From: leona@Happy-Man.com (Leona_Troese)
Subject: Solid Value #704 - late February
Followup-To: sender
Keywords: solid value commentary wolfe
Reply-To: Leona_Troese@Happy-Man.com
Organization: Happy Man Corp., Vashon Island, WA 98070-7399
Date: Wed, 8 Apr 1992 15:38:09 GMT


Solid Value 704 -- Irving Wolfe's Commentary

What follows is Irving Wolfe's column, Commentary, from the issue 
of _Solid Value/tm/_ published in late February.  

It is Copyright 1992 Happy Man Corp., Vashon Island, WA 98070-7399. 
Permission to distribute via Usenet is hereby granted.  "Hard" 
copies may be made for personal use but may not be re-distributed. 

Because Solid Value's heart is its tables of Best Buys and 
former-Buy followups, this free distribution of Irving Wolfe's 
Commentary should be interesting to some Usenet readers without 
making subscriptions less valuable to those who actually invest in 
stocks for profit.  

=====

Liquidity 

The rightmost column in Solid Value's tables, headed "Liq. Ind.," 
provides a rough measure of each stock's liquidity, or the ease 
with which purchases and sales can be made without disturbing the 
market.  While the small investor can buy or sell a few shares of 
almost any stock with little effect on its price, I have discovered 
that even a $15,000 transaction will cause some stocks to move 
sharply up or down.  

On the American Stock Exchange, the specialists often do a very 
poor job of fulfilling their public responsibility as sole 
market-maker to maintain a reasonably orderly and liquid market, 
preferring to operate with near-zero risk and maximal potential 
profit.  

In the over-the-counter (Nasdaq) market, there is another factor: 
the lemming effect.  In theory, if one or more sellers appear and 
let a dealer buy some of their shares, that dealer lowers his bid 
and asked prices so that further selling will go to another dealer 
and buying will be directed to him.  In practice, when the other 
market-makers see the first dealer lower his quotes, they become 
frightened that a big seller is about to make the shares fall 
sharply in price, so they lower their bids, too, even though they 
have not yet bought any stock.  

Our liquidity index for a stock is currently based on two factors: 
the average daily dollar value of its trading and the bid-asked 
spread as a percentage of the shares' price.  We convert this to a 
logarithmic scale that ranges from 0 to 9. 

Companies whose shares are rated 7 or above can be traded with 
minimal care even by large investors.  It is certainly reasonable 
for most individuals to use market orders in buying or selling 
these stocks, though some would argue that slightly better 
performance might be achieved even there by chiseling for an extra 
eighth.  

By placing limit orders of moderate size, watching the market 
carefully, and working with a good broker, even large investors can 
buy and sell shares rated 4 through 6.  Small investors will pay a 
penalty for placing "market" orders in these stocks, but to some, 
the extra certainty may be worth it.  

Although a rare "3" may be suited to ownership by small, careful, 
financial institutions oriented to the long-term, generally shares 
rated 3 or less have markets so illiquid that they are restricted 
to individual ownership.  Even private investors need to realize 
that if bad news comes out, it may be very difficult for them to 
sell such shares.  A liquidity index of 2 or less denotes a very 
difficult to trade stock that can take considerable time to buy or 
sell, with the problem worsening as the index declines.  

Some investors may find this more important than others, depending 
not only on the sizes of their portfolios but also on their 
personalities.  Their comfort with uncertainty and with waiting and 
the relative abilities of the stockbrokers they hire to assist them 
all bear on the right choice.  As is so often true in investment 
matters, the maxim, "Know thyself!" will likely produce superior 
results to any applicable-to-all prescription I might make.  We 
differ, and we succeed best by honoring those differences.  

The Market 

Solid Value/tm/ is in its seventh year of publication.  During that 
period, there has been just one lone issue in which there were no 
Best Buys at all, the issue that preceded 1987's crash.  The 
combination of already-excessive valuations with a rise in interest 
rates caused by some recent, stronger, economic statistics left us 
with only one Best Buy late last week.  Whether this has fallen to 
zero by our publication day or has bounced back some, it _is_ 
saying something about today's valuation level: it's pretty 
extreme.  This is surely not a time to have more than 25% of one's 
portfolio in stocks.  

Remember, there is nothing in our valuation methods that attempts 
to project the future effects of continued economic decline on 
companies' earnings and financial condition.  If the current 
recession does continue to produce lower earnings or losses, the 
affected firms' calculated values will fall.  We have neither a 
pessimistic bias or an optimistic one, because short-term economic 
prediction is, in my opinion, nearly as impossible as stock market 
prediction.  
-- 
 Leona_Troese@Happy-Man.com      Happy Man Corp. 206/463-9399 x109
 4410 SW Pt. Robinson Rd., Vashon Island, WA  98070-7399  fax x108
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