I have been hearing and reading a lot of stories lately of people buying and collecting “stuff”, such as coins, art, baseball cards, etc., and considering that an investment. This always seems to happen when the stock market and economy are in turmoil. People seem to gravitate towards “hard assets” like gold, silver, and collectibles.
Why do people like to invest in these types of assets? Just like any other investment, individuals believe that the price of the collectible will grow faster than that of the market. It is important to note that collectible markets are illiquid, opaque, and unregulated. Also, transactions costs can be rather high, since most high-end collectibles must be sold at auction.
Most Common Collectible Investments
– Art: Art is by far the most common collectible “investment”. Art has been attractive as an investment for centuries, and many alternative investment vehicles such as hedge funds and sovereign wealth funds own large art holdings. For example, Lehman Brothers, at its collapse, held over $10 million in art work.
– Coins: Coins are another very common collectible investment. People started valuing coins because they were made of hard metals, such as gold and silver. Now, many old coins hold a collectible value far above the value of their metal content. The reason is rarity and condition. Coins, for example, from the 1700s are very rare, especially in excellent conditions. As a result, collectors prize them.
– Other: There are literally thousands of different types of collectibles. Here is a small list that I could think of off the top of my head: baseball cards, antique guns, antique weapons, figurines, antique furniture, clocks/watches, glassware and pottery.
The Collectible Market
If you invest in collectibles, it is important to remember how the market works. Unlike the stock market, where everyone can see what people are paying, most collectibles have to be sold private party or at auction. This means there is very limited price data. It could also mean that there are very few bidders for the item. As a result, the market is not very liquid and prices can vary widely from year to year or location to location. Also, it usually means the transaction costs are very high. Selling at auction could cost up to 25% of the total. Even using a service like eBay has high transaction costs.
Some markets are much more transparent than others. Coins, for example, have become much more transparent over time, with designated grading for different conditions, and a price guide of coins sold in that condition. In fact, a major company in this space, Professional Coin Grading Service, has put together an index of the 3000 highest valued coins. Look to the right to see the 10 year trend of that market.
Also, collectible markets are very dependent on short-term trends and individual tastes. There are countless stories of collectible bubbles and bursts. Does anyone remember the Beanie Baby craze a few years ago? People were paying hundreds of dollars for a stuff animal! Now, all of them are pretty much worthless. As a result, the collectible market should be viewed as extremely high risk.
Finally, it is usually only proven works that hold their value. By this, I mean collectibles that have a market, a pedigree, and a link to someone famous. For example, the art works of Picasso will most likely always be valuable. This doesn't mean that if a painting sold for $100 million, it won't sell for $80 million a few years later. I'm just saying if it is valued in the millions to start with, it will usually always be that way. I doubt that it will ever go back down in price to a few thousand.
The Perils of Selling Collectibles as an Investment
If you buy a collectible as an investment, I have some bad news for you. The IRS still considers it a collectible and taxes it different than other investments. Unlike capital gains, which can be as low as 15%, collectible taxes are 28% of the profits. And, if you hold the collectible for less than a year, you pay ordinary income tax on it. Given that you are pretty wealthy to be buying collectible to begin with, this could make your rate 35%.
Under tax law, collectibles refers to:
- Works of art
- Rugs and antiques
- Metals and gems
- Stamps and coins
- Alcoholic beverages (i.e. vintage wines)
- Any other personal property specified
The bottom line is that you shouldn't consider your collection an investment. If you do collect, do so because you love the stuff you are collecting, not because you hope it will make you rich. Collectibles as an investment are very risky. Collectibles as enjoyment are fun.