4th in Series | Alternative Investments – Collectibles

TruePoint Capital

Continuing with our discussion on alternative investments, our discussion this week focuses on collectibles, which encompasses a whole host of items including the well-known, the geeky, and the downright weird.

Everyone has heard about collecting antiques, vinyl records, art, autographs, stamps, vinyl records, baseball cards, coins, comic books, wine, dolls, and toys.

There are the collectibles prized by the geek community including Star Wars, Harry Potter, DC and Marvel Comics, and Harry Potter collectibles. Then there are the collectibles that are downright weird and of dubious value. People have been known to collect items as strange as celebrity hair, coffee cup lids, traffic cones, and hamburgers.

Multi-billionaires who pay $450 million for da Vinci paintings might cringe at the thought of being grouped in with comic book collectors, but all collectibles have many things in common and have similar investment attributes.

In terms of which investment category collectibles fit in, by process of elimination, they fit most appropriately in the speculation category:

  • Speculation.
  • Growth.
  • Income.
  • Balance.

Let’s evaluate collectibles according to the following criteria:

  • Non-Correlation to Broader Markets.
  • Lack of Volatility.
  • Cash Flow.
  • Appreciation.
  • Above-Market Risk-Adjusted Returns.
  • Security (i.e., backed by hard asset).

Non-Correlation to Broader Markets –
Some research indicates that collectibles historically demonstrate a low correlation to the overall market, but other research has suggested otherwise.

As a practical matter, if the stock market is doing well, investors have more disposable income to invest in collectibles and less disposable income if the market is down. Non-correlated or not, for the reasons discussed below, collectibles are generally not a good alternative investment either way.

Lack of Volatility –
Collectibles derive their value from pure speculation – based on the whims of the investing public.

In that respect, they act very much like stocks – prone to similar levels of volatility. Remember Beanie Babies? They were all the rage in the ’90s. Someone once paid $600,000 for one of those miniature stuffed toys. Today? Not so much.

Like stocks, making money from collectibles is based solely on speculation and timing – buying low and selling high. The price of collectibles rises and falls with investor sentiment just like stocks, but with weaker returns.

A 2014 Forbes article compared the annual returns of the more popular collectibles vs. stocks based on data taken from 1900-2012:

  • Art: 2.4%
  • Stamps: 2.8%
  • Violins: 2.5%
  • Wine: 4.1%
  • Stocks: 5.2%

Cash Flow – 
Collectibles just sit there. They don’t make goods, collect rents, pay interest, or do anything else to generate cash flow.

Appreciation – 
Assets that appreciate in value have intrinsic value – value separate from increasing prices due to inflation. The value of most collectibles fail to even keep up with inflation, but assets with intrinsic value like commercial real estate and productive businesses have built-in value separate from the price people are willing to pay for them.

These productive assets generate income and therefore have intrinsic value. Productive assets generally increase rents and revenue over time – leading to appreciation in their values.

Collectibles have no intrinsic value and can’t be relied on to appreciate over time other than from speculation.

Above-Market Risk-Adjusted Returns –
Historically, average annual returns on collectibles have lagged the S&P 500 – often with the same volatility.

Security –
Owning collectibles is good in terms of security since you have a tangible asset you could always sell in a bind. However, if the economy is in a tailspin, it’s unlikely there will be many takers for fine wines and rare stamps.

When it comes to non-correlation to Wall Street the jury is out on collectibles, but the whole matter is a moot point when you consider how bad collectibles are as investments overall.

They have no intrinsic value to provide cash flow or appreciation and their returns are inferior to stocks – not to mention real estate and productive businesses – but with the same or more volatility.

Overall, collectibles are lousy alternative investments for building wealth.

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