Here's a hypothetical situation. Let's say you have $80 burning a hole in your pocket and you want to buy a coin. But imagine also that you're a collector like me. Though the artistry and beauty of the coins excite you...because after all, that's why you collect coins in the first place...you also demand a good return on the coins. Like even though money is tight, perhaps you can justify your purchase because the coins you buy will be purchased at a good price and you're thinking in the back of your mind that you'll start selling off your coins when you retire in 22 years.
So you go down to your favorite brick and mortar coin store and it's really busy! There is a sign in the window that says, "going out of business sale". Oh my God! Your world is crashing around your ears. So you go in and you see old Vick, the owner. You expect him to explain how the internet finally got to him and he couldn't compete. Instead, he's all smiles and tells you that he's won the lottery and is in a hurry to sell off his inventory and move to Florida. Great for him! Vick tells you that he's having a sale and all of the items have been discounted nicely. So you look around, and you see a couple coins that catch your eye.
One is an 1839 Large Cent. This is the Head of '38 Beaded Cords variety. It's in Extremely Fine condition, has original, unmolested surfaces, and it's on sale for exactly $80. It has a guide price of $110. Hmm...this isn't exactly making a killing on it, but its a good deal and you feel maybe you could sell it online for what you paid if you needed to.
The other coin that you're interested in is a 1939-D Jefferson Nickel in Gem Uncirculated, MS-65. It's a typical Gem, but it is the key to the series. It is also $80. And coincidently, it also has a guide price of $110 in MS65 condition.
It's at this point that analysis paralysis sets in. "Gee, that nickel is the key to the series...but look at the classic beauty of the cent!" "What do I do?" "What do I do?!"
Then you notice that the cent is exactly 100 years older than the nickel. Is there any significance to that? Is it better to buy the older coin? It is 100 years older. It's gotta be rarer, right?
The 1839 cent is 100 years older, or 173 years old.. It's guide value is $110. The nickel is "only" 73 years old. It also guides for $110, but it's a "new" coin. Surely an "old" coin is better than a "new" one, right?
Not so fast.
Think of it like this: The 1839 cent has had 173 years to grow in value to its $110 guide price. But the nickel grew in value to $110 in only 73 years. It's really hard to estimate what a good starting price would be for each one, but it does seem like the 1839 cent is growing in value slower. So a question that comes to mind is what was that nickel worth...say....72 years ago. Was it still worth a nickel then, or did coin dealers value it at 10 cents because it was the key to a 2 year old series??? Maybe we can't answer that question, but we can approach it another way.
I have in my library, a 1990 price guide. This is the redbook price guide, the same one that quotes $110 for each of the coins in the 2012 edition. In 1990, the MS65 nickel was listed at $55.00. The cent was valued at $85.00! So in 22 years, the nickel doubled in the guide. Yet the cent only increased in value about 30%. If we assume that the rate of increase will continue for another 22 years when you retire, then the guide value of the nickel *MAY* double again to $220 and the large cent *MAY* increase another 30% to about $143.
***Caution...heavy math ahead**** (if math bores you, stop reading now)
So it seems that the nickel is rising in value faster. It is doubling in guide price every 22 years. What kind of return is that? I mean, what percent? Well, there is a really neat trick called "THE RULE OF 72s". The rule of 72s works like this. If you divide 72 by the interest rate, it should approximate the doubling time. Or stated another way, if you divide 72 by the the doubling time, it should approximate the interest rate of return.
For example, if a collectible doubles in value in 9 years, what is the percent return? Well, 72 divided by 9 equals 8. So the answer is 8%.
Another (harder) example, what about a collectible that increased in value by a factor of 8 in 30 years? Well, first, we need to figure out how many times it doubled. If it doubled once, it would be twice as expensive. If it then doubled again, it would be 4 times as expensive. If it doubled one more time, it would then be 8 times as expensive. So if an item is 8 times more expensive, it doubled 3 times, right? If it doubled 3 times in 30 years, then...on average...it doubled every 10 years. So now we know the doubling time....10 years. So 72 divided by 10 (doubling time) equals 7.2 years....or 7.2% return.
Back to our Jefferson nickel. It doubled in 22 years. It's doubling time is 22 years. So 72 divided by 22 is about 3.25...so around 3.25%. Our Jefferson nickel probably stayed ahead of inflation, but barely. And the cent actually lost value compared to inflation!
Something to consider is this. The nickel's guide value is $110, but you buy it for $80. So it seems like your nickel would give you 3.25% of $110 every year...so it should go up in value about $3.50 a year at first. That $3.50 per year is actually a higher percent of your $80 purchase...its probably about 4%. In other words, because you bought it cheaper, your return is higher, because you get the return associated with a value of $110, but you actually only spent $80.
Here's a simpler example. If an item worth $100 is going up in value 5% a year, and you bought it for full price, you'd expect to get 5% return on your investment. But if you bought it for half price, you would expect more return on your $50 purchase. This is because the item will go up $5 in value every year because it's worth $100 and growing at 5%. Yet, you only paid $50, so that $5 increase in value every year actually represents 10% of the $50 investment.
One more extreme example. An item worth $100 goes up in value 4% a year. In the short run, this means the value of the item should increase $4 a year. Now imagine that you cherry picked that item and purchased it for only $5. It will go up in value $4 a year, but you only paid $5 for it. You're getting a $4 annual return on your $5 purchase...thats an 80% return on your money!
You can see that the best way to boost your returns on your collectible "investments" is to buy them for way below guide and focus on things that are moving up in value faster. IN OTHER WORDS, TRY TO CHERRY PICK THE NEWER, MORE EXPENSIVE STUFF. If you could buy that Jefferson nickel for half price, or $55, then you'd be making double the 3.25% rate of return we calculated....which is 6.5%. That's pretty good in an era when a savings account pays you only 1%. Maybe old Vick would consider selling you the Jefferson for $55 since he just won the lottery.
Post Script: Please realize that past performance (rate of return) is not an indication of future performance. For example, changing collector demographics could hurt or help the change in value of any collectible. Also realize that the 1839 cent in this example is much rarer. What made the Jefferson Nickel outperform it was likely due to a greater number of collectors putting together sets. That too could change. But I know this one thing. While the race does not always belong to the swift, nor the battle to the strong, that's probably how you should bet.
Collector Steve
