By Dr. Charles Patterson, WCI Columnist
In the quest for diversification, one stop along the way is at the altar of collectibles. It is here that we find precious metals, such as gold, silver and platinum; jewelry and coins; and a whole host of more specialized products such as stamps, cars, toys, watches, guns and books. Hunting for rare finds and curiosities can be a source of great pleasure, with collections having as much sentimental value as monetary value.
But the possible usefulness is undeniable: even this Florida plastic surgeon posed as a bandit in the 1970s and 1980s. For others, however, the logic of such collections is the product of a fever dream of apocalyptic economic collapse and the not unreasonable desire to have “something” to barter.
To the collector who derives joy from the thrill of the hunt, who acquires and keeps forever (or trades for a better find), or who finds fulfillment in relationships forged by shared interest, then I tell you more power and wear on. For investors looking for a hedge, the following paragraphs seek to frame the real value.
Why start a collection?
Some collections start naturally – with a shared interest with a parent, grandparent or friend – or perhaps with an inheritance or gift. Exposure to a curious new company can also start a fire. I still remember captivating conversations at 3 a.m. with a senior resident whose decades-old coin collection kept growing. Although I’m not a numismatist, I enjoyed learning the intricacies of coins – and even more enjoyed seeing his face light up as he explained it. It may not have inspired me to throw away my earned pennies on more valuable pennies, but it did underscore the difference between collecting for fun and collecting for value.
If you’re the type to collect for fun – or even collect for fun AND for value – then this hobby can be considered a luxury. You’re probably not looking to buy a Porsche and resell it for a profit. This is different from owning something that will increase in value uncorrelated to the market with the ability to sell at the optimal time. In the latter case, the investor is better served to treat the commodity as an individual stock. At the risk of sounding silly, I would say that building a collection can be reasonable if it is made up of a generally attractive asset, is appropriately matched to the portfolio, is disposed of rationally, and gives personal satisfaction. Allow me to elaborate.
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Assessing High Demand Collectibles
Unlike stock and bond markets, micro-markets that encompass rare books, coins, toys, etc. are somewhat unproductive. In other words, they do not monetize. With the possible exception of YouTube celebrities, no one pays you because of your impressive accumulation of anything. These goods do not contribute to building infrastructure, businesses or trade. As the art market shows, there is value to be found, but it depends entirely on what another person is willing to pay at any given time. This results in an offloading dilemma, discussed in more detail below. The profit or loss from the future transaction is primarily affected by the number of potential buyers, the desirability of the collected item, and the usefulness to the consumer.
It would behoove you to put your resources into an asset with the widest range of buyers possible, in other words, the collectibles with the highest consistent demand. In a world where even deer antlers have a market, resilience in a downturn relies in part on a large pool of potential buyers. The value of a collection of fine watches or Ferraris is going to be limited by the number of people who can actually buy them and potentially limited by the owner’s taste. Anyone who has ever had to make an estate sale can attest that one person’s preference may not reflect that of other collectors.
Assets must also be utilitarian. If we are discussing collectibles through the prism of an apocalyptic hedge, we have to think about the use of what is collected. Take, for example, gold: if you have a collection of bars or coins, how much (and what gold content?) would you “need” to use for barter? How long will this last? This is where collectibles as a hedge becomes harder to define: in essence, they act as a hybrid commodity and an alternative currency. The environment in which they are traded is unstable and precarious, even outside of a civilizational collapse. Utility is key to assessing the strength of these assets.
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Where collectibles could fit into an asset allocation
A good rule of thumb is to keep all “alternative” investments to less than 5% of your portfolio. This includes things like cryptocurrency, but excludes more difficult traditional investments such as real estate. Why 5%? Because I think you should be 95% sure that the market is going to work satisfactorily in the long run. It’s a bit of a different story if you inherit the most expensive stamp in the world. But no more than 5% and the risks of ownership, coupled with the opportunity cost, outweigh the benefits. Granted, many successful people have done well in pursuits outside of the stock market, but you won’t find support here for going heavy in Andy Warhol Cookie Jars.
I suspect that for most readers of White Coat Investor there is a common understanding that the surest way to financial success is the amicable coupling of a successful career in a well-paying profession and the diligent contribution of savings to tax-advantaged retirement accounts.
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The unloading dilemma
Tax implications, investor appeal, transaction costs and timing should be heavily considered when building or acquiring a collection.
Frankly, selling collectibles is not a tax-efficient proposition. For assets such as precious metals, any profits made are subject to capital gains tax, although the reaping of tax losses is possible (yes, they can and do lose value). That’s not the case with art, but rest assured that the IRS will find a way to wrap its meaty paws on your investment – and probably in an opaque and illogical way.
One argument to make is the potential donation of a collection or property to defray a tax bill. I find this argument to be somewhat anemic, certainly for those of us who take the standard deduction and even for most who do not. Yes, that’s a possible benefit (unless you’re the creator of the asset), but if you’re collecting art or anything else for the tax benefits, you’re either very wealthy or misunderstand the tax code.
Collector appeal is key to unloading. A Michael Jordan rookie card in mint condition will likely enjoy broad appeal with a healthy swath of potential buyers. The same goes for a Shelby Cobra. But add the aforementioned auction fees and taxes into a potential sale, and the luster fades. New forums exist for partial ownership of rare works and other novelties that can make selling more streamlined, but costs are an issue.
Finally, as with any investment, timing matters. God forbid you have to liquidate a collection at the same time as everyone else, or when your family’s undocumented heirlooms are prohibited. If it seems like there is an easier way to build wealth, that’s because there is.
Am I enjoying this investment?
Whether it’s a shortage of buyers, plummeting value, or unforeseen changes in the global economy (COVID, anyone?), you can be stuck with your investment indefinitely. Timeshare comes to mind, for some reason. Do you agree with this investment going to zero?
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The alternatives
Looking for an alternative investment that won’t end up victim to another bullshit bubble? Look no further:
#1 Relationships
You work hard for your money, but money can’t buy you time. However, it can certainly enrich the scarce time you have. And time is one of the currencies of relationships. Regularly investing in family and friendships through nights out, vacations, and shared experiences can be the best use of excess savings. Far beyond averting the most catastrophic threat to your wealth – divorce – married physicians must fan the embers of their marriage as a means of well-being and contentment. I think Rick Ferri was right when he said:
“I have no gold in my wallet. Thirty-seven years ago, the best investment I ever made was gold. I bought two gold wedding bands, and it gave me a wonderful relationship of 37 years, three children. So far, eight grandchildren. I can’t do better than that in gold.
#2 Fitness
Avoiding preventable diseases by maintaining a physically active lifestyle is an integral part of full-spectrum wealth. To that end, finding an enjoyable and habitual exercise is paramount. Money helps: maybe it’s a brand new Peloton or a Woodway treadmill. Maybe you fancy joining a rowing club or taking routine trips to your favorite spa. I don’t need to tell you how important your health and well-being are; you see it every day. But are you investing in it as much as you should?
#3 A new skill
We are curious creatures, and having income to scratch that itch is a wonderful thing. Culinary school, a pilot’s license, or even a luxurious new degree are all made possible through wise use of the extra savings.
These alternatives, as you may have noticed, all take time. Money can’t buy time, it’s true, but financial independence can save it. Money can’t buy happiness either. But the freedom that goes with it is essential. To be on the safe side, I would say that the best collections are keepsakes made with loved ones. Once you’ve reached your savings goals, enjoy the journey to financial independence by enriching the good, habitual experiences that keep you healthy. You don’t necessarily need a collection of rare gemstones for this.
Do you invest in collectibles or have you ever thought of doing so? Did you make any money from it? Do you think it is really possible to make a sustainable income from it? Comments below!