I’m completely obsessed with investing, and I also happen to be a marketer. It is no consequence that this investment enthusiast built his career in digital marketing, as these two paradigms live in parallel universes. Best practices and frameworks from investing often apply to online marketing, and vice versa. Today, I’m excited to discuss the investment concept of liquidity and how it is incredibly relevant to all marketers.
What Is Liquidity?
There are two major asset classes in investing, those that are liquid and those that are illiquid. Liquid assets are easy to buy and sell. Think about well-known, large cap stocks on the NYSE or Nasdaq. You can buy and sell at a moment’s notice, as long as the stock market is open. A perfect example of a liquid stock is Coca Cola (NYSE: KO).
Please note that not all stocks are as liquid as KO. If you transact in small cap companies, especially those traded "over the counter", buy and sell orders can take time to fill. Oftentimes, if you want to sell immediately, you may have to lower your acceptable price to get the order filled. These small caps, in my opinion, are still somewhat liquid, but quite a bit less than KO.
Liquidity Costs You A Premium
As you may expect, liquidity costs a premium. As of 4/12/16 intra-day, KO is trading at $46.67, with a PE ratio of 27.94 and a dividend yield of 2.99%. In other words, Coca Cola stock is expensive right now (although, honestly, not a bad starting yield in this amazing company). Even in a poor-performing stock market, KO (and most comparable blue chips) tend to trade at premium prices. As an investor, you pay for the stability that comes with a liquid asset. You pay for your right to sell at any time. In my opinion, you sometimes suffer lower returns if you only invest in liquid assets. That being said, the vast majority of my personal strategy involves liquid assets and I’m an incredible fan.
What Is Illiquidity?
Now, let’s talk about illiquidity. Illiquid assets are difficult, or sometimes impossible, to buy and sell at a moment’s notice. You may be "stuck" in such assets for years (or even in perpetuity). The classical example of an illiquid asset is real estate, especially when you own fractional interests in a property and are not the key decision-maker. It gets even more illiquid if you’re investing in a development project, one that will be constructed in the future. Investors typically do not experience major cash flow until the property is constructed, rented, and operating like a well-oiled machine.
Let’s look at an example. For those of you into FinTech companies like myself, think Realty Mogul. Realty Mogul offers the ability to own small, fractional interests in real estate investments. Many opportunities on Realty Mogul allow you to participate with $10,000 or $20,000 invested (a big chunk of change, but a low number in the context of real estate investing overall when you’re dealing with multi-million dollar assets).
You become part of the Realty Mogul LLC assigned to the property, and dozens of other investors are pooling their money in tandem with you. Such interests are not traded on an exchange, and you are often committing your money for a number of years (although Realty Mogul offers shorter term opportunities as well).
Typically such investments are considered illiquid. Sure, in theory you could find a buyer for your LLC interest and work with the Realty Mogul team to trade your interest, if you entered into a financial bind. That being said, extracting the true value of your asset would be really difficult. Illiquid assets are all about the long-term. You are really banking on huge value creation over time, and are giving up your ability to access your money for the privilege of potential higher returns (both cash flow and capital appreciation). The benefit of assets that are more illiquid in nature: Returns can be substantially higher than liquid assets.
Liquidity Applies To Capital Appreciation
An important nuance: There are two components of your investment return, capital appreciation and cash flow. Capital appreciation refers to how much value the asset itself gains (you may have heard "buy low, sell high"). Cash flow refers to cash distributions shareholders receive from their investment (often referred to as "dividends").
Illiquid real estate investments can start cash flowing relatively quickly (within a few years). Cash flows can become substantial. When speaking about liquidity and illiquidity, however, I’m mainly focused on the asset itself, the capital appreciation portion of your return. Quite frankly, I’m the type of investor that isn’t as concerned with capital appreciation as I am with cash flow so I truly appreciate the cash flow possibilities with illiquid assets (I’m just not concerned about selling). That, however, is the topic of a completely separate blog post!
The Best Portfolios Have A Balance
In my opinion, the best financial portfolios have a balance of liquid and illiquid assets. The liquid assets can be sold on a moment’s notice if you ever need the money. The liquid assets allow you to survive with a lower cash buffer (emergency fund). This means more money invested! The illiquid assets, in the long run, could boost the returns of your overall portfolio, but you’re locking up money. You’re making a commitment. Diversification, in my opinion, is the key to success.
How Does This All Apply To Online Marketing?
With a name like PPC Ian, you could probably guess that I got started in PPC (or pay per click marketing). I want to leverage the PPC channel within digital marketing as a way to illustrate liquidity and illiquidity in the world of online marketing.
Let’s think about keywords. In many categories these days, the bulk of one’s traffic comes from a concentrated set of keywords. Often referred to as your "head terms", these keywords are incredibly liquid. They provide a ton of traffic, their performance is consistent, and you can buy them and see results instantaneously. Because of their liquidity, head terms cost a premium. CPCs tend to be higher and the competitive landscape is fierce. You’re not going to make a ton of margin on the head terms, but they will provide steady, predictable returns when managed correctly.
Now, let’s think about long tail keywords. The long tail is like the Wild West. You’re buying keywords that may have never been searched before. Your average long tail keyword may only get a few clicks per year. It’s difficult to accurately price such keywords because you don’t have a ton of performance data (other than data from related keywords). That being said, the long tail is less competitive. You’ll often find bargains. The long tail is for the patient investor/marketer looking for increased returns. While the long tail involves more sweat equity, research, and strategy (just like investing in an illiquid real estate asset), the long-term upside is there in the form of higher margins.
The best digital marketing strategies, in my opinion, combine head terms with long tail keywords for a well-balanced portfolio.
A New Framework For Something You Already Know
While most people reading this blog know all about head terms and long tail keywords, I’m hoping today’s investment framework of liquidity and illiquidity is new to many. In your career, it’s not only about what you do but how you think about what you do (and how you explain it). I’m hoping today’s framework gives you a new perspective on the amazing things we do as marketers, and a new way of explaining your work in your next big presentation! Also, I’m striving to build excitement around investing in general, as it’s a personal passion of mine, one that is directly related to your career as a marketer!
Disclaimer: I’m long Coca Cola (NYSE: KO)
Disclaimer: This is not investment advice. Today’s blog post is just for entertainment purposes. Please connect with your investment advice professional before making any investment decisions.
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