I have recently debated the topic of collectibles with a friend, but failed to find any valuable resources online. There are some nice blog posts, more than several boring Investopedia pages, and countless senseless articles by publications like USNews written by someone who is clearly a journalist who has zero experience or real knowledge about investmenting in collectibles. Even the better resources I was able to find about the topic (reddit being a personal fav) did not convey a clear and coherent investment strategy.
Hence, I decided to make a short blog post about this topic myself. I hope I can incorporate some of my real-life experience and provide a better overview of the subject.
The basics of collectible investing
The first thing to remember about collectible investing is that it is a risky and illiquid type of asset. Far less liquid than any other type of financial asset with the exception of super high-risk assets (real estate in an area with very low demand, exotic high-maintenance car, or a rare cryptocurrency), and as risky as penny stocks or more.
It is estimated that bank interest rates in the U.S on home equity loans will pass 5% by year’s end, as a result of 2 additional rate hikes. It is not unreasonable to believe that in early 2019, economy will halt, and the stock market will enter its ever-expected correction. How do you expect the collectible markets to respond to that? What happens if the short-term halt turns into a full-fledged financial crisis? It is far easier to sell a collectible than to liquidize your retirements savings, sell your car, or get buried in debt. Part of the reason is that collectibles are luxury items with no real use, and part of it is purely psychological, but it doesn’t matter, because the truth of the matter is that collectibles get hit hard upon financial downturns.
The second thing to remember about the collectible market is that the market isn’t anything like the OTC markets. Collectibles is an experts’ market! It’s a secondary market that operates through stores, dealers, public auctions and you really need to be a collector yourself or have any form of interest in what your buying before you buy it. Not all collectibles are made alike and just like stocks, there are great ones, good ones, mediocre ones and bad ones. The difference between collectibles and other markets is that there is normally much less information at hand to base your decisions upon.
OK, so should I invest into collectibles or not?
After we went through some of the basics, we can move on to the list of pros and cons of investing into collectibles. Here we go:
- There are very few financial assets that have the same potential as collectibles. Even Netflix does not yield the same profits you would have had by investing into some collectible niches some 10 or 20 years ago. Superman issue 1 (Action Comics) was sold for 3.2m on eBay in 2014, representing more than a x10 multiple on a similar item (although lower grading) sold for $250,000 in 2010. Not to mention Chinese art which spiked x35 in 2017.
- Some collectible markets are easily accessible via eBay or local stores. You can even buy discounted collectibles in local pawn shops.
- Dealing with collectibles is a lot of fun! Unlike stocks which are nothing but rows on your excel, collectibles can serve as display pieces or decoration.
- Being a complex market, there is money to be made with arbitrage trading also in the long term. There are even people buying items off one store and selling it immediately to another store.
- Buying collectible items is a lot more time consuming than buying securities.
- Buying collectible items is a lot more dangerous for non-experts. There are many fakes and frauds in non-regulated markets.
- As mentioned before, collectibles are prone to big swings on financial downturns.
- As mentioned before, collectibles are not liquid in the same way other financial assets are. There all sort of primitive exchanges but these are not apt for the real “investing material” i.e. unique items costing several thousands of dollars or more. You would have to auction them and pay hefty auction fees.
- Storage and insurance costs are high.
To summarize, collectible investing is not for everyone. It is reserved for those who have expertise and passion for it. These people can make incredible amounts of money investing into the right items but it is important to remember the following:
- High risk investments are suitable for 2-3 percent of your investment portfolio. Perhaps as much as 5% if you feel you have a real edge over the market.
- Never investment money that you think could be needed for other purposes. If you would have to liquify your collectibles at the wrong time you are bound to lose out.
- Have a second opinion from other experts in regards to your portfolio. Collectibles are tricky and often times people buy into things they want to own rather than the ones that would have the best yield.