DO COLLECTIBLES HOLD VALUE AS AN ALTERNATIVE ASSET?
July 8, 2021 | By Sahand Elmtalab
Before we dive into the value of collectibles as an alternative asset, it is important that we define what collectibles and alternative asset are. Let’s start with the latter. Alternative assets in the sense of this writing are an asset other than stocks, bonds, or cash. This is critical to note, as most of these listed assets are relatively liquid, which will play an important role in our analysis. Collectibles are usually – but not always – tangible goods that people accumulate and hold in the hopes that they will appreciate in value over time. Collectibles can range from high end cars, to bouncy balls, to trading cards, to newer art like NFTs (which we will get to later). With our definitions out of the way, let’s sift through some examples.
WHAT MAKES A COLLECTIBLE VALUABLE?
In general, there seem to be a couple of key factors that determine the price of a collectible. Those factors are its condition, rarity, store of value, liquidity, and the passion of those who gather them.
Let’s use artwork, in particular a painting, as an example to convey our point.
- Condition: Does the painting have scratches, scrapes, and paint chipping, or is it in prime condition with minimal to no flaws?
- Rarity: Is there just one painting in existence, or did the artist replicate the painting a number of times?
- Store of Value: Does the price fluctuate greatly, or is it relatively stable over the long run?
- Liquidity: Is it increasingly difficult to find a buyer, or are there a number of people ready to purchase?
- Collector Base: Is the collector base willing to spend significant money, or are they less likely to spend exorbitant amounts?
Looking at the above, does it remind you of anything? The list above seems very reminiscent of how real estate would be valued, but with slightly different rational as to how we determine value.
Let’s use an apartment building as our comparison.
- Condition: Is the building old and in need of repairs, or is it in excellent condition?
- Rarity: Is the building in a great location with minimal competitors, or is competition fierce?
- Store of Value: Does management retain residents and provide steady cash flow, or is vacancy high with deteriorating cash flow.
- Liquidity: Are there willing buyers in the market, or would investors shy away from it?
- Collector Base: Are investors willing to pay a premium on the building in anticipation of value appreciation, or are investors in consensus that income will stifle?
In our opinion, collectibles’ value is measured in a similar way to real estate or even stocks, though there are some vital differences between them. In particular, equity and real estate tend to focus on fundamentals that provide the owner with practical benefits. They have the majority of their value derived from distributions and healthy financials. With stocks, companies have earnings every quarter, and those earnings and growth help drive their price. With real estate, they generate distributions through tenant payments, have land appreciation potential, and even the possibility for value-add by way of a building remodel.
Collectibles – though similar to stocks and real estate – tend to have their price driven primarily by supply and demand.
Most collectibles do not provide cash flows, but are rather bought in anticipation that supply and demand factors will drive positive price change. We believe this distinct factor is why there has been limited adoption of collectibles as an alternative investment for client portfolios. To better help us understand this, let’s turn our attention to a few more examples.
WHAT HAS WORKED
There have been some cases in which we believe collectibles have worked as an appreciative asset when marketed in the right way. StockX is a great example of a company that has made a marketplace for things like shoes, watches, handbags, electronics, and more.
StockX took tangible collectibles and made a space for them that looks and functions similarly to the stock market. Although the company is not much different in practice than using a website like eBay, we believe they have made value for themselves by creating a vast marketplace in which people buy and sell collectibles.
Features include a historical price chart, buy and sell amounts, recent transactions that show liquidity, and more. What is unique about the company is that all items are first shipped to a StockX facility to check for any defects or red flags. We believe the StockX system provides customers with a sense of ease for the following reasons:
- The quality of the item is checked
- A sense of regulation is put in place
- A store of value is corroborated with past transactions
- Liquidity for the product is clearer
StockX has clearly done a relatively good job at advertising and creating a platform for some collectibles, though we are not convinced that this constitutes an asset that brings stable long term price appreciation in its current state. To us, StockX serves as a niche platform for enthusiasts, not a viable long term means to diversify portfolios – at least for now.
WHAT HAS NOT WORKED
To better understand the faults of collectibles, we believe it is appropriate to peer into the world of Beanie Babies. Beanie Babies became popular in the 1990’s when they became both an internet sensation and featured in the McDonald’s Happy Meal. According to an article on Fortune, Beanie Babies at their height, may have produced roughly 10% of eBay’s sales. Some people went as far as taking out insurance on their Beanie Babies. Does this mean that they were a good investment? How does their value hold up today?
Most Beanie Babies today are in the $1 – $5 price range. In other words, the majority of their prices have stayed relatively flat, if not negative from when they originally released. Not all collectibles are made the same, which we believe is evidenced by the rise and fall of Beanie Babies, among many other collectibles. There are, however, a few exceptions in which very rare Beanie Babies have sold for thousands of dollars, but the majority have ended up almost worthless.
Before doing a quick search to see where Beanie Babies are priced, please realize a couple of things. Number one, there are some Beanie Babies with high costs, though this does not necessarily reflect a completed sale price. Number 2, there are a considerable number of fake Beanie Babies that have been conceived in an attempt to scam people. Number 3, Beanie Babies do not provide any recurring cash flows like stocks, bonds, real estate, etc. We believe these are compelling reasons why collectibles are unable to be a consistently appreciative asset, regardless of how exciting they can be to some people.
WHAT COULD WORK
We won’t spend much time here, but we do think it is important to at least briefly mention nonfungible tokens (NFTs). NFTs are digital data that are stored on a digital ledger within a crypto’s blockchain. NFTs can be used to digitize (create a kind of commodity) things like artwork, videos, photos, etc. Where the supposed value comes from is being able to uniquely identify the NFT as an original piece due to their traceability through blockchain technology. There are some cases where NFTs even hold value as they can be linked to games and other developer uses. It is yet to be seen whether or not NFTs are a fad or not, though there have been some that have sold for millions like the one below.
We believe the majority of collectibles struggle to find the ability to achieve long term price appreciation in their current state. We do, however, see companies such as StockX as a positive for the category. Collectibles seem to have the potential to become a valid investment in the future, but today it is simply too hard to predict which ones are worth the time and energy.
The opinions expressed herein are those of M&E Catalyst Group as of the date of writing and are subject to change. This commentary is brought to you courtesy of M&E Catalyst Group which offers securities and investment advisory services through registered representatives of MML Investors Services, LLC (Member FINRA, Member SIPC). Past performance is not indicative of future performance. Information presented herein is meant for informational purposes only and should not be construed as specific tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, it is not guaranteed. Please note that individual situations can vary, therefore, the information should only be relied upon when coordinated with individual professional advice. This material may contain forward looking statements that are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Referenced indexes, such as the S&P 500, are unmanaged and their performance reflects the reinvestment of dividends and interest. Individuals cannot invest directly in an index. CRN202306-357861 This material is being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific product, strategy, or service.
Sahand Elmtalab ChFC, CLU
Sahand graduated from the University of Minnesota in December 2007 with a BA in Applied Economics and started a practice in the Insurance and Investment services industry. Sahand has achieved his CLU, ChFC, CFP and MBA designations thus far. He is on the board for Carlson’s part time MBA program called “LAB” – Leadership Advisory Board. Sahand is known for being an exceptionally hard worker and straight to the point. His passion for others’ growth and happiness, along with his own motivation to research and learn, make his current role of constructing financial plans for clients based on their goals and objectives the perfect fit. On his day off, you will find Sahand researching, watching sports (Go Pack Go!), spending time with his family, golfing, traveling or watching Shark Tank. Sahand lives in Plymouth with his wife and business partner Sarah, their son Isaac, daughter CeCe and their dog Paisley.