The Low Value in High Volume Stocks

Last week’s Quick Take highlighted that retail investors were being sucked into speculative trading of speculative stocks. This piece substantiates the following:

  • High turnover stocks have only outperformed low turnover stocks by this much in the bubble
  • High turnover is a possible sign of an unstable and/or speculative shareholder base
  • We hope we help RIAs, money managers, and consultants adjust their typically positive association with “liquidity” due to the highly anomalous moment we are in while reducing risk from elevated equity duration

Any money manager who has filled out a Request for Information from a consultant has dutifully calculated their portfolio turnover and analyzed the portfolio’s liquidity risk. While the concept of estimating a portfolio’s liquidity risk can take a variety of methods, the concept is, at its core, simple. Allocators and investors understandably want to have an estimate of the possible impact of large redemptions on the managers’ portfolios and/or how much the managers’ own buys and sells might influence the price of securities.

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To grossly oversimplify the issue, people don’t want to see that large chunks of a given portfolio are in stocks that might require weeks or days to get out of. That would indicate that a large redemption might cause losses for the remaining investors, or a large inflow might artificially inflate a given set of illiquid stock prices. On average, people want to see reasonable liquidity relative to a given position.

Generally, we agree that this makes sense. But today, we believe the extremity of stock volume merits peeling the onion back a layer. We believe that high liquidity stocks are a risk factor and hope investors and allocators will be wary – what once was prized, liquidity or high stock volume, might now be a problem.

The chart below shows the rolling 12-month returns of the stocks with the highest volume have soared to 116%. Contrarily, stocks with the lowest volume returned only 35%. Very simply, the stocks that people are buying and selling the most have shot the lights out. Soaring price movements are now associated with large increases in volume.

Fig 1 Stocks with the highest turnover Are Up 116 A Level Last Seen in the Dot Com Bubble


A Volume Price Analysis: The Ugly Intersection of Positive Price Trends & Shares Traded

First, we would like to clarify how we define “stock volume.” Our volume analysis uses the percentage of the number of shares outstanding that change hands every month. So if a company has 100% turnover of its shares outstanding, that means the firm has effectively experienced the equivalent of being sold, in its entirety, in just 30 days.

We hope the absurdity jumps off the page at you. When someone buys a stock as an investment, the holders of that security will own it for an extended period. When a stock has elevated levels of turnover, it indicates the shareholders are speculators, not investors. Therefore volume is an important indicator of the health and commitment of a firm’s shareholder base.

Figure 2 below shows

What is Stock Volume and Why Does it Matter?

Simplistically, stock volume is a measure of how much the stock of a given company trades.  In this piece the KCR team tackles the investment implications of stocks with uncommonly high levels of stock volume.  As our paper explains, excessive levels of stock volume are a sign that the firm is owned more by speculators rather than actual investors.

What Does Volume Tell You About a Stock?

In most cases, volume as a stand-alone is not a particularly important metric for long-term investors.   KCR thinks about investing in a stock as becoming a partial owner of an actual firm that does something productive.   Because of that, we are trying to find great businesses trading at reasonable valuations that can be purchased and held for long periods of time.

With that in mind, this paper explains how companies with low stock volume can actually be a signal that the firm is not the subject of intense interest.  And, again to oversimplify, stocks of companies that nobody is interested in can be of great interest to long-term investors!  Our review of Seth Klarman’s legendary book A Margin of Safety makes the point that investing fads are the path to financial ruin.  Well, high levels of stock volume – particularly over a longer horizon – are a great sign that the stock might be part of a fad.   Again, we believe in fundamentals, inefficient markets and the ability of patient and disciplined investors to compound capital well above market rates by buying and holding and believe high rates of turnover can be a sign of overtrading.

  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 reading 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.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

July 28, 2021 |

Categories: White Papers

July 28, 2021

Categories: White Papers

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