I had a conversation this past week with another investor, someone who invests broadly in various asset classes. He shared that when he’s considering an investment, liquidity is a priority. I think of liquidity as the ability to turn an asset into cash easily by selling it within a reasonable amount of time without having to discount it significantly. Liquidity usually means there’s a healthy market of buyers and sellers of an asset. Many investors consider public equities a liquid asset class because stock markets (e.g., NASDAQ and NYSE) bring buyers and sellers together regularly, so shares in public companies can easily be converted to cash.

I’ve been thinking about liquidity more since my conversation this week and wanted to get some different perspectives on the topic from seasoned investors who’ve had outsize success. I came across an interview of Seth Klarman, a billionaire investor, CEO of Baupost Group, and author of the hard-to-find investing classic Margin of Safety.

Klarman shares his views on liquidity after decades of investing. Two things jumped out to me. First, illiquidity comes with a cost, and investors need to be paid for giving up the right to change their mind. In other words, if you buy something that can’t be easily sold, you need to be compensated for being unable to change your mind and easily sell the asset. Second, assets in a seemingly illiquid form aren’t necessarily illiquid. For example, a stake in a building is thought of as an illiquid asset. However, if you own 100% of the building, you can decide when to sell it. Buildings get sold all the time, Klarman said, so this asset is in an illiquid form but is actually liquid.

Klarman made some good points about liquidity in this interview. If you want to hear the rest of his views on liquidity, check out that section of the interview here.