Liquidity — Would you like to buy an M1 Abrams tank for $18,500?

As it is the case for all postings in this blog, my standard disclaimers apply for this posting.  However, since this posting discusses investments, I urge you to review the disclaimers laid out in the About section with extra diligence. Moreover, even if you have already reviewed these disclaimers in the past, you need to review them again, as they are subject to change without notice.  Do it now, and remember that whatever I say in this blog posting is simply my opinion — it is not science, it is not advice, and it is not an attempt to make you act in any way whatsoever.

Abrams-transparentIn recent postings where I discussed my investment approach through the prism of a position in Veramark Technologies and Mind CTI, I have discussed how liquidity affects the common stocks that I tend to invest in.

Generally, I embrace the lack of liquidity, because it is precisely this lack that makes institutional investors and traders steer clear of the stocks that I am interested in, effectively providing me with a discount to the intrinsic, fundamental value of the stock. So, lack of liquidity, generally, is good. Naturally, it also means that once I enter with a substantial position, I am not able to exit in a smooth, meaningful way, before the market has embraced the equity — sometimes a truly horrifying proposition.

Sometimes, however, the unintended consequences of a sustained liquidity crunch makes you laugh. Trading in the equity of one of my portfolio companies, Formula Systems, a holding company with majority interests in three other publicly traded companies, an incredibly strong balance sheet, revenues and net income raising like a rocket, and near-zero liquidity, recently yielded such unintended consequence, with a 1,000 share trade causing a drop of approximately $0.50 on a equity with a $18, or so, per share price.

The result of this trade, yielding a trading volume of of $18,500, tops, lead to an immediate capitalization loss of $6.3 million, or so (I am approximating). Let me be clear… $18,500 dollars, the economic equivalent of one model year 2012 Kia Sportage, changed hands directly, and, in the process of doing so, caused $6.3 million (actually, let me write the amount out: six-million-three-hundred-thousand dollars) in negative economic impact, the equivalent of 25 model year 2012 Rolls Royce Ghosts; one M1 Abrams, a third-generation main battle tank; or the annual household income of 165 households in West Virginia.

Actually, to be precise, if you opt for the M1 Abrams tank, you will have sufficient change left over to also be able to afford to equip your tank with the Tank Urban Survival Kit, TUSK, a series of improvements intended to improve fighting ability in urban environments. This might come in handy, since the cost of a standard RPG is about $1,000, allowing your enemies to procure 6,300 of these.

Yes, sometimes a liquidity crunch can make you laugh…

By the way, my interest in Formula Systems is based on many factors, but one of the most important of these factors is that at its current capitalization, $244 million, Formula Systems is valued at a 30% discount to the pro-rated market capitalization of its subsidiaries. Normalization, therefore, would require an immediate adjustment of the per share price FORTY, Formula Systems’ equity to $23.50.

That is what I call an opportunity to laugh all the way to the bank!

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