Spinoffs Conference: Detailed Notes From Paul Johnson – Part 2

Detailed notes of Paul Johnson’s presentation from the Spinoffs Conference brought to you by The Edge which took place on June 6th 2018. See the full notes here.

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Audience: And then [inaudible 00:29:48] say, liquidity, is that the number of public stock [inaudible 00:29:55] liquidity in general...Is that falling to the trading capital advantage?

Paul Johnson: Yeah, liquidity is a tricky thing. We have it well defined. Paul and I have a definition. I'm not sure if necessarily everybody would agree. But liquidity is divergence of opinion because you need two sides of the trade. Liquidity dries up when everyone has the same trade. If everyone loses the same trade, there's no liquidity. We want an even balance between the two.

The joke that always gets me in trouble is, you need a counterparty. In high school all the boys are getting late but none of the girls are? Some of that could be explained. We know that. But some of it can be, right? That's what I'm explaining is that you need a counterparty.

Well, liquidity means that we have divergence of opinion and somebody was outside of the trade. So we do that to best manage our liquidity when there's diversity of opinion on. So these extreme markets is where liquidity dries up because everybody's on the same side of the trade. There's nobody new. There's no counterparty on the other side.

ETFs are net buyers, and they sacked in all the capital. So now back to the story moment ago, let's say they become the net seller, I think that's where we're going to get these gaps down. I think that's going to be the case. Liquidity is weird now because we're generally avoiding market, generally high valuations, being generally on the buy side so things kind of will be [inaudible 00:31:13].

I don't know what the liquidity looks like in a crisis. We saw February, things gapped down. We found there was no liquidity on the purchase side when people wanted to sell. I think the market is a lot more fragile than any risk from a microstructure than [inaudible 00:31:26]. And we're seeing that BTS flipped the side. I don't know who the net buyer is in that environment.

I think fundamental analysis probably it's going to protect you to some degree because if you think Amazon is worth a lot less than it is, you're not going to buy it on the first trade down. If you're chasing performance, you may, in fact, buy it. I think we're going to become more [inaudible 00:31:46]. I'll give you [inaudible 00:31:47] say, we got more efficient, and more fragile at the same time.

Audience: Is it just lack of diversity of capital?

Paul Johnson: Yeah I think that's really what it is. You just don't have a lot of different capital with different objectives. Everything is just kind of the same. The moment you get homogeneity the market becomes very fragile. That consensus thing, that's the problem. Didn't talk much about it, but we have a really robust model in there is that, the more [inaudible 00:32:12] looks like, the more fragile the price is. Yeah, go ahead.

Audience: Well, documents is [inaudible 00:32:20] investment value management for the last decade due to the increasing efficiency at the time now or what's the...?

Paul Johnson: Almost exclusively. There's been some recent flamboyant articles in popular financial magazines about One Star they aren't doing so well. Reading the article is just funny. I'm going to say that report on blog said it's expensive, so they're going to send a link. We didn't really explain it in like two sentences, which is market's gotten more efficient. That edge just doesn't exist anymore.

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