Collecting for Profit: Collections as Investment Vehicles.

Is your collection going to put your kids through school,

let you retire graciously, and cure cancer?

 

In a former life, I wore a tie and talked on the phone about money.  The rule of thumb -in this particular world anyway- was that collectibles would –in the long run- keep up with inflation and nothing more.  None-the-less, I remember gold getting to the north end of $700 an ounce from $400 a previous year.  Diamonds had their run.  Then it was re-prints of Salvador Dhali’s work.   

 

The SOURCE of Collectables:

         My own parents, for example, (and a hard-boiled conservative republican pair they were), started a stamp collection for each of their four children beginning with the month of our births.  This involved a plate of stamps that came out every month.  Then the post office got greedy –rather then one commemorative stamp every month –they decided to come out with two or three.  Or four.  And my parents decided to dispense with the collecting.  It simply got too expensive.  When you stop to think about it –they were making a gift to the post office –“Here is some money –give us these stamps which we will never use to purchase your services.”  “Good deal!” said the USPS and they did –and still do- everything they could to get people involved in the fascinating hobby of stamp collecting.  Or to put it another way –they worked very hard to get people to donate money to the post office.

         This brings me to the first point of my exploration –the value of some collections (be they stamps, Salvador Dali prints, or baseball cards) is often at the mercy of the source.  To put it another way –if the USPS, Dali’s estate, or a bubble-gum company discover that they have a good thing –they can fire up the presses.  They can exploit that good thing to their own advantage and make end up making it a bad thing for the guy at the other end of the line. 

         It doesn’t take a lot of study to find examples of this happening.  Little islands in the Caribbean issuing stamps of American icons a weekly basis, the artist Thomas Kinkaid[[1] ] franchising galleries to flog his work, the DeBeers diamond cartel manipulating the market, the Maple leaf and Krugerand advertised in every magazine in the world as the price of gold peaked somewhere north of $700 an ounce, (It’s back to under $400 last I checked.)  The list goes on. 

 

But prices DO go up –sometimes:

          None-the-less, if you talk to experts in any field of collecting, (and I talk to a lot of them) they assure me that they make impressive returns.  Their collectable –if only their collectable item and only the way they collect- will always go up in price.  I am sure these people are sincere.  I also suspect that the people who have not had such good fortune are less inclined to talk about it. 

         But I do not give sufficient credit to the serious collector.  In talking to them, another thing becomes abundantly clear.  These people know their stuff!  I mean they REALLY STUDY IT.  They own the books and subscribe to any number of journals.  And they actually READ them.  As in cover-to-cover –and they read the advertisements too.  The question then becomes, do they do all this reading and studying for the sake of their investment or do they do it because they are fascinated by the subject at hand?  I have to believe it’s the later.

 

Investments as Collectables:

         Consider financial instruments.  There are 'em what collect them to sell sometime down the road at what they hope will be a higher price.  Sometimes they clip coupons in the meantime.  There are also those collect them as a hobby.  Called SCRIPOPHILLY (and may -or may not –depending on who you talk to- include paper money).  

         Completely different things you say?  Well, undoubtedly so, but then again, let's look at the similarities.  One gets the impression that collectors are history buffs of a particular flavor[2] , but then, so are sophisticated investors.  They just have a shorter –more modern- time-frame.  But woe unto the investor who doesn't remember and understand the end of the oil & gas boom in '85, or crash or '29, or the collapse of silver prices at the end of the American Civil War, or the melt-down of Dutch tulip market in the 17th century.   A lot of people were absent the day they covered these lessons and lost a lot of money it in the dot.com implosion of '99.[3]  

         As in interesting aside, the Walt Disney Corporation was having fits a few years ago because people were buying a single share of Disney stock to frame and put on the wall in the nursery.  A lovely certificate it was –had Cinderella and Mickey and I don’t know what all, but people were using a financial instrument –and as such, one that needs a third party transfer-agent and no little paperwork- as a collectable or a decoration.  The cost of transferring a share of stock – a lovely examples of the printer’s art- is much higher then transferring a block of stamps, another lovely example the printer’s art.

 

Collectables as Investments:

         So what about turning the problem around –and considering collectables from the view of the button-down guy in the three piece suit?  If you were to ask –let's say- a stock broker to comment on the investment value of a painting, he would have to say (if he were honest anyway) that it's impossible to value something as vague as "aesthetics."  He absolutely right, but he's going to use mathematical precession to come up with an accurate present value of future earnings?  Fat chance.  There is also the matter of liquidity.  Our hypothetical stock broker knows he can find a market for his stock.  May not be the price he would like, but within a week, the transaction is done and paid for.  Not so with collectables.  Sotheby's [4] has auctions every month or so.  No telling, but I suspect if you needed the $'s in a hurry, your local pawn-broker could settle-up with you a lot quicker.  

          The British Rail Pension, of all people, did it well and gained some fame in the belt-and-suspenders crowd.  They bought fine-art in the '70's and early '80's and sold in the late 1990's. Despite good -indeed PERFECT- timing, British Rail's returns only matched that of the wider U.K. stock exchange.

 

The Contrarian View.

         There is value in understanding why collectables go up.  Indeed there are times when some collectables do go up in value faster then the market in general.  My research has led me to a lot of material on art with well documented prices etc.  I can not prove it, but I strongly suspect that you could substitute the word "collectables" (or "coins" or "stamps", or "political buttons" or "any-damn-thing-you-collect" for the word '"art" in the following and find things to learn.  

         Several (rather dry) articles I read suggest that one big reason is that the world has seen a significant increase in wealth since the end of the cold-war.  This money needs someplace to go and people –most particularly RICH people- buy art –if only to impress the other rich guy / gal. 

          As an example, Ireland has an increasingly well educated population that speaks English, (Hoist a few with and Irishman and see if you can understand word one –but this is another story), and sits closer to America then any other European country.  Despite having gotten itself tangled up in the charitable French organization quaintly called the "European Union," Ireland has been kicking economic butt sense the mid 80's and the value of its art has been tracking right along.  Clearly a strong local economy is good for the home-town artists. 

          Unless it isn't.  A weak local economy may have its effect too.  Wealthy (and presumably smart) Japanese investors saw the difficulties that their economy would face in the late 90's.  Seeking to get their wealth out of Japan, they all went ga-ga for the impressionists.  Surprise!  The impressionists went up like mad.[5] 

          Taxes are another cause of the art-appreciation effect.  One analyst suggests that in America,  rolling back the punitive top tax rates in the 1970s goes a long way to explaining why art did so well in the 1980s.   Interested in investing in art?  What side d'ya think will win the next election?

        Sometimes taxes and the local economy get together and really screw things up.  Sweden had a hot economy in the 80's and comparatively relaxed tax regulations.  This was followed by a retightening of taxes in the 90's -at about the same time the world's art markets were "correcting."  If world-wide art prices were correcting, Scandinavian art –up smartly in the 80's- have been "languishing" ever sense.  ("Languishing" is a technical investment term.  Means that your kids do State U. after all, rather then Ivy-League.)


         To the extent that the above is true –and applies to whatever you collect –and I think it is and does- you would do better to study the world's economy and politicks  then the World Gazetteer of Collectable Stamps.  Ask yourself if you are smarter then the guy you are buying it from, This guy has owned if these last few years and might reasonably be expected to have been reading up on it more carefully then you have.  (If he died recently and you're buying it from his kids –and a spoiled rich lot they are- you can skip this question.)  If you are buying from a dealer, ask your self how much it must appreciate before you have made back his commission or mark-up.  More on dealers shortly.  Finally, if you are still telling yourself that your collection -once complete- will finance your retirement, ponder this next question.

 

The Sum of the Parts….  

          Is a complete collection more valuable then the sum of its parts?  I set out to answer this question to my own satisfaction and am not at all sure I have succeeded, so I leave it to you to chew on.  To put it another way –What might be the value of all the Major League Baseball player’s bubble gum cards for a given year when compared to the value of all the necessary cards if purchased one at a time from various sources?  Go down to the Chevy dealership and buy a car and you will pay one price.  Buy it one part at a time –factory original parts –from the same dealership’s parts-department -and exactly the part that some book says you need- and it will cost you quite a bit more.  Paper-work and handling charges and all, and you still have to put it together.  Why then, do dedicated collectors work so hard to finish their collection?  (And I know that some collections are never finished.)  To some degree, they are working hard to get a complete Chevy that is goes down in value the very moment it is complete. 

One of the answers has to do with the handling charges and paperwork.  E-Bay and Craig's List not-with-standing, it is the dealers that make it all happen, and dealers have to make a profit.  In some ways, the question I am really asking is, “How much value is added to the world when all –or most –or even an awful lot of the X’s in the world are gathered up in one place and labeled?”   Certainly some value is created. 

Take a bunch of rocks, and dead bugs, and dried out plants, hire a couple of PhD's to sort and label them and you have yourself a natural history museum.  Truth to tell, I haven't been to such a place in years, but loved –absolutely LOVED the field trips me' school-mates & I took to the Denver Museum of Natural History when I was little. So the best answer I can come up with as to why collector's work so hard to assemble stuff that is likely to be less valuable then it cost to assemble can be answered in two words.  

It's fun.   

And this is an altogether good and sufficient answer.

 

 


CONCLUSION:  

         James Sproule for The Art Newspaper puts it so very well that I will lift most of what he says, mangle some of it and flat-out get the rest of it wrong.  But it makes sense to me, and this is all the matters.   Mr. Sproule says suggests that market moves are a consequence of people making mistakes, correcting those mistakes, and trying not to make them again –or at least to make new mistakes.  The problem comes when enough people are making similar mistakes for long enough. At that point, what in retrospect will be seen clearly as a mistake, can look like a whole new trend and rationales can be dreamt up to support why the world has changed. One could argue that when a thing gets hot –it attracts money and interest –and this makes it hotter and this attracts more money and more people and this attracts….

        This is nothing more or less then a bubble market.  Financial markets are certainly subject to such bubbles, but financial investors can rely on reassuring--if at times [wildly] inaccurate--economic models, as what drives prices.  Not so for art collectors. Financial investors often lament that their investments are undervalued by the wider market.  Similarly, investors in art have to accept that public taste is fickle, and not everyone's taste is going to be as good as their own.

He closes so well that I type here in bold, italic, underlined, and with a loud font:  

I don’t wish to suggest that collection is a bad investment –but I do stress that it is NOT an investment at all.

 

 

[1] Some of the comings and goings of both Kincade and his company, Media Arts Group Inc. are the stuff of the tabloids.  I lift just two quotes from Wikipedia:  …"uses Christianity as a tool to take advantage of people" and  "…a devotee of ritual urination to mark territory" (?!?!). I leave it to you do your own research.  He has been sued by many of his franchisees and while he made $53 million up to the point of taking his company public, the stock no longer trades.  Draw your own conclusions as to the "investment" value of his work.

 

[2] Before the internet came along, I sold my casework at various hobby & collectors show, including coin shows.  On one occasion, my booth was next to a dealer in ancient coins.  Over a weekend I got one heck of an education in Roman history from this old boy.  And for every story, he was able to pull out a coin of the era.  Indeed, sometimes it was a coin minted by the particular emperor and there was his ugly mug on the coin.  As I have said in other of my ruminations, there is no better way to learn about a subject then having it explained to you someone who loves that subject and for whom had it has become a life-long hobby.

 

[3] Swear-to-Goodness –not your author.  I was on the sidelines trying to understand what these computer geniuses were talking about when they were tossing their 3 & 4 (& more) letter acronyms around.  Made me feel old & dumb.  Turned out I wasn't so dumb.  Old, yes, but not so dumb.

 

[4] Seems also that no less august an organization then Sotheby's of London & New York  –founded in 1744 no less- was charged with –and found guilty of fraud in 2000.

 

[5] The Japanese were also buying American golf-courses like mad then.  Many have since been sold at horrible losses.  They bought one in Carmel or Pebble Beach or some-such-place where you and I couldn't afford the green fees.  Paid a ridiculous amount and a few years later, they sold it back for about one-tenth their cost to the SAME PEOPLE THEY BOUGHT IT FROM.