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26.02.2025 | Zsolt & Martin's Talk
The crucial question of exit liquidity
Investors are bombarded with promises of returns or growth. It's crucial to consider the exit strategy before making a purchase. Questions to ask include: What does "exit liquidity" mean in the context of investments, and why is it important? What factors influence an investment's exit liquidity, and how do these differ across asset classes (e.g., stocks, real estate, crypto)? What risks arise when an investment has low exit liquidity, and how can investors mitigate them? How do exit strategies differ between private and institutional investors, particularly in illiquid markets? What historical examples exist of liquidity bottlenecks at the exit stage, and what lessons can investors learn from them?
The content discussed in this video is for general informational purposes ONLY and under no circumstances constitutes a recommendation to buy or sell specific investments. It is therefore not investment advice, as I cannot assess the risk profile and financial situation of individual viewers. Anyone who decides to buy or sell investment products or assets based on the information discussed in this video does so at their own discretion and risk. I cannot accept any liability if you make your own investment decisions based on the information in this video and consequently incur losses.
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The crucial question of exit liquidity: A capital market discussion
Welcome to our capital markets talk today. We're pleased to discuss an important topic with you: exit liquidity. What does this mean for you as an investor, and how should you consider this issue in your investment decisions?
What exactly is liquidity?
When you buy a security or invest in a company, you exchange liquid assets in exchange for a piece of paper, a right, or a promise of profit. This provides the company with liquidity, which it can then reinvest. The crucial question is: How do you get your liquidity back when you want to sell the paper again?
The question of exit liquidity
Very few investors give much thought to the question of Exit liquidity This means: What will the liquidity situation be like if I, as an investor, want my money back? Does someone have to buy back what I bought from me? Or can I exchange the security for cash?
Zsolt Janos He emphasizes how critical it is to address this question. It is essential to understand how you can later convert your investment back into liquid funds.
How does the recovery of liquidity work?
There are two main ways you can get your liquidity back:
- The issuer will repay you the amount from its liquid assets (e.g., from customer receivables).
- They utilize the market. If the security is listed on a market, a third party can provide you with the liquidity.
A security that is listed on a stock exchange generally offers higher liquidity than a security that is not listed or is a private placement.
Herd instinct and liquidity
Many investors tend to hold onto investments that are increasing in value and where there is a lot of liquidity in the market. Conversely, they often want to sell products when liquidity dries up and prices fall. This is an example of our Herd instinctIdeally, one should trade counter-cyclically: when liquidity is low, one should exchange their liquidity. When liquidity is high, one should sell their securities.
However, it's also important to note: just because something is cheap due to low liquidity doesn't necessarily mean that liquidity will return and the value will increase. Liquidity is a factor, but not the only decisive one.
Liquidity and intrinsic value
The intrinsic value The value of an investment plays a crucial role. What is the stock really worth? What returns can I expect? Liquidity is an additional factor that must be considered.
Bank runs and liquidity
Even if you only keep your money in one account at a bank, you can still experience a lack of liquidity. If all customers try to withdraw their money at the same time (bank run), the bank cannot provide sufficient liquidity. The business model of banks is based on the fact that not all customers access their money simultaneously.
The importance of additional liquidity
As an investor, it's advisable to always keep additional liquidity on hand. Never be too... 100% investedUnexpected events may occur that require liquidity. Or situations may arise in the capital markets where you cannot access your liquidity.
Liquidity has its price
The immediate availability of liquidity comes at a price. Interest rates on overnight deposits often don't even cover inflation. You're therefore accepting real losses in the value of your money. This is the price you pay for being able to access your funds whenever you need them.
The real estate market as an example
The current situation in the real estate market shows how quickly liquidity can disappear. During the period of zero interest rates, pension funds and insurance companies provided a great deal of liquidity by purchasing real estate. When interest rates rose, this liquidity was siphoned off from bonds. Many investors are wondering where the money has gone. It flows to where there are more attractive returns.
Mark-to-market rating
Mark-to-market valuation helps reduce liquidity problems. You always value your assets at the price you could get if you sold them. This allows you to generate liquidity. However, this daily valuation can be psychologically stressful when prices are falling.
Private equity funds
Private equity funds are illiquid investments. You lend your money to the fund manager for a certain period (e.g., 10 years) and only receive it back after that time. The advantage is that the fund manager is not under pressure to maintain liquidity because investors might withdraw their funds.
Conclusion
The question of exit liquidity is a crucial factor in your investment decisions. Consider how you can later convert your investment back into liquid funds. Diversify your portfolio and always keep additional liquidity on hand. Understand the mechanisms at work in the capital market and don't let yourself be guided by short-term trends and emotions.
Zsolt Janos He and his team are happy to provide you with comprehensive wealth management advice. Together, we will find the right investment strategy that meets your individual needs and goals.
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