Tim wakes up with a startle. It is 2 am, pitch dark and very silent.
He remembers that he is in Leh.
He is feeling breathless. He remembers his friends telling him that he will need to inhale oxygen directly from the cylinders kept in the store.
He also remembers that they have ample supply of oxygen. Although uncomfortable, he isn’t much flustered.
He gets up and drags himself out of bed. His head is heavy and he is barely able to walk. The walk to the store seems like ages.
He mutters to himself that soon he’ll be fine once he inhales the oxygen.
At last he reaches the room. He puts his hands into his pocket to feel for the keys but can’t feel a thing.
His mind is all fuzzy. His memory is failing fast. He can’t remember a thing. He has no energy left.
Time passes by and and with time even Tim passes away.
This example highlights what is popularly known as liquidity risk.
Many of us who own homes (real estate) live with this risk. But we never ever realise it. Neither we care about it. We always happily live under the notion that all is well and we are wealthy.
We assign a high value to the property based on half baked knowledge. However, let’s say there is an emergency and we need money very very urgently.
Quite obviously, we would look at selling the house?
Now when you do this you will invariably experience the following :-
1) Finding a buyer is one hell of a job.
2) Getting the price you once were so sure of seems less likely.
3) Completing the transaction takes a great deal of time.
You needed money badly and the time that it takes to close the transaction is way too long.
Now what do you do?
I guess one has not much of a choice but to bear the consequences.
This is liquidity risk and more often than not we discount this risk. We live in denial and take things for granted.
So if this concept is well understood, you’ll not allow yourself from getting choked. Keep the oxygen cylinder handy. It is a matter of life and death.
Invest in mutual funds instead. All the best.
Sam Koshy, Mob:+91-9847410933