Investing

The smartest guys in the investment management business are often focused on some variation of a single theme.  They all want to discover the world’s most under-owned asset class.  And then they want to buy that magical asset – preferably a lot of it as cheaply as possible.

There is a simple reason for this unerring focus.  The widespread ownership of an asset class is usually inversely proportional to its future return potential.  Once a particular investment – regardless of whether it is a stock, bond or REIT – becomes well known, prices inexorably rise as the asset becomes more popular.  Everybody wants a piece of it, so to speak.  This phenomenon drives up prices as there is a frenzy to buy.

Once everyone does own their hundred shares though, it becomes less and less likely that the asset in question will continue to outperform other assets.  After all, there is a limit to how much Apple, Tesla or Bank of America stock investors are willing to stuff into their portfolios.  The resulting lesson is perfectly clear.  Relentlessly search out the most under-owned asset class and buy with both fists.  If you can patiently wait until it becomes popular, you will assuredly be rewarded with above average returns.

The only problem with this idea is that there is no good definition of “under-owned”.  After all, every asset must be owned by someone at all times.  They don’t simply disappear when no one is interested in them.  So when we discuss under-owned investments what we are really talking about is ownership distribution.  Under-owned assets have “lumpy” ownership distribution compared to popular assets, where almost everyone owns at least a little bit.

Now comes the big question.  What is the world’s most under-owned asset class today?  In other words, which asset class is not only unpopular but also has a lumpy ownership distribution, with most people having no significant investment position.  I think the answer to this question is obvious.  Investment quality art and antiques are the clear winner here.

First, investment grade art and antiques are not a well known or popular asset class.  Most people think you need to be a billionaire to build a meaningful art collection.  Or they think that fine antiques can only be acquired for a million dollars or more.  These myths are both false, but they have effectively prevented most people from fully exploring the investment benefits offered by this asset class.

Now I would like to conduct a thought experiment.  How many pieces of fine art and antiques are present in your household?  For most people the answer is zero; absolutely nothing they own could be mistaken for investment grade art and antiques.  For those people who do own some, it is typically not much.  In most cases it will be one or two separate, unrelated pieces.  And in most instances, these few investment quality specimens will have been inherited, not purchased.

Instead, high quality art and antiques are primarily owned by a select group of savvy connoisseurs and collectors.  These farsighted investors may only spend a few hundred dollars on a single item – and sometimes even less.  But they use their specialized knowledge of the field to pick out the very best antiques, leaving the dregs behind.

These discerning art and antique aficionados are building important collections bit by bit that, one day, will undoubtedly be worth large sums of money as the asset class becomes more popular.  Fine art and antiques are currently a grossly under-owned asset class destined for a high future rate of return.  And for those who are shrewd enough, it isn’t too late to get your share.

A rather disturbing thing has been happening in the investment world recently.  Interest rates have been going negative for short maturity – and sometimes medium maturity – sovereign debt.  This effectively means that “investors” actually pay governments to borrow money from them!  I use the word “investor” euphemistically in this context because paying for a guaranteed loss doesn’t seem like much of an investment to me.

And this phenomenon of negative interest rates has been spreading.  Countries such as Japan, Switzerland, Germany, Sweden, the Netherlands, Italy and Spain are currently (as of 2017) experiencing negative interest rates on short term government debt.  While other major countries like the United States, the United Kingdom, Canada and Australia don’t have negative interest rates yet, they certainly seem to be slouching in that direction.  It wouldn’t be a stretch to say that widespread negative interest rates in developed world sovereign bonds are almost an inevitability at this point.

This situation presents a bit of a conundrum to traditional investing strategies.  Classic balanced portfolios contain a mix of stocks and bonds.  But why would you allocate a portion of your money to investments like bonds that will earn you a negative return – a.k.a. a guaranteed loss?  Certain institutional money managers like pension funds, endowments and banks may have no choice but to accept negative returns for some of their investments due to their official mandates.  You and I are in a better position, however.  We, as individual investors, don’t have to accept this ridiculous situation.

Buying stocks is one obvious solution to sidestep negative interest rates.  But while this strategy isn’t completely without merit, it isn’t the panacea it may seem at first glance.  For one thing, stock valuations have risen relentlessly over the past several years already.  Much of this increase in price has been driven by falling interest rates.  Now that interest rates are already skirting zero in most developed nations, most of the easy money in equities has already been made.

This is especially true when one considers that negative interest rates reflect a weak global economy.  No rational investor will accept a negative rate of return on government debt if everything is fine, economically speaking.  So this proves, prima facie, that things are decidedly unbalanced in the global economy.  These inevitable future economic troubles, even if not apparent yet, do not bode well for the earnings potential of most stocks.

This leaves investors in a tight spot.  The traditional asset classes – stocks, bonds and cash – are either guaranteed money losers or carry substantial – some would argue unacceptable – risk.  What is a prudent investor to do?  Well, there is a little known alternative asset class that still sells at reasonable prices and has good return prospects: fine art and antiques.

Whether it is a gold encrusted Edo era Japanese lacquerware box or a weighty block of gem-quality, mint-green Guatemalan jadeite jade, art and antiques are endlessly captivating.  They unfailingly impart a sense of history, beauty and wealth to their lucky owners.  And most antiques are far more accessible than many people believe, too.  A few hundred dollars is usually enough to buy a compelling, elegant and historically important work of art.  Even as little as a hundred dollars can get your foot in the door.

Best of all, negative interest rates are nowhere to be found in antique-land.  Instead you can expect steady, moderate, positive appreciation for decades and decades to come.  Negative interest rates may be the bane of the modern investor, but there is no reason to feel intimidated into accepting them.  Fine art and antiques give a viable alternative to bubble-priced traditional asset classes that astute investors everywhere can appreciate.