Posted by Bob on July 21, 19100 at 06:11:53:
In his classic book entitled The Theory of Investment Value, John Burr Williams defines investment value, which includes an adjustment for expected changes in the purchasing power of money (Chapter 5, Section 1, pp 55-57). This definition of value includes uncertainty and the premium for risk (Chapter 5, Section 8, pp 67-70). But this definition of value does not include marketability (Chapter 5, Section 12, pp 74-75). Williams writes:
"Marketability, or salability, or liquidity, is an attribute of an investment to which many buyers of necessity attach great importance. Yet it would not be helpful to amend our definition of investment value in such a way as to take cognizance of marketability. Risk, to be sure, should be covered by the definition, as done above, but not marketability, for the inclusion of marketability would only lead to confusion. Better to treat intrinsic value as one thing, salability as another.
"Likewise, stability is a thing distinct from investment value, and from marketability as well. While the expected stability of the price of a security in future years is a consideration of great importance to some investors, particularly banks, yet it is not a component of investment value as the latter term ought to be defined."
As elaborated at the Global Value Investing website, liquidity is one facet of the stock evaluation process. To avoid potentially manipulative situations in the stock market, an investor can screen out stocks with prices below a minimum threshold and with trading activity below a minimum daily volume. The thresholds are not absolute and rigid, but rather chosen by each investor and varied as conditions warrant.
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