Investing Archives - Page 18 of 56

The Wealth Building Paradox

Photo Credit (CC 2.0 license): Eric Golub

A lot of investors approach wealth building as if it were a vending machine. They expect to regularly invest a certain amount of money each month and then sit back and watch it grow at around 10% a year.

After all, this is how investing works, right? You put your money into the investment vending machine and come back in 30 or 40 years to find that it has spewed out millions and millions of dollars for your retirement.

Unfortunately, this is a diabolical lie. Wealth building is nothing like a vending machine at all. The universe is simply under no obligation to give you a 10% return on your money in perpetuity. Real wealth building just doesn’t work that way.

Let me tell you a story that encapsulates this misguided vending machine analogy perfectly. I recently stumbled across a post by the financial blogger Joshua Kennon titled “Diamonds Are A Perfect Example of the Inability to Calculate Financial Intrinsic Value“.

In the post Joshua relates how he had visited Borsheims – a Berkshire Hathaway owned jewelry store. I’ll allow him to tell you the rest of his story below:

…there was a wedding band that caught my eye. It was phenomenal. It featured 5.34 carats of diamonds in a platinum eternity setting, with the diamonds rated in the exceptional white colorless range (F on the GIA scale) and a VVS in clarity.

I ran the compounding math in my head. Ten or twelve times. If I were to buy two identical copies, even at the Berkshire Hathaway discount price (which the sales associate was kind enough to ballpark for me and is substantial – at minimum 30% off retail, probably more) at an average rate of compounding, by the time I was Warren Buffett’s age, it would cost me $5 to $10 million in foregone wealth. That is my opportunity cost.

So I went ahead and ran the numbers on this guy’s “opportunity cost”. He states that one of these eternity rings would cost $27,000 at retail. At the 30% discount he references, two rings would cost $37,500. The “about” section of his website says that he is 35. Therefore I estimated that the difference between his age and Warren Buffet’s is around 50 years.

By dumping all of this information into a spreadsheet and working a little finance magic I can infer that Joshua thinks he will garner an average return on his portfolio of 10.26% to 11.80% annually over the next half a century.

That belief is, in my humble opinion, utterly insane.

It completely ignores financial history, where wealth building via compound interest has regularly been wiped out by global wars, ugly debt defaults, bloody revolutions, horrific stock market crashes and messy nationalizations.

Like it or not, the diamond eternity band that caught Joshua’s eye will undoubtedly still be around (and worth a substantial amount of money) in a couple centuries. In contrast, it takes a certain naivety to trust that Berkshire Hathaway (or most of today’s other major corporations) will still exist in the year 2200.

Now I want to make it clear that I don’t think buying diamond eternity bands from Borsheims (or any other jeweler for that matter) is a good investment. White diamonds are my least favorite gemstone from an investment perspective (with the notable exception of old cut diamonds). Anyone looking for the real sleeper hit of the gemstone world should bypass white diamonds entirely and check out spinels instead.

In addition, paying a jeweler’s retail price (even a “discounted” retail price) is almost always a poor move. The fact is that most new jewelry instantly depreciates by 75% to 90% the moment you walk out of the store with it. This is why anyone interesting in using jewelry as an investment vehicle should 1) do a lot of research before they buy and 2) always buy antique, vintage or estate jewelry on the secondary market.

But I digress.

Compound interest can work wonders for your portfolio, but there is a paradox buried in this conventional wealth building strategy. If you happen to invest in a time of peace and prosperity, you can be rewarded with seemingly ever increasing paper asset prices. This situation can endure for many decades at a time – so long, in fact, that it is easy to become complacent (and start implicitly believing in the investment vending machine theory).

But the good times inevitably lead to an over-issuance of paper assets like stocks and bonds. The physical economy simply doesn’t grow fast enough to support all the new paper claims against it. The only solution is ultimately default – either through inflation or bankruptcy. In both of these circumstances, holders of paper assets suffer terribly while investors in hard assets – antiques, precious metals and, yes, gemstones – benefit tremendously.

The last time the developed world experienced a synchronized restructuring of financial assets was the 1930s and 1940s. During this time, massive numbers of bonds, stocks and even currencies became effectively worthless, leaving many ill-prepared investors destitute.

But that was a long time ago – over 70 years now. As a result, today’s investors have forgotten the paradox of wealth building: compound interest is so powerful that no economy can sustain it forever.

Unfortunately, we seem to be right on the cusp of financial history at the moment. It is apparent that our bloated financial system won’t be able to stagger along much longer under the weight of its excessive paper asset obligations. The smart money knows that tangible assets are the right wealth building strategy for the coming financial implosion, and now you know it too.

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The 5 Best Stock Investments for Antique Collectors

Let’s say that you’ve done your research and you’re interested in antiques as an investment. Congratulations! You’ve taken an important step forward to secure your future.

But let’s also assume that, for whatever reason, you can’t actually buy physical antiques. Maybe you don’t want to go through the hassle of buying and selling physical assets. Or perhaps you would love to buy some high quality vintage items, only to find that all of your free cash is tied up in retirement accounts.

The latter scenario can be a big problem for antique collectors because, with few exceptions, art and antiques are forbidden in retirement accounts. Yes, there is one little known loophole for precious metal IRAs that allow U.S. citizens to own select, numismatically-oriented coins in their retirement accounts. But this unusual trick only works if coins are your thing – and for a lot of antique lovers, they just aren’t.

So the question looms: what if you want to invest in antiques, but discover that owning physical examples is off limits for whatever reason? Are there any substitute stock investments for antique collectors out there?

Well, the answer to this question is complicated. Yes, there are definitely some companies that deal in businesses that are tangential to the antiques industry. But there aren’t very many of them. And they oftentimes dabble in other, unrelated business lines, as well. Regardless, there are still a few antique or fine art-themed stock investments that rise above the pack.

So without further delay, here are the 5 best stock investments for antique collectors, as compiled by the Antique Sage:

1) eBay Inc. (NASDAQ Ticker: EBAY)

eBay is the global e-commerce giant that got it all started way back in 1995. It connects buyers and sellers all over the world, and many of them choose to trade antique watches, coins, art and silver, in addition to many other collectibles. Although eBay isn’t a pure-play on antiques, the e-commerce platform is well-established and very profitable.

eBay is the largest company featured on this list, with a gargantuan market cap of almost $42 billion and 2017 revenue totaling more than $9.5 billion. In spite of its solid profitability, the company does not pay a dividend, but instead chooses to deploy its excess free cashflow on share buy-backs. The stock currently trades for $34 a share and has been flat over the past 12 months.

It might not be the most innovative stock investment for the antique collector, but eBay is still a good choice with high profit margins.

2) eBay Inc. 6.0% Notes due 2056 (NASDAQ Ticker: EBAYL)

This next security is a bit of an anomaly. It isn’t a common stock like the other securities in this list, but is instead an exchange-traded debt security, otherwise known as a baby-bond. Small investors can invest in these bite-sized, $25 increment bonds while enjoying the convenience and liquidity of a security that trades on a major stock exchange.

This particular exchange-traded debt security is a senior, unsecured bond issued by eBay with a $25 par value and a 6.0% interest rate. It can be called (redeemed at par value) at eBay’s discretion anytime after March 1, 2021, although the final maturity of the instrument isn’t until February 1, 2056.

While baby bonds don’t have the same upside potential that stocks do, they are much lower-risk because the issuing company is legally obligated to make both principal and interest payments. EBAYL currently trades for around $26 and would be the perfect security for antique enthusiasts looking to add stable income to their investment portfolios.

This security has been called and subsequently delisted.

3) Etsy Inc. (NASDAQ Ticker: ETSY)

Etsy is a successful e-commerce platform that specializes in handmade and vintage goods from small sellers. It has done incredibly well in this niche, carving out an important online venue for artists, handcrafters and antique dealers alike. And while it is a stretch to say that Etsy deals exclusively with art and antiques, it comes pretty close.

Etsy has a market cap of $5.9 billion with annual revenue of $441 million. While it doesn’t currently pay a dividend, Etsy has experienced robust revenue growth over the past few years and finally became profitable for the first time in 2017. The stock trades for about $49 a share.

I really like Etsy as a platform and believe it has excellent growth potential, making it one of the better stock investments for antique aficionados.

4) Collectors Universe Inc. (NASDAQ Ticker: CLCT)

Collectors Universe is a third-party authentication service that is focused on a few specific areas in the antiques and collectibles market. It runs three different business units: PCGS, PSA and PSA/DNA.

PCGS (Professional Coin Grading Service) grades and authenticates old and rare coins. PSA (Professional Sports Authenticator) certifies vintage sports cards. PSA/DNA (PSA/DNA Authentication Services) authenticates celebrity, historical and sports autographs. The company collects fees for performing these services, but in return its third-party certified collectibles are easier for collectors to buy and sell on the secondary market.

Collectors Universe is a relatively small company with a total market cap of only $121 million and annual revenue of around $70 million. However, it makes up for this by occupying an important niche in the antiques market that has little competition. Because of this, CLCT is quite profitable and pays an enticingly high dividend.

Out of all the stock investments listed here, I believe that CLCT is the most intriguing from a conceptual standpoint. CLCT trades for around $13.50 per share at the moment.

This company has been taken private and subsequently delisted.

5) Sotheby’s (NYSE Ticker: BID)

Sotheby’s is one of the world’s two major art and antiques auction houses. It organizes and markets public sales of high-end art, antique jewelry, medieval manuscripts, rare coins, vintage watches and fine wine, just to name a few. If you want to buy or sell the very best of the best that the world has to offer, then Sotheby’s (or its rival, Christie’s) is the place to be.

This makes Sotheby’s one of the leading stock investments for the antiques collector. The firm has a market cap of $2.4 billion and annual turnover of nearly $1 billion. Because it is an established, top-tier auction house, Sotheby’s is reliably profitable, although the company chooses not to pay a dividend. BID currently trades at $46.50 a share.

I do feel compelled to point out one potential weakness of Sotheby’s business model: it has evolved to cater exclusively to a high-end clientele, thus divorcing the firm from trends in the broader antiques market. This could be either bad or good, depending on your industry outlook.

As an aside, I would also have also included Sotheby’s chief competitor, Christie’s, on my list of the 5 best stock investments for antiques collectors, but it was taken private by Groupe Artémis S.A. in 1999.

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Celebrity Provenance – Why Antiques and Fame Don’t Mix

Photo Credit (CC 2.0 license): Insomnia Cured Here

I was recently thinking about the importance of celebrity provenance when valuing or collecting antiques. This was prompted, in part, by the research I did for my recent article titled “Your Hopalong Cassidy Collectibles Are a Bad Investment“.

Although Hopalong Cassidy was the genesis of this idea, I wanted to more broadly examine how fame impacts a vintage item’s desirability. In this case, I define a celebrity as any politician (kings, queens and dictators count too), entertainer (including movie stars and musical artists), writer or sports star. While celebrity provenance can take many different forms when applied to antiques, there are two primary categories.

The first is autographed photos, items or other ephemera. The second is objects that can be definitely attributed to the ownership of a famous individual, usually via an inscription on the item or photos of the famous person in question using the item.

In any case, a fundamental question about celebrity provenance occurred to me. How famous does a person have to be in order to render a personal effect or autograph desirable?

In my opinion, the answer to this query is fairly simple. A person is famous enough when his or her name is familiar to the average person on the street. But there is a catch. It only counts once a century has passed from the peak of that celebrity’s fame.

Unfortunately, as we will soon discover, lasting fame is brutally difficult to achieve. There are precious few 19th or early 20th century celebrities who remain household names today. However, by examining those who make the cut (and those who don’t), we can make an educated guess at which antiques with celebrity provenance to purchase and which to avoid.

Let’s take a look at a few examples, starting with politicians, kings and other rulers.

How many 19th century rulers are still well-known by the average person today? I would argue that the answer is not many. Perhaps the French Emperor Napoleon, U.S. President Abraham Lincoln and British Queen Victoria pass this grueling test.

I also think the Russian Czar Nicholas II slips onto this list, but only because he and his doomed royal family were murdered by the Bolsheviks during the Russian Revolution. After all, nobody today remembers Nicholas’ father, the Czar Alexander III. Only the last of the Romanovs passed into legend as martyrs.

And then there are the 19th century political also rans. These were rulers who were undoubtedly household names in their time, but whose fame inevitably faded over the decades.

I would include the French Emperor Napoleon III in this category. Now this is where most people say, “What! There was another Napoleon?” The answer is yes. The original Napoleon had a nephew who resurrected the glorious French Empire 50 years after his death, but few people beyond history buffs (or Frenchmen) know it.

I also think that the Chancellor of the German Empire, Otto Von Bismarck, is another politician who doesn’t quite make the grade. Although he was an incredibly influential man during the late 19th century, my guess is that only 1 in 10 people (or fewer) would have any inkling who he was today.

Celebrity provenance is just as vitally important when considering antiques and autographs from movie stars, musicians and other entertainers. However, we tend to run into the same durability issues as with rulers and politicians; few entertainers remain famous a century after their time in the sun.

For instance, I feel that early 20th century celebrities Charlie Chaplin and Harry Houdini are fairly safe bets. Even today most people know who these superstars were.

Silent film star Rudolph Valentino is a distinct maybe. Although he was wildly popular in the 1920s, Valentino’s continued name recognition today is most likely due to his untimely and tragic death in 1926. Nothing preserves a star’s memory better than dying young and at the height of his (or her) fame.

But many of the silent film era’s biggest stars remain on the cusp in the modern age. Clara Bow (the original “It Girl”), Buster Keaton, Greta Garbo and Douglas Fairbanks might be familiar to early film aficionados, but few Millennials will recognize the names. It is a fair bet that in another 50 years, the Millennials’ grandkids will have absolutely no clue who these people were.

So here is our grand question. If you are interested in collecting antiques with celebrity provenance, which famous people from the last 70 or 80 years are a good investment?

I think the list is pretty short – probably shorter than a lot of collectors would like to acknowledge.

World War II leaders like, Winston Churchill, Joseph Stalin, FDR and Adolph Hitler, are unlikely to be forgotten anytime soon. U.S. President John F. Kennedy is also well-placed for eternal popularity.

But second tier 20th century rulers such as Ronald Reagan, Mikhail Gorbachev and Margaret Thatcher are riding the bubble. They may or may not ultimately be household names in another 100 years.

Lasting fame for movies stars is a tough sell in today’s “flavor-of-the-month” entertainment world. But I think that Humphrey Bogart, James Dean, Elizabeth Taylor and Arnold Schwarzenegger could be good enough.

As an aside, I’m under no illusions that Arnold Schwarzenegger was a great actor, but he did become both a pre-internet meme (I’ll be back!) and a successful politician (elected governor of California). Sometimes it isn’t the truly great ones who are remembered. As they say in Hollywood, fame is a bitch.

When it comes to musicians and desirable celebrity provenance, I believe the 20th century will bequeath the future with only 3 giants: Elvis, the Beatles and Michael Jackson. Every other musical artist of the 20th century, regardless of talent, will be an afterthought compared to these colossi.

The trend in the world of sports will probably be very similar to those in music. Maybe a handful of great 20th century players from every major sport will be remembered. I nominate Babe Ruth (most people know the name even if they’ve never watched a baseball game in their life), Pelé (I hate soccer and I still know about Pelé), Mario Andretti (I don’t know a thing about racing, but the name Mario Andretti is synonymous with speed) and Arnold Palmer (a great golfer and all-round likable guy who has a drink named after him).

But the flip side of these predictions is that most vintage items with celebrity provenance from lesser known or second tier famous people will either stagnate or drop in value over the decades.

This is because people naturally have a recency bias when evaluating celebrities. In other words, if a person was famous during your lifetime – and especially within the past 5 or 10 years – there is the tendency to believe that people in the distant future will also fondly remember this star.

But that isn’t the way the world works. As every new generation is born, they begin life with a celebrity blank slate, so to speak. Yes, some parents may pass their love for a certain famous singer or actor down to their children, but this is very much the exception and not the rule.

The rules of celebrity provenance are clear. If you are interested in collecting autographs or celebrity-linked antiques, stick to those figures you firmly believe will continue to be household names 50 or 100 years from today. Just be aware that the list will probably be a lot shorter than you hope.

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Why You Shouldn’t Invest in (Most) Vintage Quartz Watches

Photo Credit (CC 2.0 license): Joe Haupt

Some watch enthusiasts have been looking at vintage quartz watches from the 1970s and 1980s as a collecting alternative due to the rising prices of vintage mechanical wristwatches. But does this make sense? Are vintage quartz watches investable?

In a word, no. With only a few exceptions, I don’t believe it is wise to purchase vintage quartz watches for investment purposes.

I do want to give you a caveat though. This is only my (informed) opinion. And there are many different opinions out there in watch land. Some collectors simply love vintage quartz watches and must own them.

And honestly, if you’re only buying for the pure joy of owning an original 1980s Casio G-Shock or 1970s Timex Electric Dynabeat, then have at it. Just don’t expect to make a fortune from your hobby. The secondary market almost always assigns a lower value to vintage quartz watches compared to similar-quality vintage mechanical watches.

In my opinion, there is one big reason why vintage quartz watches are an investment non-starter when compared to vintage mechanical wristwatches: longevity!

But in order to grasp why this is the case, we have to first understand the basics of quartz watch technology. Quartz wristwatches work like this:

1) A battery delivers power to a microchip embedded on a circuit board.

2) The microchip relays electricity to a tiny quartz crystal, causing it to vibrate at 32,768 Hz.

3) The microchip then measures these vibrations and converts them into electrical impulses.

4) The electrical impulses drive a tiny motor at a rate of 1 pulse each second.

5) The motor drives a small set of gears, which in turn move the watch hands (and any other functions the watch may have).

As you can see, the heart of a quartz watch movement isn’t really the quartz crystal, but is instead the microchip. And this is also where the Achilles heel of all quartz watches resides.

You see, solid state circuitry is a consumable component. Every pulse of electricity that goes through a circuit board degrades that electronic component little by little, regardless of how low the voltage might be.

This process, which is known as electromigration, is effectively imperceptible under normal circumstances. Although it is silently at work in every electronic device, including mobile phones, TVs, laptops and appliances, in most situations these devices become obsolete or suffer other, unrelated failures long before electromigration kills them.

Unfortunately, wristwatch aficionados are implicitly asking vintage quartz watches to last forever (or at least a couple hundred years). But because of electromigration, we know that won’t happen.

Instead, your vintage quartz watch will happily tick along with only the occasional battery change for a couple decades or longer. Then it will suddenly die without any warning.

And once a microchip dies from the effects of electromigration, there is no resuscitating it. It is toasted, finished, stone-cold dead.

Our modern consumer society has learned to live with this limitation inherent to integrated circuits. We don’t generally bother trying to repair modern electronics because, by their very nature, they can’t be repaired. The best you can do is swap out the dead microchip or circuit board for a new, compatible one.

Vintage quartz watches are no exception to this rule. Most are not serviceable because it was (correctly) assumed that it would simply be cheaper and easier to buy a new one when the inevitable finally happened.

Even if you are determined to restore your prized vintage quartz watch, getting a functioning replacement movement will become increasingly difficult as the decades pass. Eventually, you may be forced to substitute a modern quartz movement for an unavailable original movement. But at that point you are into dreaded Frankenwatch territory – a place no vintage watch collector wants to go.

Incidentally, this is an issue that also impacts the collectability of all vintage consumer electronics. I explore this topic more fully in an article titled “Will the Original iPhone Become a Valuable Future Antique?”

Quartz watches have another big durability issue as well. It isn’t uncommon for their batteries to leak, particularly if they’ve been sitting around unused for many years. Once a quartz watch’s battery leaks, it is almost a foregone conclusion that its movement is utterly destroyed.

This is in stark contrast to well-made mechanical wristwatches, which can sit abandoned in a drawer for a decade or longer and come out with few ill effects, other than needing a routine servicing.

Another largely unrecognized concern for quartz watch collectors is that early vintage quartz watches from the 1970s and early 1980s were nearly all over-engineered – a surprisingly common feature in products using new technologies.

For example, early personal computers were often housed in ridiculously thick steel chassis. This was because a computer could easily cost several thousand dollars in the 1980s, and you wanted to be sure yours didn’t break prematurely.

Now, you might be wondering to yourself how over-engineering could possibly be a bad thing. The answer is very simple; it leads to unrealistic expectations about product longevity based on customers’ experiences with the early, over-engineered models.

You can verify this phenomenon by perusing watch forums. There are dozens of different people posting about how their vintage quartz watch is still running like a champ even though it is 35 or 40 years old. What is left unsaid is that 1) those quartz watches were built to much higher standards than most quartz watches from the mid 1980s or later and 2) in spite of being over-engineered, the circuit boards in those vintage quartz watch movements are still being incrementally “used up” over time.

All quartz watches will inevitably fail one day, we simply don’t know when. My best estimate is that most quartz watches (even fairly cheap ones) will last 25 to 35 problem-free years. After that, I would expect a small (but still significant) percentage of the surviving population to fail every year until 50 to 70 years have elapsed, when there is only a remnant population left functioning.

Yes, mechanical wristwatches will wear out eventually too (as will anything with moving parts). But fine mechanical wristwatches are meant to be serviced. Any failed or worn parts can be swapped out with replacement pieces by a skilled watch repair technician – an avenue not open to most quartz watch movements.

In short, fine mechanical wristwatches are heirlooms that can be passed from generation to generation. Vintage quartz wristwatches, on the other hand, were meant to be disposable (albeit long-lived).

Vintage Men’s Rolex Oysterquartz Wristwatches for Sale on eBay

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As with every rule of thumb, there are exceptions. A handful of quartz movements are built to incredibly high standards. Two examples are the superb Grand Seiko 9F caliber, which has a 50 year service interval (excluding battery changes), and the magnificent Rolex Oysterquartz series, which is one of the most underappreciated Rolex calibers of all time.

However, these two quartz movements are very much exceptions. They are finished just as well as any luxury mechanical movement and were built to be serviced, unlike most quartz watches. They are also thermo-compensated in order to account for changes in ambient air temperature, which can (minutely) throw off the timekeeping of lesser quartz watches.

Consequently, these ultra-accurate quartz movement masterpieces are known as high-end quartz. They even feature regulating levers for precision tuning, something usually only found on quality mechanical watch movements.

If the circuit board in one of these quartz super-watches dies after many decades of reliable use, you would move heaven and earth to replace it! This is something no one would ever dream of doing with a run-of-the-mill quartz watch, and with good reason.

Grand Seiko 9F Quartz Movement Wristwatches for Sale on eBay

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I should also note that there are a few, non-masterpiece quartz movements that might be worth the attention of open-minded horologists. For instance, the tiny, yet robust quartz movements found in vintage Must de Cartier tank wristwatches are very well finished and quite reliable. But these make sense because they are the right movement (they were produced in-house via a Cartier/Ebel joint venture), in the right watch (the Must de Cartier tank was an iconic 1980s/1990s fashion watch), at the right price (Must de Cartier tanks rarely sell for more than $2,000).

In most instances though, you’re best investment is buying vintage watches with a mechanical heart. And I suspect many watch collectors are just fine with that.

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