“Beauty is in the eye of the beholder.”
Until a few weeks ago stock and bond markets (and also cryptocurrencies and gold) were trading at or near all-time highs. Now, having come off their highs these markets are all in significant turmoil. Both states drive many investors to seek alternatives. As such, collectibles markets have seen a surge of interest and prices in many of them are at record levels. Collectibles are an ill-defined category that includes artworks, antiques, automobiles, coins, stamps, and sports memorabilia, among other things. Investors should view buying such things (we will not call them “assets”) with great caution. True assets (stocks, bonds, and real estate) have intrinsic returns (earnings, interest, and rent, respectively) for which well-known theoretically-based valuation models exist. Despite their flaws and necessary assumptions, these models can at least give us consistent relative valuations. While commodities lack intrinsic returns, there are ways to get some idea of valuations based on production costs, supply and demand, government controls and/or subsidies, etc. With collectibles, we have none of this; everything is in the eye of the beholder, and beholder beware!
Collectibles also typically have wide bid/ask spreads relative to financial markets and they are expensive to carry (transactions costs and things like insurance, security, storage, maintenance, transportation, authentication, etc.). Rare automobiles, for example, need to be stored in secure climate-controlled facilities, moved about in closed transports, require constant maintenance, and must be insured. Over time, these expenses can overwhelm the cost of the car itself! The recent sale of Andy Warhol’s painting of Marilyn Monroe for $195 million is instructive. With the 15% commission the true cost is $224 million. Insurance on the painting will likely be about $1.5 million per year. The 10 and 30-year U.S. Treasury Bonds each yield about 3% now. Thus, $224 million would earn about $67 million in 10 years. Not including any other costs, the painting would have to sell for $306 million in 10 years for the buyer to break-even versus the risk-free alternative. The comparable figure in 30 years is $471 million. It might indeed sell for this much, or much more, or much less. That’s the point, we just don’t know – and that’s the very definition of risk in finance: uncertainty about future returns. Thus, these are very risky “investments”, something too many people fail to appreciate.
It is hard to assess how these things will be viewed over time. Marilyn Monroe, now dead for 60 years, may pass into obscurity in subsequent generations and Warhol is of very recent vintage as a painter whose work commands such a princely sum. How will time affect the view of him -- he’s not Rembrandt after all? The same for many other collectibles. Will baseball cads be prized in the late 21st century? Will people care about old, internal combustion driven automobiles? Maybe, maybe not -- tastes and fashions change. The bottom line is that collectibles should be viewed first and foremost as consumption goods, not investments. If you happen to make money along the way, that’s a bonus. If you have a spare quarter of billion laying around and you like a painting, fine. Same goes for a $12 baseball card. The beauty (and the cost!) is in the eye of the beholder.
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