Revisiting the Liquidity Liability

  • There are now $2.5 trillion worth of companies whose shares are trading so furiously that the entire share base of the firm is changing hands in 40 business days or just two months
  • We recently wrote an in depth White Paper on the unusually high risks associated with the market’s most liquid stocks
  • We recently explored Warren Buffet’s comments on the importance of stable shareholders and low turnover in our recent Quick Take

There are $2.5 Trillion of companies that are effectively sold in their entirety every 40 business days. For app intensive active traders, pattern day traders and those who want to start bear trading, history suggests caution. Frantic trading of speculative assets will definitely make your broker rich…but not necessarily you.

Total Market Cap of Companies Where 100 of Shares Outstanding are Traded Every 40 Business Days

Day Trading for Beginners – A Stop Loss Does Not Stop Losses

The chart above makes it clear: speculative short term day trading is bigger today than 2000. As people dive into day trading strategies that react swiftly to price movements, millions of new trading accounts have been opened. From technical analysis to swing trading to betting on “yes-or-no questions” the frenzy is ubiquitous.

This next chart is even more disconcerting in our view.

The chart shows the average market cap of the firms being sold every couple of months. The number is astounding.

Today the typical firm being turned over every 40 days has an average market cap of $60 billion dollars. For context, a $60 billion dollar market cap is bigger than 95% of the companies in the Russell 3000. Our piece on the duration of equities emphasizes that many of these names also carry enormous interest rate risk.

These are huge companies being tossed back-and-forth like hot-potatoes. We live in an environment where the word “trillion” has become shockingly common. We believe it is easy to forget that a company with a $60 billion market cap is in the top 5% of the largest firms in the United States.

Average Market Cap of Companies That Are 100 Sold in Just Two Months

A $60 billion market cap firm should have a formidable profit engine substantiating that extraordinary market cap. If it lacks fundamental merit, it is a speculation that may eventually face a reckoning with economic reality and high expectations. The table below shows that the “High Turnover Firms” we feature in this piece are much more the latter (speculations) than formidable firms.

Despite negative free-cash-flow these companies trade at over a 50% premium to the market based on EV/Sales (5.0x vs. 3.3x). Even worse, the firms are funding their operations by issuing equity. We calculate “Total Yield” as dividends + net (issuance) or repurchases of stock. These “hot potato” firms are diluting owners by -3.3% annually.

High Turnover Firms are Loss Making Hot Potatoes The Bottom Line is Be Careful

The owners of these firms clearly do not see their shares as an investment in an actual underlying business. Again, if you haven’t read our quick brief on Buffett’s views on this we encourage you to do so. The piece is tight, to the point and references three key pieces of Buffett’s writing on the topic.

Below we provide a list of the speculative baubles that investors are tossing about today. We suggest caution to those who believe they can win the Keynesian beauty contest. History suggests such endeavors bring great risks and tremendous costs as our Are Clean Tech Stocks a Short points out.

“Day Trader for Dummies” books are not the subject of routine interest lists on the internet. KCR, as always, encourages investors to speak with a financial advisor and invest with caution.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra for anyone seeking out more information related to the topics above.



The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

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August 13, 2021 |

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