Mental Models discussed in this podcast:
- Bias towards action
- Mr. Market
Please review and rate the podcast
If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show’s audience.
Follow me on Twitter and YouTube
Twitter Handle: @TreyHenninger
YouTube Channel: DIY Investing
Support the Podcast on Patreon
This is a podcast supported by listeners like you. If you’d like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron.
You can find out more information by listening to episode 11 of this podcast.
- The purchasing of illiquid stocks presents some challenges. Your buying process needs to be focused on overcoming those challenges. The challenges are 3-fold:
- Acquiring a full position size
- Not pushing the stock price up too far
- Too far is defined as beyond a purchase price that provides a sufficient margin of safety
- Managing your personal impatience and bias towards action
- Initial purchase attempt:
- Ideally, you’ve studied how the stock price has traded in recent days. If the average daily trading volume exceeds your total position size, it’s not an illiquid stock for you.
- Use limit orders
- If last trade is above my target price, set a limit buy order at your target price
- If the last trade is below my target price, consider setting a limit buy order at the last trade price, but above the current bid. (if any)
- Adjust your purchase price based on new information
- Study changes in ask price and any executions that occur
- More liquidity usually exists than is actually traded on an average day. You can take the whole volume if the price is right.
- Offer up a large number of shares in a bid that doesn’t actually move the stock price up.
Purchasing illiquid stocks is all about managing your relationship with Mr. Market. When you seek to acquire a full position you need to avoid pushing the stock price up too quickly. This can draw attention to the stock from competing investors. Meanwhile, you’ll need to manage your personal impatience in order to successfully fill your position at a reasonable price.