Most investors believe that when investing in illiquid assets they are guaranteed to earn a so called illiquidity premium. First, that’s not true and second, it’s not so easy to get this insight across via purely economic arguments. I think a simple parable could be more convincing than sophisticated economics.
Let’s look at a famous episode of Homer’s Odyssee to illustrate the point. It is well known that Odysseus – before passing the land of the sirens – had himself tied to the mast of his ship and the ears of his sailors plugged up with wax. In this way he was able to enjoy the music and singing of the sirens. But being tied to the mast he could not steer the ship into the dangerous waters around the island of the sirens despite their luring sound. His sailor were able to hold steady course because they could not here the luring sound.
So, Odysseus gave up maneuverability (think: liquidity) to enjoy (read: get a premium) the beautiful sounds of the sirens. Clearly, giving up control over his ship was a necessary condition to get that joyful premium without wrecking the ship. However, tying yourself to a mast of a ship anywhere on an ocean and plugging up the ears of your sailors with wax will not make sirens sing. Or does it?