Monopoly Stock Exchange Add-On Stock Certificate
Kennon-Green & Co. Global Asset Management, Wealth Management, Investment Advisory, and Value Investing

The New York Stock Exchange is set to reopen today after having been closed for two consecutive trading days as Hurricane Sandy made landfall on the Eastern seaboard.  The last time this happened due to weather was in 1888, when a blizzard shut down the city. 

It could have been much worse.  The lesson: You cannot rely on your stocks for liquidity.  When the world goes into crisis mode, and you are likely to need cash most, the odds are good that selling off your ownership in businesses is not only the last thing you should be doing, it might be impossible.  On its website, the New York Stock Exchange provides a PDF file detailing the closures dating back to the 1880’s.  Consider one of the more extreme cases: During the outbreak of World War I, unrestricted trading in stocks was shut down between July 31st, 1914 and April 1st, 1915.  That was more than eight full months during which you could have been cut off from your wealth if you held it all in publicly traded securities.

[mainbodyad]If you run your family’s investment portfolio wisely, that shouldn’t matter.  I know older investors who have owned certain real estate assets for 30, 40+ years.  They never get quotes on the property value.  Instead, they measure their success by the net rents generated each year.  If you have accounts stuffed full of things like PepsiCo and Johnson & Johnson, Procter & Gamble and Nestle, it probably isn’t going to matter much over a 5 or 10+ year period whether or not you can buy or sell shares.  During the hurricane, you couldn’t have traded shares of Coca-Cola, but do you think that people in India or Brazil suddenly stopped drinking Coke?  Of course not.  The companies themselves were just fine as cash kept pouring into the treasuries from product sales.

That is why one of my favorite pieces of old Wall Street advice that has been around since as long as anyone can remember remains, “Never own anything that would wouldn’t be comfortable owning for five or ten years.”  It’s hard to go broke if you follow that rule and you are disciplined in your purchasing.

So let me say it again: Don’t make the mistake of thinking that simply because stocks are liquid, they are a source of readily liquidity.  They are not cash equivalents.  They are not intended to be.  They are intended to generate cash that you can then save, reinvest, spend, or give to charity.  Think of it as an apple tree.  If you need apples, you don’t go cut down the tree.  You harvest apples from the tree, store them, preserve them, and then use them whenever you want to make pies or jelly.