Most of us are looking to invest our retirement funds in asset classes that stand the test of time. When we access our money 10, 20 or 30 years in the future, we not only expect it to still be there, but to have also grown. In other words, we want to buy perpetual assets. This investment philosophy is best summed up by the famous Warren Buffett quote, “Our favorite holding period is forever.”
In order to achieve this end, Warren Buffett invested primarily in common stocks. And an entire generation of investors eagerly followed his lead without really understanding the mechanics behind it. Both Wall Street and the general public have completely embraced the idea of “stocks for the long run.” As a result, we are currently overrun with stock-oriented mutual funds, ETFs and hedge funds. In fact, there is a very good chance that your workplace 401-k plan is dominated by equity funds, with only a single money market fund and maybe one or two bond funds as alternatives.
But the idea that you can robotically dump your retirement savings into stocks and expect eternal 10% returns as if it were a fundamental law of nature is hopelessly misguided. The sad truth is that a great deal of the success of stock-based investing over the course of the 20th century is attributable to an accident of timing. Simply put, the mid 20th century was a great time to buy the broad U.S. stock market. Valuations were modest and the country had many decades of strong economic growth ahead of it. This combination of variables essentially assured the stellar stock market returns we have seen over the last several decades.
But, unfortunately, stocks are not the perpetual assets that most of us were hoping for. The Dow Jones Industrial Average lays bare this truth. Founded in 1896 by Charles Dow, the DJIA is one of America’s oldest and most venerable stock indices. Of its original 12 components, only one, GE, is still in the index today. All the rest of the original DJIA companies have either been acquired as their business prospects declined or gone bankrupt. In fact, the DJIA’s constituents have changed 51 times since the index’s inception.
The DJIA’s high turnover isn’t exceptional either. Stocks in the S&P 500 index only have an average lifespan of around 15 years today, a massive decline from the 67 year average lifespan of a listed U.S. company in the 1920s. And there have been a parade of bankruptcies over the past 30 years involving formerly iconic American companies, including Eastman Kodak, General Motors and Texaco. And this list excludes the slew of storied financial firms that disappeared during the Great Recession of 2008-2009. The idea of treating stocks as perpetual assets suddenly doesn’t look so smart anymore.
However, there is an asset class that doesn’t face the prospect of bankruptcy. It has been treasured and coveted by the elite of society for hundreds of years. This asset class has been a reliable store of value for the wealthy and powerful for century after century. I am talking about real perpetual assets – fine art and antiques.
The famous Sancy Diamond illustrates this point superbly. This faintly-yellow gem of just over 55 carats was most likely mined at the renowned Golconda diamond mines in medieval India, although its true origins are lost to the mists of time. It’s first recorded historical appearance was in 1570, when the diamond came into the possession of its namesake, the French diplomat Nicolas de Harlay, seigneur de Sancy.
Over the centuries the glittering Sancy Diamond has passed through the hands of much of Europe’s royalty, while simultaneously escalating in value. It sold for £25,000 in 1657, £80,000 in 1828 and £100,000 in 1865 before finally being sold to the Louvre Museum for $1,000,000 in 1978.
The gem’s long term performance is made all the more impressive by the fact that the British Pound suffered almost no inflation between the early 18th century and the 1930s. In addition, I strongly suspect that the diamond’s final sale price of $1,000,000 might have been discounted as a gift to the most famous museum in the world! In any case, as perpetual assets go, the Sancy Diamond has an impeccable 400 year long (and counting) investment track record!
Of course, less expensive antiques and fine art also enjoy all the benefits of perpetual assets. Ultra-rare pattern coins, antique silver cigarette cases, and vintage fountain pens are just a sampling of the fine antiques that are accessible to savvy investors right now at reasonable prices. Once purchased, these perpetual assets will continue to accrue value for decades and decades to come.
Although it is little recognized in the investment world, fine art and antiques behave a lot like zero coupon bonds. A zero coupon bond makes no interest payments during its life, but is issued at a discount to its face value. The difference between its discounted purchase price and the bond’s ultimate redemption at full face value is the investor’s profit.
Antiques replicate this zero coupon bond effect, albeit without any explicit face value. Investment grade art and antiques have a tendency to gradually and steadily rise in value over long periods of time. This means that an antique purchased today will most likely sell for a higher price tomorrow. And the longer you hold an item, the higher its eventual sale price will probably be. As an added bonus, fine art and antiques also possess implicit inflation protection – a vital attribute when looking for perpetual assets to invest in.
Whether we realize it or not, most of us are looking to place perpetual assets in our investment accounts. Most people don’t want to be bothered with having to constantly check on their investments to make sure they haven’t spontaneously combusted. And, unfortunately, spontaneous combustion, otherwise known as bankruptcy, is an unsettlingly common feature of the modern stock market. The Sancy diamond might be forever, but publicly listed companies are decidedly not. Fortunately, you can avoid the modern-day stock market casino by investing in fine art and antiques.
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