The long horizon to something rare

What are the characteristics of purchasing collectables as investments.

Collectable investments are physical assets of limited supply that may be purchased for investment reasons.  Common collectable investments include art, antiques, wine, coins, books, stamps as well as items such as classic cars, fossils and military medals.

Like investments in commodities and precious metals, collectable investments generally do not provide investors with any form of income and their intrinsic value can be difficult to determine.  Prices for collectables are generally determined by demand, supply and quality factors.  Over the longer term, as with commodity prices, the price of collectables can rise by the rate of inflation and, for this reason; collectables can act as an inflation hedge in an investment portfolio.

Unlike commodities, rare collectables are generally not actively traded on any exchange and can therefore be illiquid with prices determined at auction or in private transactions between collectors.  There are also dealers in collectables such as art, wine, stamps and coins that facilitate trading.

In August 2014, a near pristine copy of a comic book, Action Comics No. 1, which first featured Superman, sold on ebay for US$3.21 million.  When it first went on sale in June 1938 it cost US 10 cents with the most recent sale price representing a compound return of 25.5% per annum over 76 years.

One issue with collectables is that they often are acquired for sentimental reasons or personal use rather than purely investment purposes.  For example, antiques and art works may be purchased to ornament a home or office as well as for investment purposes.  One advantage of the personal use nature is that gains on the sale of collectables may not be subject to capital gains tax, depending upon when they were acquired and the amount paid for them.

Because of the blurred investment and personal use nature of collectables, the Australian Government has legislation to prohibit self-managed superannuation funds (SMSFs) from investing in collectables where there isn’t a pure investment purpose.  At present, SMSFs in Australia have around $400 million invested in “exotic” assets such as wine, art and other collectables, however as this represents less than 0.1% of the total amount SMSFs have invested they are not a large component of SMSF portfolios.

Another factor to consider is that quality is very important to collectors as it increases the collectable item’s appeal.  Collectables in mint or original condition are worth significantly more than used and damaged items.  Therefore, many collectables need to be carefully stored in secure, climate-controlled conditions and insured.  When items are being acquired or traded their provenance or authenticity also needs to be determined so as to ensure that they are not counterfeit.

The other issue to consider with collectables is that it can take a very long time (e.g. at least 20 years) for the item to turn from something that is relatively low cost and common, such as a postage stamp or bottle of wine, into a rare item of great value.  This long time horizon, combined with the high degree of uncertainty about what someone may pay for the item in the future, makes it difficult to include collectables in many investment portfolios – particularly portfolios designed to provide for income in retirement.  Other investments, such as inflation-linked bonds, may provide a more liquid and reliable source of inflation protection than collectables which can be easily damaged, lost or accidentally consumed.

 

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