Apr 08, 2015 Investing in Collectibles - Is It a Smart Investment?

by Canadian Cents

Canadian Cents

Collectibles and memorabilia are an alternative way to invest, and for many people, a more enjoyable way to do so compared to buying stocks or bonds. There are many issues to this style of investing, but if you are able to gain specific industry knowledge and have a passion for the field, this route may be able to provide greater gains and fulfillment at the same time. In this article we will look at the positives and negatives of being a collector and make a determination on whether the average investor should expose himself or herself to this type of risk.

 

Positives

The biggest positive of collectible investing, and the one that draws most people to it, is that you can trade something you are passionate about. This can include art, sports memorabilia, and other historic items. The issue many investors face is that they confuse the hobby aspect for the financial aspect and end up only purchasing collectibles they prefer, which the market may not have demand for. If you are able to take advantage of your industry knowledge and purchase items that can sustain a trend or carry long-term value, then you will be able to profit from your knowledge rather than suffer from it. 

Another positive for this industry is that the values of the assets usually track with the rate of inflation and allows the investor to have protection from larger macro-economic factors.  The other upsides include being able to collect any cultural item, the ability to trade assets across geographic areas without regulation (for the most part), having temporary ownership of rare items and being able to hire dealers to sell products for you at a markup.

Negatives

There are quite a few reasons to not become an investor in this space. The first reason is the liquidity issues. If you purchase an item, there is no guarantee that the item will be sold in a certain timeframe. This can cause issues if you require withdrawing capital in between trades, and increases the overall risk of holding any asset that can depreciate. The assets also do not provide an income stream for investors who want to see an incremental return over time, which further deters many investors.

Another downfall for investing in collectibles is the requirement of having a knowledge base of the trends in a certain industry. There are industry specific issues that can alter the value of assets extremely quickly, and this volatilely makes it hard to project the long-term value of any asset that does not carry a historic significance. 

Usually based on the asset’s historical value, an item’s intrinsic value usually never comes from its utility. This makes it almost impossible to create a margin of safety and to understand the exact moment to buy and sell based on fundamentals. This type of investing is purely based on market trading, which means the item is only worth what another person is willing to pay for it.

Based on all the reasons stated in this article, it is clear that investing in this space requires passion and industry knowledge. If an average investor is seeking this type of risk profile, they should consider seeking an expert third-party to invest behind, rather than to begin to trade on their own. 

No comments

  • Apr 19, 2015
    By Lana Sanichar

    Thanks for your comments Robert!

    It's great to have a real life example!
  • Apr 8, 2015
    By ROBERT CHARLTON

    My wife and I had been private collectors for many years and eventually operated an antiques business for some 25 years. The market was robust for much of that time, driven by the baby boom generation. Their presence in the marketplace drove prices up and that created an "investment market" beyond what had been a collector marketplace. We often heard our customers express their belief that buying antiques was better than money in the bank. We tried to educate them by encouraging them to buy only what they needed and to buy the best they could afford, but most people wanted quantity and ended up looking for the lowest price way to furnish/decorate their homes.



    About ten years ago, we noticed a lower level of activity, and remembering what I had read in David Foot's book, Boom, Bust & Echo", we put two & two together and realized that the end of the investment boom was at hand. We got out of the business, but any of those people who "invested" in the lower end of the market are facing an expensive reality today. They are nearing retirement and want to downsize their homes. This means selling some of the "investment antiques". At the same time, their parents are dying and leaving estates full of furniture and collectables. Compounding this is the sheer volume of their cohorts in the same position, and their children have little or no interest in these assets. Needless to say, the glut in the marketplace has pushed the value of their investments down, just when they want to liquidate for retirement.



    There are pockets of collectables that continue to do very well, and the top end of the marketplace continues to hold or gain value. If you could afford the stratospheric prices to gain entry to those items 30 years ago, you will probably do very well if you liquidate now.

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