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Anchoring and the New Reality of Antique Investing

The world is continuously changing. It happens regardless of whether you are awake or asleep – 24 hours a day, 7 days a week, 365 days a year. And nowhere is this unremitting change more apparent than in the world of investing. Securities markets fluctuate ceaselessly – sometimes second by second. People who invest in alternative assets like art and antiques may believe they have escaped this bewildering, cacophonous situation. But this is an illusion. Even the illiquid antiques market is always changing, albeit usually on a less manic timetable than traditional investments.

This constant variation can lead to unexpected – and sometimes negative – consequences. One example of this is the psychological phenomenon known as anchoring. Anchoring is the process where a person relies too heavily on immediate history to frame his opinion or world view. This can be a pernicious bias in the world of investing in general, but especially so in antique investing.

Let me give you an illustration. For many years I had admired the impressively large silver trade coins that France struck before World War II for its colony of French Indo-China in modern day Vietnam, Laos and Cambodia. These extremely attractive silver coins, called piastres, bear the French personification of Liberty on the obverse. The French version of Liberty on the piastre is seated, but otherwise looks uncannily like the Statue of Liberty in New York City’s harbor. This is no coincidence as the Statue of Liberty was originally a gift to the United States from France in the late 19th century.

In any case, I had always thought about adding a specimen to my collection. Prices were quite reasonable, if not downright cheap, with good quality examples selling for perhaps $25 to $40 each. But I never did manage to pull the trigger. Life distracted me. There was always some other, more immediate obligation that needed my $40.

I thought this wasn’t much of a problem. Although most of these coins are now over a century old, they were struck by the million. So I assumed there would always be a ready supply of these coins available. And besides, I reasoned, “Who, other than me, could possibly be interested in French Indo-China piastres?”

And for the longest time I was right. For many years prices barely moved. You could have bought a nice French Indo-China silver Piastre trade coin for $25 in the year 2000. In 2005 it may have cost you $30. In 2010 one may have run around $40. I always thought I would be able to acquire a fine specimen for somewhere in this “traditional” price range. I was wrong.

I was engaging in anchoring in the worst possible way. I was allowing my knowledge of past prices to influence my ideas about future prices. Instead of focusing on the relevant facts of the coin series – its attractive design, historical importance, impressive size and substantial silver content – I relied on the fact that prices had hardly changed over more than a decade, from the late 1990s to 2010. I “anchored” to the old pricing structure and imbued it with an importance and permanence that it did not merit.

Anchoring is a fairly common mistake among antique investors. The prices of antiques often “stair-step” upward over time. This means that a certain investment grade antique may trade at a specific price point for an extended period of time only to double or triple in price over a relatively short time once it is “discovered” by aficionados and connoisseurs.

Today, in the fall of 2016, a problem free French Indo-China silver piastre in good, but not great condition will easily sell for $60. And honestly, if you want a really nice, problem-free coin – a higher grade example that isn’t scuffed, nicked, harshly cleaned or otherwise impaired – it will most likely cost you at least $100. This is what happens if you succumb to anchoring. Prices walk, trot or, occasionally, gallop away from you.

I would like to think that my experience with French Indo-China trade piastres is an isolated situation. Since then I have made a conscious effort to prevent anchoring from coloring my investment viewpoint. And that is why I feel compelled to tell you this secret. Prices for investment grade antiques are rising practically across the board. They often sell for double or triple what they did only five or ten years ago.

And I don’t foresee this trend changing anytime soon. I wouldn’t be surprised if many categories of fine antiques were to double (again) in value over the next five years. Under these circumstances, anchoring is a grave financial misstep; don’t let it hamstring your antique investment plans. The price you see today may just be the best opportunity you have to acquire high quality antiques.

Welcome to the Modern Coinage Dark Age

A dark age is defined in the dictionary as “a long period of stagnation or decline.” The popular usage of this term is generally applied to the era in Europe after the fall of the Western Roman Empire, from about 500 AD to 1000 AD. But there are other kinds of dark ages too. Coinage for example, much like civilizations, can fall into its own dark ages. And the very first of these coinage dark ages occurred, funnily enough, during the Roman Empire.

The 3rd century AD was a time of profound discontent in Rome. After the halcyon days of the 1st and 2nd centuries AD which were dominated by the prosperous, largely peaceful reigns of the adoptive emperors, the Empire underwent a crisis. Barbarian tribes like the Carpians, Goths, Vandals and Almanni assaulted the Romans along the Rhine and Danube frontiers. Simultaneously, a revived Persia, in the form of the Sassanid Empire, harassed the eastern borders of the Roman Empire. Rampant plagues and bloody civil wars rounded out this century long disaster for the beleaguered Romans.

It is no surprise that Roman coinage underwent a parallel crisis during this troubled period. The primary currency unit of the Roman Empire was the denarius, which was traditionally a coin of almost pure silver weighing about 4 grams. Although introduced during the Roman Republic several centuries before, this Roman monetary workhorse had only undergone modest debasement in the time leading up to the 3rd century AD.

However, the acute economic stress of the 3rd century prompted relentless, irreversible debasement. First, the hitherto hallowed silver coinage dropped below 50% fineness, to the level of billon. Eventually, late in the 3rd century AD, the noble, ancient silver money of Rome was reduced to small, crude bronze coins coated with a thin layer of silver.

Now while this history lesson might be interesting by itself, it also has implications for coin collectors and investors. You see, almost no one wants to collect coins from a numismatic dark age. They are generally ugly, miserable base metal creations of necessity that hold little attraction for the connoisseur of fine coins.

Roman coinage from the 3rd century AD underscores this point. The few people who collect these issues do so either to showcase the extreme debasement that occurred over the period or to complete a “full set” of emperors, including the “bad” emperors. Most ancient coin collectors prefer, with good reason, to stick to the glory days of the Roman Republic or early Roman Empire.

After all, why bother with mean, crude and dumpy coins that signify a civilization in decline when you can instead collect sophisticated, artistic and tasteful examples that represent the pinnacle of imperial glory?

Coinage dark ages aren’t restricted to ancient times, though. A similar period commenced much more recently for the world in the 1960s. This was the decade when silver was removed from most countries’ regularly circulating coinage.

For the United States, 1965 was our numismatic annus horribilis, the year silver was removed from dimes and quarters (and greatly reduced in half dollars). This was a very traditional, if abrupt, debasement. In place of its time honored 90% silver alloy, the U.S. mint adopted a pure copper core sandwiched between two layers of cupro-nickel alloy. This new copper-nickel clad coinage was struck in huge quantities to replace its silver predecessors.

25 years ago, in the early 1990s, I frequently read opinion articles by numismatists who repeatedly asserted that these wretched copper-nickel clad coins would one day be valuable in uncirculated condition due to the fact that no one was saving them. This prediction turned out to be partially correct. The coins were not saved in any quantity and high quality specimens are, consequently, somewhat scarce today.

But all those predictions about the coins being valuable were dead wrong. This is because nobody wants them. Who would willingly collect nasty, copper-nickel clad Washington quarters or Roosevelt dimes from 1965 to the present, when fine silver examples from 1964 and before are available?

More recently, in the 1980s, our present coinage dark age took a turn for the worse when countries around the world discovered they could wring money from well intentioned, albeit ignorant, collectors and investors by over-issuing commemorative coins. And over-issue commemorative coins they did.

Massive numbers of commemoratives, often in the millions for a single issue, have been struck year after year by mints around the world for the past 30 years. These modern commemorative monstrosities are often issued to celebrate obscure or inconsequential events, while their designs are typically prosaic and unexciting. Today’s governments view their mints as profit centers and coin collectors as marks to be shaken down. It is a pity that the most advanced minting technology in the history of mankind is used this way.

Our current coinage dark age isn’t likely to end soon either. Recently, many countries have taken debasement to the next – and perhaps final – logical step. Circulating issues that used to be cupro-nickel or copper have been steadily replaced by nickel or copper-plated, steel-composite coins lately. These ultra-debased coins are the nasty of the nasty, with effectively no redeeming qualities.

Today’s coin connoisseurs should beware. A hundred years from now, future coin collectors and investors will undoubtedly look back on the current era as a coinage dark age. And rightfully so. Who would want to own these uninspired, base metal monstrosities issued by the million, if not billion?

The answer is obvious: no one. The savvy investor will take note. With the exception of perhaps a few bullion issues, there are scant opportunities in modern numismatics. This is predictable, given that we are currently living through a coinage dark age.

A Theoretical Approach to Valuing Antiques and Fine Art

One of the enduring enigmas of investing in art is valuation. Unlike traditional financial assets that are largely priced according to expected future cash flows, fine art has no future cash flows except for the ultimate sale proceeds. In this regard art is similar to a zero coupon bond. Of course, the future selling price of any piece of art is unknowable in the present. This presents any would be financial analyst of the art world with a conundrum. A fair valuation – and by extension a reasonable performance estimate – cannot be made without knowing the future sale price of a work. Using expected future cash flows as a valuation method for art and antiques is therefore a doomed exercise in circular reasoning.

For a long time, this problem bedeviled me. Relative valuation, in comparison, is a much more approachable riddle in the world of antiques; items of higher quality and condition are generally worth more than those of lower quality and condition. But absolute valuations stumped me. How do I know that the antique I’m considering is priced fairly compared to stocks, bonds or other traditional financial assets?

But then it hit me. Maybe I was approaching this issue from the wrong angle. Rather than trying to determine valuation from unknowable future cash flows, maybe I should be looking at the amount of money available in an economy to buy art. In other words, I should look at the inputs (available money) rather than outputs (future sale prices). According to my hunch, inputs in this instance would be nominal (non-inflation adjusted) GDP (gross domestic product) – the value of all goods and services produced in an economy during a year.

So I started gathering data. Now historical price information for art and antiques is somewhere between difficult and impossible to find. However, after significant effort, I managed to put together a miniature index of U.S. type coins with price data back to 1950.

This index consists of three equally weighted constituents:

1) 1842 Liberty Seated silver dollar in XF condition (mintage: 184,618)

2) 1857 Flying Eagle cent in XF condition (mintage: 17,450,000)

3) 1908-D no motto $10 Indian Head gold eagle (mintage: 210,000)

These coins were very specifically chosen. They are all classic pieces that have been popular among U.S. coin connoisseurs for many decades. Although not plentiful, none of the pieces is a rare or key date. Only one coin is gold, limiting the impact of gold spot price fluctuations on the overall index. And because they are all U.S. coins, we can surmise that nearly all collector demand for them originates in the United States. This allows us to exclusively look at U.S. economic data in an attempt to find a meaningful correlation. In addition, our U.S. type coin index, possessing all the desirable attributes of investment grade antiques, should be an excellent proxy for the broader art and antiques market. So any relationship with economic data we find here will most likely carry over to that larger market.

This first chart shows our proprietary U.S. type coin index graphed from 1950 to 2015 against both nominal U.S. GDP and the U.S. inflation rate (CPI). You’ll notice the very close relationship between the coin index and nominal GDP. The correlation coefficient between these two data sets is 0.943, a very high number indicating almost perfect correlation. To put this value in perspective, a correlation coefficient of -1 means two data sets are perfectly inversely correlated. A coefficient of 0 means two data sets are completely non-correlated, moving randomly in relation to each other. And a coefficient of 1 equals a perfect correlation. Inflation, useful as a reference baseline, lags far behind. The coin index and nominal GDP moving in almost perfect sync seems to confirm my theory that nominal GDP is the primary driver of collector demand. This makes a lot of sense, as art aficionados and antique collectors are constrained by their available resources and nominal GDP is a reasonable measure of those resources.

But we can take this data one step further. We can plot a ratio of our coin index versus nominal GDP to reveal periods of overvaluation and undervaluation. This is what our second graph shows. In this case, the long term average has been indexed to 1. So any number around 1 implies fair value while those significantly above signal overvaluation and those substantially below show undervaluation.

The results of our graph are intriguing. We can see that most of the period from the 1960s through the 1980s shows persistent overvaluation in the coin index. This period also broadly coincides with an elevated rate of inflation. So the story seems fairly straightforward. People who fear inflation flee underperforming stocks and bonds for the relative safety of tangible assets, including bullion, art and antiques. This phenomenon eventually pushes these tangible asset classes into overvalued territory. Our proprietary coin index almost reached double its fair value in 1975.

The period on our chart from 1995 to 2015 is equally illuminating. Once inflation receded and traditional financial assets began performing well again, people tended to abandon tangible asset en masse. This drove valuations well below fair value for the last 20 years. Although the coin index – and investment grade antiques in general – bounced off its year 2000 low of 0.57, tangibles are still substantially undervalued today. The latest 2015 data point for the coin index is 0.64, meaning a rally of more than 50% would be needed to return to our long term average valuation.

But how can we be sure our coin index data isn’t a fluke, or perhaps just coin specific? Well, I also managed to get some historical data on the Antique Collector’s Club Antique Furniture Price Index. This is an index started in 1968 by John Andrews that tracks the performance of 1400 types of commonly seen antique British furniture. It is divided into seven categories: oak, walnut, early mahogany, late mahogany, Regency, Victorian and country. Antique furniture is a radically different kind of market than coins. So if we find the same relationship to nominal GDP here that we found in the coin index we can be assured that it is meaningful. However, one caveat about antique furniture is that it is not, in my opinion, technically investment grade. This is due solely to the fact that furniture is not portable, a requirement for investability by my definition. But we work with the data we have, not the data we want.

The next chart shows the ACC Antique Furniture Price Index from 1968 to 2015 versus U.K. nominal GDP and the U.K. inflation rate (RPI). You can immediately see the tight relationship between the furniture index and U.K. nominal GDP from 1968 to 2002. At that point the relationship seems to break down. Looking at correlation coefficients confirms this analysis. From 1968 to the index’s peak in 2002, the correlation coefficient is a near perfect 0.974, but if we look at it over the entire period, the correlation coefficient drops to 0.710. This is still a fairly good correlation, but not nearly as close as it had been until 2002.

What happened? Well, the antique furniture market has been undergoing a tumultuous period for the last 15 years or so. Specifically, living arrangements have been changing. Smaller houses, condos and apartments are now the norm. So a lot of massive antique furniture from bygone eras simply doesn’t fit in the average home anymore. Also, many people are overly indebted. They struggle to make the monthly payments on their massive mortgages, car loans and credit cards. Paying top dollar for antique furniture isn’t a top priority when you’re barely making ends meet.

This leads us to our last graph. It shows the ratio of the ACC Antique Furniture Price Index to U.K. nominal GDP. And it shows a remarkably similar story to our coin index chart. A period of overvaluation in the 1970s through the early 1990s turns into extreme undervaluation for the most recent 10 years. As of 2015, the furniture index to GDP ratio rests at 0.40, indicating a 150% increase would be necessary to reach fair value.

Now I would take this indication of extreme undervaluation in the antique furniture market today with a grain of salt. While I do feel that antique furniture is undoubtedly selling too cheaply, lifestyles have changed in the last couple of decades – perhaps permanently. Fair value may be lower today than the (still evolving) long term data says it should be.

In any case, I think there are a few important points we can garner from this data. First, we can successfully measure the absolute value of art and antiques. Second, art and antiques as an asset class tend to appreciate at the same rate as nominal GDP growth over the long term. Third, inflation and the accompanying underperformance of paper assets lead to periods of overvaluation in antiques while booming stock markets and low inflation rates give birth to secular undervaluation. Fourth, all indicators show that tangible asset classes like art and antiques are somewhere between moderately undervalued and egregiously undervalued today. It is clear that there has rarely been a better time to become a connoisseur of fine art.

Euro Currency Déjà vu – The Latin Monetary Union

The European common currency – the Euro – is often thought of as a new and bold political experiment of the 21st century. As of 2016, 19 members of the European Union use the Euro, which has also become the world’s second most traded currency. But as groundbreaking as many believe the Euro is today, it wasn’t Europe’s first common currency.

That honor belongs to the now defunct Latin Monetary Union. The Latin Monetary Union was established in 1865 by founding members France, Belgium, Italy and Switzerland. This arrangement wasn’t a single currency among participating members per se. Instead, each country retained its individual national currency, but harmonized the weights and finenesses of their gold and silver coins. This was possible because countries in the mid 19th century relied on fixed gold or silver standards.

A single currency unit in the Latin Monetary Union was defined as a 5 gram coin of 83.5% fine silver. The largest silver coin was 5 units, weighing 25 grams of 90% silver. The workhorse high denomination gold coin was 20 units, weighing 6.4516 grams of 90% fine gold. And the largest gold coin was 100 units, weighing a hefty 32.258 grams of 90% gold. Any silver coins smaller than 5 units were only struck in 83.5% silver because they were fiduciary coinage only, ineligible to settle large payments or debts.

Although there were only four participants to the agreement initially, membership soon grew. Romania, Spain and Greece joined in 1868. Peru, Columbia and Venezuela soon followed. Finland, Serbia and Bulgaria also adopted the standard. Austria-Hungary went halfway, striking some coins that matched the Latin Monetary Union’s requirements and others that did not.

Even tiny Albania joined the Latin Monetary Union upon its independence from the Ottoman Empire in 1912, although it didn’t mint coins until the 1920s. So many coins were struck to Latin Monetary Union standards in the late 19th and early 20th century that they are still commonly encountered in the collector’s market today.

In hindsight the Latin Monetary Union was shockingly successful. A preponderance of European nations joined the treaty along with a handful of Latin American countries as well. It wasn’t perfect however. At first the free coinage of both silver and gold was embraced. This meant that an individual could go to the national mint of a Latin Monetary Union member with either raw gold or silver and have it coined into legal tender.

But due to the discovery of massive quantities of silver in Nevada’s Comstock Lode in the Western U.S. in the 1860s, the price of silver soon declined precipitously in relation to gold. This naturally led to destabilizing arbitrage, where people took cheap, raw silver to the mint to have it coined and then exchanged it for more valuable gold coins.

This situation eventually forced the Latin Monetary Union members onto a de facto gold standard when they finally agreed to limit the quantity of silver coins they would mint. Some countries could not resist the temptation to debase their money, however. Greece, that perpetual basket case of monetary intransigence, was expelled from the Latin Monetary Union in 1908 due to recurring debasement. In spite of these occasional problems, the Latin Monetary Union flourished from its founding in 1865 until the onset of World War I in 1914.

World War I, though, was the final twilight of the Latin Monetary Union. The war blew out the national budgets of all belligerent nations. The countries involved in the global conflict turned to the expediency of currency debasement in an attempt to ameliorate their fiscal plights. This rendered the previously robust international monetary agreement inoperative almost overnight.

A couple nations not involved in the war – Switzerland and Venezuela – struggled on issuing coins that conformed to the old standard for decades to come. The fatally wounded Latin Monetary Union was finally officially euthanized in 1927 after it became apparent that most nations involved in World War I were never going to reestablish their pre-war parity gold standards. Lonely Switzerland struck the final coinage adhering to the old specifications in 1967 – a 5 gram 1 franc piece and a 10 gram 2 franc coin, both of 83.5% silver.

Thus a noble, if doomed, experiment in international monetary synchronization ended. I suspect that barring a full political union, the current Euro currency will share the same fate as its Latin Monetary Union predecessor. The massive, unrelenting forces clawing at the periphery of Europe’s current pecuniary arrangement are already plainly obvious to the casual observer. How long the Euro lasts is anyone’s guess, but I doubt it will even take a world war to dismantle it.

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