Liquidity

     Many years ago, when I worked on the factory floor of a filthy aluminum smelting facility, a fellow worker came in with some exciting news for his close friends. It seems that his wife worked for a life insurance company across the river and they were willing to sell company stock to willing investors. Several of my co-workers bought considerable amounts of stock based on the bullish comments of their friend. They bought the stock directly from the Chief Financial Officer (CFO) of the company, thereby eliminating the need for a stockbroker. Sounds great, right? Inside information about a small and growing company that someday may become another Prudential or Mass Mutual. Not exactly! The main problem with this investment is that the stock was not listed on any public exchange. In order to sell these shares, the holder would have to find a willing buyer himself, maybe even by placing an ad in the newspaper. In other words, the stock was illiquid. When things go bad or when I want to cash-out I like a nice easy way to exit a position. When a company has to sell its stock by solicitation, it usually means that they cannot or will not comply with the listing requirements of the exchange. Not all illiquid investments are bad, assets like precious metals, real estate, even CD's are designed to be held long-term. Scamsters often prey on unsophisticated investors with "private equity" and the results are usually a disaster for the holder of such stock. A better way to play this game is to buy an experienced company that invests in startups. These are called Business Development Companies or (BDC). This gives you the benefit of owning a piece of many small and growing companies, giving diversification, and liquidity by owning a publicly traded stock. Concerning the life insurance company- they were not required to provide investors with any financial statements that were audited by GAAP standards. There also was no analysts who covered the company and rendered an opinion about its investability. Basically your flying blind, handcuffed and upside down. Needless to say, many of my co-workers lost their entire investment in this company, but the lessons they learned lasted a lifetime.