Establishing a position in illiquid securities

[jfan]

I've been digging in the wastebasket of illiquid stocks recently and was wondering how to best establish a position in these businesses without 1) affecting the market price and 2) without incurring significant trading costs? Hoping to get some advice from experienced investors.

 

Thanks

[Gregmal]

To me the biggest thing with these is you have to eliminate the idea that you're trading; you are making an investment. So with that said, you need to make sure your work is tip top. And then forget about this whole notion of "effecting the market price". If its illiquid and you think its worth 2-3x more, I could care less about moving the market, I want to accumulate the desired position, and over a specific accumulation period, get in at or below the highest acceptable purchase price. 

[fareastwarriors]

I put out a bunch of Limit orders at various prices that I don't mind owning the stock at.  And then it's just lots of patience and understanding that I might not get the fills I want. 

 

I guess that's the meat of it. Lol no special strategy.  

 

 

Edited June 1, 2022 by fareastwarriors

[Longnose]

I have a few small positions in some penny stocks that are this way. to not affect the price always use limit orders and you'll need to buy over time. Look at the bid ask spreads. Usually, youll only be able to buy small blocks unless there is a big seller out there. 

 

Greg is also right, Almost always you need to look at these as investments where youll lock up the money for a period of time with expectation of a large return down the road. (more than 6 months often a year or 2)  DD is key in these illiquid stocks. You sell when liquidity arrives and your thesis becomes realized. 

[aryadhana]

1 hour ago, Gregmal said:

To me the biggest thing with these is you have to eliminate the idea that you're trading; you are making an investment. So with that said, you need to make sure your work is tip top. And then forget about this whole notion of "effecting the market price". If its illiquid and you think its worth 2-3x more, I could care less about moving the market, I want to accumulate the desired position, and over a specific accumulation period, get in at or below the highest acceptable purchase price. 

 

I think that's probably the right attitude, but without a lot of market makers energetically balancing supply and demand, it's rather possible you buy enough to move the market and plenty of people you would have sold to on the way haven't been paying attention to their portfolio to enter an offer, and come to remember and do so over a period of days as the price goes up a bit.  

 

If people are willing to sell at X, good chance a sizable number are willing to sell well below the prices you would end up buying at if you bought in too quickly.

 

Presently trying to balance this with AMBC warrants, which have shockingly low volume for a pretty well-known situation. (500 shares traded today, a few thousand last Friday). 

[Gregmal]

The biggest mental hurdle for many is to stop thinking like a little investor. If Icahn wants a company you think he’s afraid of tendering because it moves the market? What about entities that offer huge premiums for a full buyout? Typically you want to have the same mentality. In an illiquid security or market you have to make it liquid. If I have something at $17 trading for $5 who gives a shit if you pay 6/7/8? Of course like @aryadhanajust mentioned, be practical. Take a few weeks or even months to balance out your buy orders. If your fears are that you buy it at $7 and your brokerage statement shortly thereafter shows $5….play a different game then.

[Spekulatius]

if you don't want to move the market, you need to wait until the market  moves to you. You often get more liquidity before and especially after earnings. It also can help to put a large bid out there at a price you like to own it. Someone who likes to sell might see the bid and just fill it. Patience is definitely required - you can't force it.

[SharperDingaan]

You are marrying it, so better be really sure it is worth your patience and skill; almost always there are a better solutions elsewhere.

It is almost always better to bid above market on a single six digit all-or-none day order. Buy more than you want, bleed some of it out later in the day, and walk away.

 

Illiquid stocks move on liquidity events, and you have just provided one. You have also tipped the market there is a sizeable buyer, which will pull in others, that you are going to  bleed shares into. Stay off the bulletin boards; 3-4 months later your presence will have been forgotten, and you can pull the trick again. 

 

On your first order, it is almost always better to go bigger, vs smaller - the 175,000 vs 125,000 order; it will be your best opportunity to accumulate size. It will also be a sizeable cash outlay, so it better not be dog sh1te, and you better be able to hold it (with no liquidity events) for at least 1-2 years. If you are being laughed at, you have done your job well.

 

Professional, vs little investor, approach.

 

Good luck!

 

SD

[jfan]

Thanks everyone for the great advice. In other words:

1) Got to be right on the business first

2) Patience

3) Spread out the orders over time

4) Create a liquidity event at a price above market (as long as you are happy with the price) using limit orders

 

Much appreciate your insight!