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The Curse of Unrealistic Investment Expectations

The Curse of Unrealistic Investment Expectations

In the mid 1990s I used to spend a lot of time hanging out at a good friend’s house.  For some reason, his family seemed to accumulate cars in various states of disrepair on their property.  My friend was particularly proud of one of these cars – a mid 1980s vintage Jeep Grand Wagoneer.  One day while I was wasting time at his house, I idly asked how much the car was worth.

My friend replied with some satisfaction that his family’s Jeep Grand Wagoneer was a $40,000 car.  Now, granted, the car was in reasonable used condition.  More importantly, unlike some of the vehicles parked in my friend’s yard, it actually ran.  But I still found it puzzling.  How could this somewhat unattractive but functional progenitor of today’s luxury 4×4 sport utility vehicle be worth a small fortune?  I filed this mental tidbit away, determined to discover the answer one day.

Then, years later, I finally figured it out.  That Jeep Grand Wagoneer wasn’t a $40,000 car – not when it was new and certainly not after it had been used as a grocery getter for 10 years.  In other words, my friend was completely delusional.  But his fantasy of automotive riches is certainly instructional to those of us interesting in collecting art and antiques.

People have a congenital bias towards overvaluing items they own.  It doesn’t matter whether it is a house, car, painting or piece of jewelry.  As soon as an item enters the average person’s possession, it becomes an irreplaceable masterpiece.

Realtors have to deal with this problem all the time.  Half of a realtor’s job is talking people into listing their home somewhere near its market value, rather than a multiple of it.  Sometimes they aren’t successful.  When this happens, the deranged seller usually fires his real estate agent and lists the property as “for sale by owner” – another name for “extraordinarily overpriced”.

This psychological truism is also on full display in the world of art and antiques.  If you ever peruse garage sales, yard sales or eBay for your next treasure you are bound to confront this situation.  An otherwise reasonable little old lady at a church bazaar will adamantly refuse to sell the deformed plastic ring that she fished out of a Cracker Jack box two decades ago for a penny less than $1,000.

No, a plastic trinket isn’t worth anywhere near $1,000, but good luck convincing her of that fact.  In her mind it is a priceless artifact and you are trying to steal it from her for a fraction of its actual value.  Of course the ugly truth is that most antiques or collectibles have a very modest value.  Only the best of the best are really worth big money.

Of course most of these problems of unrealistic expectations can be remedied by purchasing art and antiques from an experienced dealer.  With few exceptions, these professionals have to make a living buying and selling.  Therefore, they are forced to price their wares at or near market value.  If they don’t, they don’t generate enough revenue to stay in business.

As deleterious as it can be to the buying process, the tendency for investors to overvalue their own holdings is even more dangerous to the selling process.  It can render an otherwise reasonable person a raving, obstinate madman.  This is especially the case for illiquid asset classes like art and antiques.  Keeping an open mind and engaging in careful market research before you list an item for sale can help keep your expectations grounded.  Failing that, retaining the services of a professional dealer or auctioneer and selling via consignment or auction can help tremendously.

The story of my friend’s $40,000 Jeep Grand Wagoneer has an interesting postscript.  To the best of my knowledge, the car was eventually hauled off to the scrap yard.  And, no, the scrap yard did not pay $40,000 for it.  But at least some people think a pristine vintage Grand Wagoneer may be worth a small fortune.  Ironically, if my friend’s family had either put their car up on blocks in their garage when it was new or painstakingly restored it to like new condition, it may have actually been worth close to $40,000 today.

Welcome to the Modern Coinage Dark Age

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.

Diminutive Art in the Modern Age

Diminutive Art in the Modern Age

I’ve seen both ends of the materialism spectrum in my family.  My parents have a house rammed full of so much stuff it’s difficult to walk around in.  And most of their possessions are junk.  They won’t throw anything away because of emotional attachments, but deflect any criticism by claiming that “as soon as we throw out (fill in the blank), then we’ll need it.”  One would think this is the perfect way to ensure that they would never need anything again, provided they already own it.

But, of course, life doesn’t work that way; they always buy more.  Growing up in their house has caused me to value the simplicity of an uncluttered life.  I have vowed never to emulate them.

My brother sits on the other side of the materialism fence.  He has embraced extreme monasticism, to the point where he even eschews useful furniture like a bed or dresser.  To him possessions are a sign of dubious individual moral fiber.  They are chains, tying you down to the banality of the physical world.  Once, after finding my brother sitting cross-legged on the floor of his room surrounded by a pile of books (with no furniture to be seen) I concluded that my brother’s approach to life was unnecessarily austere.

And that brings us to my own personal, middle path philosophy.  Don’t own many things, but make certain that the things you do own are nice.  And perhaps the highest application of this dictum is the field of art and antiques.  We all want a little color in our lives, something beautiful and inspiring.  Art and antiques, in addition to being fine investments, give us that special, deep connection to history, nature, philosophy or aesthetics that we crave.

But many people are intimidated by the scale of traditional art forms – the so-called major arts.  Paintings?  You need a gallery to display those properly, or at least a mansion with an extra wing.  Sculptures?  They require an exhibition hall or perhaps you could sneak by with only a large courtyard.  But good art doesn’t have to be cyclopean in size.  Some fine art and antiques are actually quite compact.

Over the last couple of decades our lifestyles have changed.  We are now more mobile than ever.  Our cell phones are mobile.  Our media is mobile.  Even our living arrangements are oftentimes mobile.  So why can’t our art be mobile too?

It can be.  The minor arts like jewelry, silverware, miniature sculpture and lacquerware, to name just a few, gracefully mesh with this modern philosophy of unencumbered living.  A superb, Edo era Japanese boxwood netsuke sculpture may be only a couple inches tall, yet overflows with history and culture.  An ancient Greek gold stater coin only weighs about 8 grams, but clearly reflects the grandeur of ancient Greece and the skill of her artists.  Small is beautiful and our society is just now coming to realize it.

The size of diminutive art bears no relation to its value either.  Most investment grade antiques are crafted from precious metals, glittering gemstones, exotic woods and other rare materials.  These miniature works of art are small, but exceedingly valuable.  Antiques conveniently allow us to hold a piece of the past in our hands while simultaneously being, if carefully chosen, top notch investments.

A collection of fine antiques takes up little space and can usually be displayed on a couple small shelves or, if need be, stored in the corner of a closet or a dresser drawer.  A modestly sized home safe or bank safety deposit box will also easily accommodate most collections.  Investment grade antiques are discreet and easily transportable, regardless of whether you need to take them down the street or halfway across the country.  And no one – not your friends, family or coworkers – will know you own a valuable collection of investment grade vintage wristwatches, antique jewelry or medieval prints – to name just a few possibilities – unless you tell them.

Art is a necessity in a balanced life, like food or water, but for the soul.  But art doesn’t need to be big to be good.  A compact collection of investment grade antiques can satisfy your aesthetic needs while also offering good investment returns.  As I like to say, own few things, but let the things you do own be nice (without taking up much space).

Investment Grade Antiques Have Always Been Expensive, Even When New

Investment Grade Antiques Have Always Been Expensive, Even When New

A common misconception surrounding antiques is that items that were originally cheap or commonplace decades ago can somehow age into choice, investment grade art today.  In this fantasy, junk collectibles gradually improve with age – not unlike a fine wine – until, if you hold them long enough, they finally become incredibly valuable.  Occasionally there are stories in the media that reinforce this idea.  For example, a million dollar treasure trove of old, rare baseball cards – including Ty Cobb, Cy Young and Honus Wagner cards – was found in the attic of an old farmhouse in Defiance, Ohio in 2012.

With sensational stories like this it is no wonder that many people believe their grandparent’s knick-knacks and junk could be worth a fortune.  After all, vintage baseball cards were free, throw-away prizes for buying candy or tobacco products in the early 20th century.  They were made from cheap cardboard, one of the most fragile and least durable materials on earth.  Doesn’t this definitively prove that an antique can go from zero to hero – in terms of desirability and monetary value – if stashed in an attic long enough?

Disappointingly for many people, the answer is an emphatic “No!”  That particular story of old, valuable baseball cards is very much the exception and not the rule in investment grade antiques.  Instead, the theme that we see repeated again and again is that today’s investment grade antiques were almost always extremely expensive when they were new.  And if you stop to think about it, this makes a great deal of sense.

Two of the attributes that are highly valued in fine antiques are durability and quality materials.  These two characteristics are inexorably intertwined.  When an item is crafted from high quality materials it is almost always durable.  The inverse is also true.  When an item is durable, it is almost always constructed from high quality materials.  However, only very skilled craftsmen or artists tend to work with these substances.  For one thing, good materials are very expensive.  They also require great proficiency to mold properly with minimal wastage.  Additionally, no true artist wishes to bequeath the world a poorly executed or shoddy work of art composed of fine materials.

A consequence of this is that good quality items – the sorts of things that later become investment grade antiques – were naturally very expensive.  Ancient and medieval coinage is a perfect illustration of this.  Gold coins have always traditionally been made with the greatest of care while bronze coins were hastily and crudely struck.  This was nearly universally true in pre-modern times, regardless of culture or era.  Civilizations as diverse as ancient Rome, medieval Germany and 17th century Mughal India all followed this unwritten rule of coinage.  Gold coins always had face-values significantly higher than their bronze counterparts and were thus substantially more expensive – both straight from the mint and among collectors today.  It is only with the advent of modern minting technology in the 19th century that all coins have been struck to similarly high standards, regardless of their metal composition.

Antique Japanese lacquerware offers another good example of this phenomenon.  In the 19th century Edo and Meiji periods, only the wealthy could afford finely adorned lacquerware dishes and boxes.  Today, these very same high-end pieces, resplendent with maki-e (gold) and raden (mother of pearl inlay) decoration, are the best of the best of investment grade antique Japanese lacquerware.  Very plain lacquerware, in contrast, was much cheaper to make and destined for those who were lower on the socio-economic totem pole.  In the current age, this undecorated Japanese lacquerware isn’t nearly as desirable.

This pattern repeats endlessly, regardless of whether we look at Tiffany jewelry, Gorham silver flatware, Patek Philippe pocket watches or medieval French illuminated manuscripts.  Items that are desirable, investment grade antiques today tended to be expensive – oftentimes very expensive – items when they were new.  So keep this little bit of wisdom in mind next time you’re convinced you will strike it rich by digging through your relatives’ old junk heap.