Arguments for and against Collecting for Profit

Ok, I'm biased about the potential for profits from collectibles.  Here's an excerpt from the book I'm working on:

CHAPTER TWO

ARGUMENTS AGAINST COLLECTIBLES AS AN INVESTMENT:

            If you do your research, I’m sure you’ll find those who disagree with buying collectibles as an investment.   These well-intentioned people will say that you should buy collectibles because you like them and not as an investment because people seldom making money with investments.  They will cite many reasons why investing in collectibles might be unwise, such as:

• It is difficult to determine the market value of these items:  You can overpay.

• You have to have specialized knowledge to invest in collectibles:  For every one winner in collectibles, there are often a large number of losers and it takes specialized knowledge to know one from the other.

• You can break or lose them:  What if you buy a rare item and break it?  Or lose it?  Or it burns up in a fire?

• Collectibles don’t pay off until you sell them:  They don’t pay dividends.

• Collectibles aren’t liquid:  They are not easy to sell.

• You can get ripped off by scam artists:  A sucker is born every minute.

And do you know what?  They are right about all of these!  Just like any other form of investing, there are risks involved.  Let’s look at them one at a time:

It is difficult to determine the market value.  Let’s give ourselves some credit here.  The fact that you’re holding this book in your hands automatically puts you in a different class than the potential investor this advice is aimed at.  You do your homework.  Collectibles do require homework.  You will need to do homework not just to prevent losses, but also to maximize gain.  But here’s a tidbit; unlike highschool, homework can be fun!  You can, and should, start off slow, and use some of the ideas contained within this book.  By learning prices (studying price guides, reviewing past auction results) and purchasing items in a competitive environment (like an auction),  you likely won’t overpay.  Overpaying is a real risk, but it can be overcome with education.

You have to have specialized knowledge to invest in collectibles.  Yes you do.  You also need specialized knowledge to invest in stocks or real estate.  But should we avoid investing in stocks and real estate because we’re not real estate professionals and stock brokers?  Of course not.  Instead, we need to educate ourselves to invest in collectibles just like stocks and real estate.  This book will give you a jump start on gaining that specialized knowledge.  It will highlight what you need to look for, and where you need to look.  In preview, one of the things we’ll learn is to buy the collectibles that are already established “winners”.  Read this book twice and do some window shopping first before you start investing.  Start off slow, apply the principals in this book and you’ll be fine.

You can break them or lose them.  Yes. Yes you can.  That is why we have insurance and safety deposit boxes and why we must use caution when handling our collectibles.  If you don’t already know this, you will quickly see that amount of care you will take with an object is directly proportional to the amount of money you have invested in it.  This is because the state of preservation is a key component in the valuation of better collectible investments.   So, yes, collectibles do exhibit this type of risk, but all investments have risk of some kind. If you elect to avoid investing in collectibles because of the risk that you might drop it or damage it, you will want to invest in something else, and you'll end up transferring the responsibility to grow your investment to someone else.  It's a fact that the alternative to “collectible damage risk” is the risk associated with giving your money to someone else and making them responsible for growing it.  Personally, after being an unwilling participant in the recent Wall Street meltdown and watching land values turn upside down in a foreclosure crisis, I am as comfortable trusting myself not to break a collectible when I carry it from Point “A” to Point “B” as I am to trust someone else to invest my money wisely.  There will always be risk in investing.

Collectibles do not pay off until you sell them?  That’s true.  But this is also true of other asset classes such as land purchased on speculation and many "growth" stocks that purposefully do not pay a dividend for tax considerations.  Just because an investment does not pay dividends does not mean it is a poor investment.  The yardstick with which to judge an investment is it’s rate of return and by this measure, collectibles perform admirably.  Further, in some ways, collectibles are superior to non-dividend asset classes such as land or some common stocks because they can be portable and leave little or no paper trail.  In perilous economic times or even adverse political times, this is a side benefit that is worth your consideration. 

Collectibles are not liquid?  This is partially true.  Liquidity of assets has significantly improved due to the creation of local and national internet sales sites.  Irrespective of the greater liquidity that has been created by the internet, some collectibles are definitely not liquid, but some are liquid.  Whether a collectible is liquid or not is dependent on its popularity, rarity, and condition.  It could take months to sell a rare automobile worth over $1 million.  It could also take months to sell an inferior run-of-the-mill collectible without a deep discount because collectors are picky and are more hesitant to purchase common items unless they are deeply discounted.  However, some collectibles are relatively liquid if they fall in a price range that does not create significant price resistance and they are otherwise very desirable.  So the bottom line is that the collector should stick to items relatively unaffected by price resistance and that are popular, rare, and in a nice enough condition to command the attention of other collectors when they come up for sale.  Education is plays a large role here.   Most importantly, however, the collector needs to recognize that collectibles, like some other asset classes such as real estate or even a certificate of deposit may not be easy to cash out without selling at a discount.  With the exception of items bought on speculation, collectibles are generally expected to be a long-term asset and profit will be maximized when great care and patience is exercised when it comes time to sell them.

You can get ripped off!  How can you stay safe?  There are many sad stories, with a basis in fact, about some old man or old woman who spent their life savings buying collectibles only to later find out that they were fake or over-graded or over-priced.  Yet all of these cautionary tales had one common thread.  In almost all cases, the buyer was dependent upon a single seller for their purchase.  The solution to this problem is simple.  Never buy all your collectibles from a single source.  Whether you are buying all of them at one time, or a little at a time, do not purchase from the same source; Not from shopping networks on television; Not from dealers, or from classified ads, either in a newspaper or on-line, with the bargain of a lifetime.  Heck, not even from me.  Don't put your trust entirely in one person or one institution.  Instead, spread your purchases around.  You should buy from at least 3 to 5 reputable sources minimum.  And though you may  believe on-line purchases are risky, in my own experience, the risk is minimal if you purchase from sellers who have proved their trust-worthiness over time and have the positive feedback to show for it.  Also, another way to protect yourself is to attempt to sell one or two of your collectibles every once in a while as a test to confirm that what you think you are buying is really worth that you think it is worth.  Sometimes, the results can be eye-opening.

You may noticed that there is one potential argument against collectibles that is not listed here.  The rate of return of collectibles as an investment is seldom called int question except, perhaps, by the uninformed.  Over the long un, well selected collectibles handily outpace inflation and returns of more than 10% can be common for the better material.