Who Knew Money Could Be Worth So Much!

A good friend of mine lived in Russia during the 1998 financial crisis. Just before the brink of Russia’s default, the country redenominated the Ruble, with one new Ruble equivalent to 1,000 old Rubles. People were allowed to trade in the old Rubles for the new ones. My friend kept a few crisp old Ruble bank notes. His mother thought he was crazy! Why keep old money that was about to be completely worthless? Well 18 years later, some of those bank notes are worth hundreds or thousands of dollars! Who knew! Anyways, the whole story got me thinking…are collectibles good investments? 

You Can Collect Anything

These days you can collect just about anything. We’ve all heard stories about how much the original Superman comic books are worth when they could have been originally purchased for 25 cents! Or maybe a rare Micky Mantle baseball card that could be worth thousands.

Kevin O’Leary (my favorite Shark Tank investor!) is a known collector of art, fine wine, and sports memorabilia. Watch him talk about some of his investments in this quick interview:

Here are some of the most common collectibles out there today:

Comic books

Art

Sports memorabilia

Coins/currency

Wine

Stamps

Video games/video game consoles

Records

Vintage cars

There are collectibles for just about anything these days. In fact, you would be surprised to see just how much ‘old junk’ can go for. Maybe there is a case for becoming a hoarder 🙂

A lot of people think collectibles are just rich men/billionaire hobbies. That couldn’t further from the truth! Collectibles can be for average Joes as well.

Collectibles Have Returned How Much?!

Researching the returns of collectibles is somewhat hard, because there are rarely any research firms doing this kind of work unlike stocks or bonds or real estate.

However, here are some very interesting facts about returns on collectibles I found:

• Between 1993 and 2013, a portfolio of investment grade wines would have returned 13.62% annually, double the S&P 500

• Between 1970 and 2006, a 12-piece U.S. gold coin set would have returned 12.94% annually, over 200 bps above the S&P 500

• According to the Knight Frank Luxury Index, fine art returned 226% over the past 10 years

• According to the Knight Frank Luxury Index, rare stamps returned 195% over the past 10 year

Overall, it seems like if you know what collectibles are hot, you can generate some very decent returns.

Why Are Collectibles Worth So Much

The interesting thing about collectibles is that there is no clear way to value them. Collectibles don’t generate income, cash flow, or pay dividends. As a result, we can’t apply a price earnings ratio or some kind of dividend yield to them like we can with stocks or other traditional types of investments.

When things are hard to value…they tend to be overvalued. In fact, the only way to make money off collectibles is to sell it for more than you paid for! It’s the greater fool theory in action.

Yet despite all of these concerns, rare collectibles seemed to have handily outperformed the S&P 500 over multiple decades.

Here 3  reasons why I think collectibles have appreciated much more than the stock market:

1. Limited supply: The supply of many rare collectibles is fixed! In fact, I would argue that the supply actually declines over time. For example, a vintage of 1940 rare wine can never increase. In fact, it’ll probably decrease as buyers drink it!

As time goes by, the number of rare collectibles in any particular vintage probably declines as they may be lost, damaged, destroyed, used, or become owned by museums.

Given that the supply of rare collectibles is fixed or declining, an increase in demand will benefit prices disproportionately!

2. Irrational buying: A lot of collectibles have a nostalgia factor, which stimulates impulsive/irrational buying. A lot of people grew up watching Mickey Mantle play baseball. A lot of people loved their first original Nintendo gaming system. They bring back memories of great childhoods. And collectibles represent a way of holding onto a great memory or owning a piece of important history.

This is in stark contrast to other assets like bonds, rental properties, or stocks. With these investments, people are looking at earning and cash flow to assess valuation, not memories.

3. Expanding middle class:  As emerging economies continue to grow, the middle class will continue to expand. This will bring much more demand for collectibles over the next few decades! Remember, most collectibles are in limited or fixed supply. In other words supply cannot possibly keep up with the demand for collectibles!

3 Reasons To Invest In Collectibles

With the stock market at all time highs, I have been contemplating how to invest some of my excess cash. Bonds may be one option given a recent spike in rates. However, collectibles have sounded more appealing recently.

Here are some reasons why you might want to invest in collectibles:

1. Collectibles can generate substantial returns: My research shows that rare collectibles can generate substantial returns over multiple decades, even trouncing the S&P 500. Now, this doesn’t mean you can invest in any collectible and expect astronomical returns; it still requires a lot of research and due diligence.

However, the ability to generate stock market-like returns outside the stock market is something I find very appealing. Plus I kind of like how collectibles aren’t widely quoted on exchanges like stocks or indices. I feel like constantly checking the price of your holdings is actually detrimental to long-term capital appreciation.

2. Potentially less correlation with the stock market: According to several research studies, collectibles have generated stock-market like returns with less volatility. This means they are less correlated with the equity markets. Similar returns to stocks, but less up and down movement? Sign me up!

3. Own something tangible: Some people like to own and invest in something tangible like real estate. Something just feels better when you can actually touch your assets.

5 Things To Know When Investing In Collectibles

While collectibles may seem like great investments, here are a few things you should know about first:

1. Get it graded: The collectible industry is filled with scam artists. Remember that when you’re buying an ungraded collectible there is a change you could be buying a fraud. Each collectibles market has a few reputable firms that specialize in that particular item. For coins its PCGS and NGC. For trading cards its PSA/DNA and JSA.

If you have an ungraded collectible, it would be a good idea to pay to get it graded. Having a graded collectible will not only increase the item’s liquidity, but it will also make it much more valuable (people are willing to pay more for a professionally graded collectible).

2. Store it in a safe place and get insurance: The downside of having a rare collectible is you have to physically store it somehow. This may be hard if you have pets or children in the house. It’s generally a good idea to buy a safety deposit box (you can get a small one from a bank for ~$50/year) to make sure it is professionally protected.

If you own any collectibles that are worth $2,000+, it would probably be a good thing to get them insured. I have never insured any collectibles, so I have no idea how much it would cost.

3. Beware of transaction costs: While some collectibles may be worth a lot, they can also be illiquid. Collectibles markets are much smaller than the stock or bond market. You’ll likely have to pay someone (i.e. a broker or auction house or some other middleman) to sell a higher-end collectible. These investments are not like stocks and bonds where you can sell them and get cash almost instantly.

4. Handle with care:  Over many decades, collectibles may degrade or be subject to normal wear and tear. For example, rare wine should be stored in a wine cellar. Some professional wine storage units may be expensive.

It would be a good idea to brush up on how to properly handle and store collectibles in whatever market you’re researching. Unlike many other assets, collectibles must be physically taken care of properly.

5. Beware of taxes:  Keep in mind that I’m no tax lawyer, so I could be wrong on this.

The U.S. tax code has special treatment for collectibles, which the IRS defines as artwork, rugs, stamps, metals, coins, among others. When you sell collectibles, your gains are taxed at an ordinary income rates (up to a cap of 28%), unlike long-term capital gains on stocks.

Here’s some commentary about collectibles tax by Hogan Taylor, that can explain the taxes better than I can.

My Coin Convention Experience

About a year ago I attended my first coin show at the Long Beach Coin Expo. The event highlighted many rare coins, stamps, and other rare collectibles.

I went because I was researching the Company that owned the expo and I thought it would be nice to check out some rare coins. All of the exhibits were amazing and the people were nice and shared a wealth of coin collecting knowledge.

In the end, I decided to pick up a little souvenir:

Overall it was a great experience and I might be back in the future. I learned a lot about collecting coins and how they are graded.

Readers, what do you think? Are collectibles good investments? Do any of you collect anything or have a rare item? Let me know below!

PS. stay tuned for my next discussion in this series where I talk about my idea for investing in sports memorabilia.