During times of economic dislocation – when people lose faith in
conventional instruments like stocks and bonds – investment dollars are often allocated to various unconventional vehicles, including rare collectibles. A mysterious and fervent devotion attaches itself to items like watches, coins, stamps, art, jewels, antiques, wine, books, paintings, sports memorabilia, automobiles, and other exotica. This can happen in good times, too.
People have often sought to hedge themselves against national financial disasters by hoarding beautiful relics. It happened in the South during the Civil War, and it happened in Europe after World War II, when the defeated countries’ currencies became worthless.
Today, though, we fear there’s a misleading impression of the easy money to be made in collectibles. On PBS’s “Antiques Roadshow,” appraisers always tell people the insurance value or replacement value of the gewgaw they’ve hauled in, or what it might fetch in an ideal auction before expenses. What they don’t say is what knowledgeable dealers would pay in cash then and there – what we might call the actual value. That would be the revelation.
It’s always fun to watch the delight on the face of somebody who paid $250 for a painting in 1950 when he discovers it’s supposedly worth $5,000 today. What this scenario doesn’t show is the opportunity cost: If he’d put that same $250 in the stock market in 1950, he’d have $130,000 today.
Our basic advice is this: Collect for love, not for money. There are enormous drawbacks to collecting as a financial endeavor. Here are four rules:
1: If it’s advertised in a mass-circulation journal as rare, important and potentially valuable, stay away – unless you like it for its own sake.
Items specifically made to be collectible almost never are. That special commemorative medal struck by Acme Tool & Die to celebrate the inauguration of Vice President Joe Biden? Turns out it’s not that valuable, even though it was advertised in TV Guide. Things like this have no intrinsic value except to make money for the manufacturer. There is rarely a secondary market because they were not that rare, precious, or beautiful in the first place.
2: Collecting goes in fads.
Around the turn of the twentieth century there were crazes for collecting medieval manuscripts. J. P. Morgan and other tycoons collected illuminated manuscripts and other rare books from all over the world. Staggering prices were paid until the early 1920s. Then the fad abruptly disappeared. Today, those manuscripts will barely fetch prices reached 85 years ago.
The same has been true of Indian marble statuary. Much beloved in the Roaring Twenties and into the 1930s, it has never returned even what it was selling for during the Great Depression. All those medieval manuscripts in your study and marble statues in your garden? They’re probably not worth as much as you thought. Sorry.
Because collectibles generally have little intrinsic value, only people’s wishes make them come true. When the fashion passes, the collector is left with a drawer full of old PEZ dispensers or whatever was desirable at the time. Beware of fads unless you are deeply in love with the faddish item and do not care what people think or about making money on it.
3: Beware thinly traded markets.
The market for collectibles can be about as liquid as the market for stolen Vermeers. To find oneself at an art auction, whipped into a frenzy of enthusiasm and confidence that a certain item will make you rich and happy, is one thing. The auctioneer will cheerfully accept your money and congratulate you as he hands over the painting and moves on to the next item.
To try to get your money out at the other end is a horse of a different color. When the time comes to sell, you’ll have to essay the haphazard methods traditionally associated with selling used cars.
4: If you can’t afford to be patient – financially or temperamentally – find another hobby.
Collectibles can be subject to wild swings in value even when in constant demand. They do not diversify the rest of your investments, because their prices are highest precisely when stock markets are bubbling. Then, since collectibles are the epitome of discretionary spending, they’re the first to be dispensed with in hard times. As “high beta” objects, they should be held in the smallest of quantities, if at all, and by people who will never have to sell them to raise money.
So our basic guidance on collectibles is to discourage collecting for purely speculative reasons. Yes, lovers of beauty and aficionados of the most esoteric items do stand to make money. In the world of Louis XVI clock collectors, profits can be made by a Louis XVI clock collector who knows what time it is. But the true collector will derive immense psychic pleasure – the most important kind – whether his object pays off in cash or not.
If you decide to indulge anyway, remember that buying and selling collectibles will exaggerate trends already in evidence in the rest of the economy. When the stock market is hot, modern artists will fetch record prices. When we’re in a recession, prices of collectibles will be the first to fall. They don’t hedge anything.
The takeaway to stitch into an antique sampler? It is not easy to convert money into beauty and then back into money again.
Excerpted with permission of the publisher, John Wiley & Sons, Inc. (www.wiley.com), from The Little Book of Alternative Investments: Reaping the Rewards by Daring to be Different by Ben Stein and Phil DeMuth. Copyright © 2011 by Ben Stein and Phil DeMuth.