economic growth.

Thanks for the opportunity to go off on this tangent.

By: BryanWillman Sat, 26 May 2012 03:58:27 +0000 Consider too that some illiquid investments, if successful, will by definition become liquid.
(Restricted stock from investing in a startup – if startup does well, most likely goes public – presto turns liquid.)

What about the statistics? How many investments that started illiquid ended up going public and thus made the stock index?

And of course these are often binary results investments – your startup most likely either failed, or went public. So your return is most likely either total loss or something pretty good.

None of that makes for a sensible retirement plan for a person of normal means.

By: Stevensaysyes Sat, 26 May 2012 01:57:22 +0000 The illiquidity premium is countered by the fact that certain market participants prefer illiquidity. Financial advisors who bought venture capital over the Russell 2000 were probably happier over the last market cycle, even though the returns were lousy:

-Illiquid investments report quarterly, so clients don’t see the daily lows, and they are less likely to call you with every swing of the Dow

-When clients do see their assets fall, they can’t liquidate everything until the end of the lockup period

-Since illiquid investments don’t have an active market to price them, you can report to clients “optimistic” estimates of their value, and also charge on it

If I were a cynical advisor, I’d put my clients in a portfolio of private equity, venture capital, hedge funds, and private real estate funds regardless of whether I expected them to outperform stocks.

By: FifthDecade Sat, 26 May 2012 00:41:21 +0000 @TFF, Of course, you’re right. As previously discussed in this column at some length, the demographic of the West is aging and moving from productivity to non-productivity; in effect, this magnifies the effect of the flat or falling population, but a big new revolutionary idea would have more effect.

It’s like the difference between Addition and Multiplication – all we’ve been doing for the last decade or so is adding up 2+2 and not noticing that 2×2 could be more powerful because all we have is the idea of using 2 in the formula. What we need is someone to come up with the idea of using a different number so the multiplication will make a difference. But with so much patenting of colours and processes and other legal restrictions on progress (I’m not talking about regulatory issues here) everyone’s so busy navel gazing the big picture remains largely unobserved.

What happened to all the visionaries?

By: TFF Sat, 26 May 2012 00:08:13 +0000 Fifth, real growth can also come through population growth. Europe’s population increased over 30% between 1950 and 1995. Now it is running in reverse.

Technological growth has been perhaps more important, but demographics are a strong headwind to fight at this point.

By: FifthDecade Fri, 25 May 2012 23:56:05 +0000 Another way of looking at things, Ken, is that real growth only comes through real progress in technology or productivity increases (rather than cost cutting or cheap labour) – in other words, from new ideas.

Since the internet boom of the 1990s there really haven’t been enough (if any) great strides forward, although genetics is perhaps one area for the future. But don’t look at returns in biotech right now as the timescale for research, development, testing and authorisation well exceeds the normal timescale that a typical VC investor wants a return in – and that’s if one of the world’s erstwhile leading technological Nations doesn’t disallow the research on the basis of what was written in a morals manual most recently updated about 1600 years ago.