“Liquidity does not equal control.”
For many investors confusion arises often as they equate liquidity with control.
The 2 concepts are worlds apart.
While liquidity provides flexibility and accessibility, it does not necessarily grant control over the underlying asset or its market value. Investors often falsely assume that having liquid assets translates into having power over their financial outcome. However, this presumption overlooks the fact that liquidity primarily emphasizes convertibility rather than control.
One can even go so far as to say with liquidity it is often the opposite of control. Liquidity can be illusionary in so far as it says to many investors, “I’m safe. I can handle the storm.”
This is true and false. Being “safe” and “handling the storm” don’t account for the future and growth of net worth, purchasing power, decision-making factors not yet in their lives and so much more.
Contrary to liquidity, control suggests an ability to influence or direct the outcome of investments. I
Literally in syndications, control entails having decision-making authority or ownership over an asset or entity. It encompasses factors such as voting rights, managerial control, and the ability to shape strategic direction. None of that is a guaranteed outcome.
Control often requires a more long-term commitment compared to liquidity.
The confusion between liquidity and control can have significant repercussions, especially when it comes to investment decisions.
Investors who prioritize liquidity, assuming that it automatically translates into control over the asset or entity enjoy a misconception which leads to misaligned expectations and misguided investment strategies.
As an illustration let’s look at a stock market investment. It’s defined as liquid. The cash can be had in 3 days or so. A shareholder with a significant amount of liquid assets may assume that they can exert control over a company’s decision-making processes. However, without a corresponding ownership stake or influence over voting rights, their ability to direct strategic decisions may be limited.
This realization can be a rude awakening for those who wrongly conflated liquidity with control.
Additionally, individuals often overlook risks associated with highly liquid investments. While they provide easy access to cash, they can also be subject to market volatility and sudden price fluctuations. In contrast, assets that offer greater control often require a more long-term commitment, but they may provide stability and potential for higher returns over time.
Stability and higher returns sound good to me. You?