Lucky and Good: Risk, Decisions & Bets for Investors, Traders & Entrepreneurs by John Sherriff

Author:John Sherriff [Sherriff, John]
Language: eng
Format: mobi
Published: 2013-08-27T14:00:00+00:00

FIGHT FRICTION COSTS

“Watch the costs and the profits will take care of themselves.”—Andrew Carnegie, Scottish-American industrialist

All costs are your enemy. Friction costs are expenses that relate to buying or selling an asset, or putting on and unwinding a trading position. An important element of these costs relates to something called “liquidity.” The term has two different but closely related meanings.

LIQUIDITY VERSUS “LIQUIDITY”

When it comes to potentially running out of cash, liquidity simply means that you have enough cash or access to cash to pay your current bills. “Enough” cash may mean having the money in the bank. For a large company, it may mean, short-term, using its bank credit lines. An individual might simply rely on a pre-approved home equity line of credit or even credit cards (at exorbitant interest rates). Illiquidity, or lack of liquidity, might come into play if you only have a single asset that cannot be converted partially or wholly into cash. For example, if you are the plaintiff in a lawsuit, you might anticipate collecting $10 million in three years. But no bank will lend you money based on this speculative asset, and in the meantime, you have to pay the rent and put gas in the tank. In this case, you are definitely illiquid, unless the lawsuit-funding industry steps in to help. (More about this later, in Chapter Six.)

Those who complain about a “lack of liquidity” imply that they have plenty of assets but are temporarily short of cash. But if a company is illiquid today, has no cash, and has no assets that can be converted into cash to pay the bills, it is also insolvent, bust, bankrupt, toast, and a Chump.

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