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The Last Resort (A Few Words About Liquidity And Small Investors)

In any trade one side is right and another side is wrong. Let me repeat: in one trade a buyer is a winner and a seller is a loser while in another trade a seller is a winner and a buyer is a loser.

Institutional investors conduct about 80% of trades on stock market. Institutional investors have usually better access to information and it analyses as well as better equipped and have lower fees than individual small investors. Therefore in 80% of trades small investors are scapegoats of Wall Street that play loser game.

An urban myth tells that institutional investors underperform market. The truth is that institutional investors in average perform in average as market and underperform market only after all "expenses" that include their 7 digits salaries, payments for extensive research of industries and companies (that a small investor cannot afford) and sophisticated trade software (which is more productive that anything small investor can access). Some individual investors think that they can compete with Wall Street. If you think that you can outperform market read excellent book "Quantitative Equity Investing: Techniques and Strategies" by Frank J. Fabozzi, Sergio M. Focardi, Petter N. Kolm and compare your resources with Wall Street.

But there is a place for even game - stocks that are out of Wall Street interest. One group of such stocks are equities of companies with small trading volume.

So I decided estimate possibilities of such institutionally illiquid market for a small investor and in particular for small dividend growth investor. I performed the test on May 23, 2012 - it was average trading day on NYSE and NASDAQ, so the numbers below are quite representative.

I downloaded data from, removed Closed-End and Exchange traded Funds and got 4934 companies. Using closing price on May 23, 2012 and average volume I calculated amount of money traded daily for each company (CDT). I presume that investor is NOT affect stock price if his/her investment (NYSE:IM) is less than 1% of CDT. The table 1 shows how many companies investor can approach without stock price influence for different IM:

Here and below CCC=1 indicates companies listed in David Fish's CCC list issued on 1 May 2012. It seems that about 40% of all companies and less than half of companies with long history of dividends growth (included in CCC list) are available for institutional investors.

Assuming normal distributions for stocks characteristics I got the statistics for market capitalization of companies for different IM. It is shown in the table 2:

Mean and median for market capitalization of CCC companies is large than market capitalization of all companies with the same CDT.

Therefore small investor or small dividend growth investor has a plenty of choices there he or she can avoid uneven competition with Wall Street. IMO at least 30% of small investor portfolio should be in such stocks if he or she can sustain market fluctuations.