Mental Models discussed in this podcast:

• Bias towards action
• Liquidity
• Mr. Market

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Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode53

How to buy illiquid stocks

• The purchasing of illiquid stocks presents some challenges. Your buying process needs to be focused on overcoming those challenges. The challenges are 3-fold:
  • Acquiring a full position size
  • Not pushing the stock price up too far
    • Too far is defined as beyond a purchase price that provides a sufficient margin of safety
  • Managing your personal impatience and bias towards action
• Initial purchase attempt:
  • Ideally, you've studied how the stock price has traded in recent days. If the average daily trading volume exceeds your total position size, it's not an illiquid stock for you.
  • Use limit orders
  • If last trade is above my target price, set a limit buy order at your target price
  • If the last trade is below my target price, consider setting a limit buy order at the last trade price, but above the current bid. (if any)
• Adjust your purchase price based on new information
  • Study changes in ask price and any executions that occur
  • More liquidity usually exists than is actually traded on an average day. You can take the whole volume if the price is right.
  • Offer up a large number of shares in a bid that doesn't actually move the stock price up. 

Summary:

Purchasing illiquid stocks is all about managing your relationship with Mr. Market. When you seek to acquire a full position you need to avoid pushing the stock price up too quickly. This can draw attention to the stock from competing investors. Meanwhile, you'll need to manage your personal impatience in order to successfully fill your position at a reasonable price.