To Be Liquid or Not To Be Liquid—That Is The Question

Most of us are not like Warren Buffett with a whole lot of money lying around that we can call on whenever we need it. We just don't have that reserve of money we can call into action whenever an investment opportunity presents itself. However, we can take measures by which we can maintain a consistency of liquidity within our investment portfolio. In fact, there are three things you can do to bring that about. One thing you can do is take advantage of stock arbitrage opportunities. Another thing you can do is draw up a list of stocks that you want to hold only for the short term, and third and final thing you can do is develop a group of investors that will invest with you.

Investing in stock arbitrages is one way to go if you want maintain some level of liquidity in your investment portfolio. It's money that you can use over and over again. Real estate, on the other hand, is like frozen ice. You can't use the money in it until it unfreezes and returns to water. That means that if you needed money for cab fare, you might not have it even though you have over a million dollars invested-frozen-in real estate. Sure, after many years, you might be able to sell the property for a large chunk of change. However, it won't help you in the here and now. It won't help you find the money to invest in an investment opportunity that you are presented with at this very moment. That's why I argue that it is good to get involved in initiating stock arbitrages in which you make a profit on the price spread between one company's cash offer to buy another company for a certain price and that other company's current trading price, which is, hopefully, lower than the price being offered. For instance, let's say that company Y decides to buy company Z for cash. And let's say that it is offering to buy company Z's stock at $5.00 a share. Company Z's stock currently, let us say, is trading at $1.00 a share. The spread, obviously, between the two companies is $4.00 ($5.00 - $1.00 = $4.00). Now if you were to go out and buy 100 shares of company Z ‘s stock at $1.00, and sell it to company Y, once the stock arbitrage has been executed, you would have earned a profit of $300.00 on your $100.00 investment ($400 - $100 invested = $300). Question: What do you do with the $300 return on your investment? Do you put it in a long-term portfolio account where it will become frozen like ice causing you to become illiquid? Or, do you put some of it in a long-term portfolio and roll the rest of it over to be used again and again for other stock arbitrage opportunities? I would choose the latter because it will give you the liquidity to finance more and more deals so that you can growth your wealth over time.

Investing in stocks for the short-term is another way to stay liquid. Instead of putting all of your saving into a long-term portfolio that you might sell or see for several decades down the line, you invest part of it into stocks you want to sell for cash flow that you can use to take advantage of other investment opportunities. As I stated heretofore, sometimes we need money not ten years in the future but right here, right now! Again, investing in stocks you hope to sell in short order will help you achieve that liquidity result you aim for. As you know stocks go up and down. They gyrate. What you want to do is watch a few of those stocks that are have been experiencing some kind of trouble and are at a low to their usual price. It is at this time that you want to pounce on them and buy them. As the saying goes, "Get them while they're down". Once they begin to rebound, you want to squeeze the profit out of them. That is to say you want to make money on the difference between where they were before versus were they are currently. For instance, let's say that you bought 100 shares of United Airlines when it was experiencing difficulty and was selling for a low of around $3.00 a share. And let us say that as you were monitoring the stock, the stock started to rise. However, before it topped at about $42.00 a share, you sold at $20.00 a share. How much money will you have made in pre-tax dollars? You would have made a profit of $2000 less your investment of $300, the initial cost of your purchase of 100 shares of the stock at $3.00 a share. Now imagine that you did this not just for one stock but for several stocks: You bought them at a low from their usual prices. You wait for their share prices to climb. Once a significant spread has developed between the prices you purchased them for and the price that they are trading for currently, you cash out your position, thus, increasing the liquidity of your investment portfolio. You shovel some of the returns into other stocks you hope to hold for the short run and cash out once a significant spread has developed between what you paid for them and what they are selling for now. By cashing them out, you improve liquid position.

Still a third way to stay liquid is to persuade others to invest with you. This is perhaps one of the best ways to get started if you have little or no money. It is called using other people's money. I, first, ran across this technique when I read a book or two by the prominent real estate author and magnate Robert Allen. That's right, you ask people to invest say, $100 or so, so that you can work (i.e. finance) your deal. In return you promise to share the booty of your investments with them. As you make money, in other words, they do too. Let me take you back to our prior examples: Suppose you didn't have that $100 to buy 100 shares of company Z. You could have instead had 10 investors each invest $10 with you so that you could pull off the deal of buying 100 shares of company Z's stock at $1.00 share. Once the deal went through, you could have paid them a 50% return on their money (i.e. $150 in total) and still made a pretax profit of around $150 for yourself. Similarly, you could have lined up investors to help you purchase stocks from your short-term investment list. Instead of you putting up $300 from your savings account to purchase 100 shares of United Airlines stocks trading at $3.00 a share, you could have developed a group of 3 investors, each of whom invested $100 with you to purchase the 100 shares. Here again, you would make a profit even though you would be forced to share part of it with your co-investors. You can do the math yourself for this one. My point is that you can keep yourself liquid by developing a group, list, or team of investors who will go in with you on investment deals that you find.

To be liquid or not to be liquid, that is the question. If you tuck your money away solely in long term, frozen, ice-like investments, you are slowly making yourself less and less liquid. On the other hand, if you do any or all of the following, you stand to make yourself more and more liquid: You engage in stock arbitrage deals and roll part of the returns over into other stock arbitrage deals. You develop a list of stocks you buy at a low relative to their usual price and hold only to the point that a significant spread have developed between what you bought it for and how much it is trading for currently in the market. Last, you develop a group of investors that you can tap for money to help finance your investment deals.