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The Demographics of Antiques

The Demographics of Antiques

The Greatest Generation, those who came of age during the Great Depression and World War II, are almost gone.  The few who remain are now in their 90s, if not older.  Those who followed them, the Silent Generation, have now entered old age, with even the youngest in their early 70s.  While little recognized, the gradual passing of these two generations has important implications for both collectors of, and investors in, 20th century antiques.  As we shall see, demographics are inexorably intertwined with the antiques market.

As people reach an advanced age, they tend to move to nursing homes or downsize to more convenient living arrangements.  They also sometimes die.  These life changes often lead to the dispersal of some or all of their personal estates – including items that are often of great interest to connoisseurs of fine 20th century antiques.  Furthermore, there is a direct relationship between the age of a person when his estate is liquidated and the age of items contained in that estate.

For example, throughout the 20th century it was common for middle and upper class families to gift a high end watch, pen, piece of jewelry or other fine luxury good to their children upon reaching adulthood.  This would often occur after graduation from high school or college, when the young adult was in his late teens to early twenties.  So it is reasonable to conclude that an individual’s accumulation of estate items usually begins around this age – 20 years old.  These personal goods eventually become tomorrow’s antiques, with the very finest of them reaching the status of investment grade.

Of course this analysis is slightly simplistic.  The average person will accumulate and dispose of many personal items – future antiques – throughout his life.  In addition, an individual may be gifted family heirlooms that are already 30, 40 or even 50 or more years old when given.  But the fact remains that most of the items an average person accumulates over his life will be purchased new, starting when he reaches age 20, give or take.

Average life expectancy in the United States – and most of the developed world, as well – is around 80 years.  Therefore, a little simple math lets us know that many of the items coming into the antique market today will generally be no more than 60 years old.  This is calculated by taking the average life expectancy of 80 years and subtracting 20 years, the starting age of accumulation.  This means that currently, in 2016, the bulk of antiques hitting the market from estate liquidations will be no older than the mid 1950s.  Demographics make this a near certainty.

The estate supply of iconic solid gold wristwatches, classic fountain pens, elegant sterling silver cigarette cases and other fine objets d’art from the 1920s, 1930s and 1940s is nearing exhaustion.  Yes, there will be exceptions; some people live to age 100 and never throw anything out.  The occasional investment grade Art Deco or Retro piece will still surface from time to time.  But the demographics are both established and inexorable; pieces from this era are becoming ever scarcer and more desirable.

This epiphany makes one thing absolutely clear.  If you are interested in investing in or collecting Art Deco or Retro antiques from the 1920s, 1930s or 1940s, do not delay.  Make every effort to buy as many high quality examples that you can find, as soon as possible.  The supply of these underappreciated works of art will only shrink further as the years roll on.

But there is a notable corollary to our initial conclusion.  Right now there are still ample amounts of vintage Mid-Century 1950s and 1960s items for sale on sites like eBay and Etsy at reasonable prices.  But this apparently robust inventory is really a temporary artifact of demographics.  The older generations who have these antiques stashed in their dresser drawers or buried in their closets are currently in the process of releasing them into the market en masse.  Within a mere 10 to 15 years these coveted Mid-Century antiques will also become increasingly scarce.  And their prices will undoubtedly increase significantly when that happens.  Invest accordingly.

Stocks Are Not Rare; Good Art Is

Stocks Are Not Rare; Good Art Is

Most of us save for retirement by diligently filling our 401-k and IRA accounts with common stock.  Regardless of whether we buy Ford, Apple or Citigroup for our accounts, we have been trained to believe that common stock always gives the best investment returns.  The mainstream financial media applauds and reinforces this conventional approach to investing, assuring us that we’ve made the right choice and that financial nirvana surely awaits us once retirement arrives.  The reality, unfortunately, is probably somewhat less sanguine than Wall Street firms would have you believe.

We would all like to think that when we invest in stocks we are acquiring something truly valuable and scarce in return for our hard-earned money.  Sometimes this is the case, but all too often it isn’t.  For example, most publicly traded companies have hundreds of millions or even billion of shares outstanding.  As of December 31, 2015, industrial giant General Electric has 9.44 billion shares issued and outstanding.  Online marketplace Amazon.com has 470.84 million shares in existence.  Copper miner Freeport-McMoran Inc. has issued 1.25 billion shares.

As if having a billion shares outstanding wasn’t bad enough, publicly traded companies can – and routinely do – issue more shares on a regular basis.  The reasons for doing so range from paying for bloated executive compensation packages to refinancing high interest corporate debt to acquiring industry competitors in a fit of ill-advised empire building.  In any case, you can rest assured that these highly dilutive bouts of corporate stock issuance will almost never be advantageous to existing shareholders.

The worst part about publicly traded companies is that they are often forced to issue additional shares of common stock precisely when they are highly stressed financially – during financial panics, for example.  This effectively means they heavily dilute existing shareholders in order to get the financing they need to keep the lights on.  I suppose the upside of this arrangement is that existing shareholders recover some value from what would otherwise be a bankruptcy case.  The downside, however, is that the company management gives away most of your equity stake in the firm for pennies on the dollar.  Oil and gas exploration companies are the latest object lesson in this dirty secret of the securities industry.

The one hundred shares you own in a publicly traded company makes you one of a very exclusive group of several million owners in the same company.  That is to say, when you buy common stock you are a member of a not very exclusive group at all.  The juxtaposition of stocks versus fine art and antiques could not be starker.  An investment grade antique is often unique – a one-of-a-kind item that has no peer in the world.  Even those antiques that aren’t unique will rarely have a total surviving population of more than a few thousand at most.  The equity markets, on the other hand, are literally flooded with billions and billions of shares of common stock, with the ever-present promise of many more to be issued in the future.  When stated in these terms, it becomes obvious why good art has not only appreciated so rapidly over the past couple of decades, but are likely to do so in the future as well.  I’m not so certain we’ll be able to say the same about common stock in most publicly traded companies ten years from now.

A Recent Trend in High Intrinsic Value Antique Jewelry

A Recent Trend in High Intrinsic Value Antique Jewelry

I have been interested in antique jewelry since the late 1980s.  Early during that time I developed an advantageous method of buying undervalued pieces.  Antique jewelry is typically highly illiquid and inherently difficult to value.  But an easy method of establishing a minimum base valuation is to sum the intrinsic values of each individual component of a piece of jewelry.  If you were to add up the bullion value of a piece of jewelry’s precious metals along with the value of all its mounted precious stones, you would have its base intrinsic value.  This calculation is both crude and oftentimes low because it completely ignores any collectible or artistic value the piece may have.  A truism of antique jewelry is that a genuinely fine piece will always be worth more than the sum of its parts.

My policy was to buy antique jewelry close to its base intrinsic value.  This investment philosophy was an excellent way to simultaneously limit risk and maximize potential gain.  And it served me well for many years.  I especially gravitated towards Art Deco and Edwardian jewelry; I not only liked the look of these styles, but they often possessed high intrinsic value components.  The intrinsic value of a quality piece of antique jewelry is usually concentrated in its large, precious stones.  Consequently my investment strategy was dependent on finding pieces mounted with sizable, high value gems.

Then the world changed.  Starting in the mid 2000s it rapidly became progressively more difficult to find pre-World War II examples that fit my criteria.  When you could find them, the prices were oftentimes prohibitively high, erasing the margin of safety I was trying to achieve by purchasing high intrinsic value pieces in the first place.  By 2010, it had become nearly impossible to acquire investable antique jewelry in this way.  I had to change strategies, but first I had to try to understand what had happened to the previously plentiful supply of high-end antique jewelry.

Upon reflection, I came to believe that part of what drove the sharp price increases for high quality Art Deco, Edwardian and Victorian jewelry was the realization that the rubies, sapphires and emeralds they contain are often exceptional, all-natural, untreated stones.  Antique jewelry used to be one of the few ways to acquire these types of coveted gemstones without paying exorbitant prices for certified stones from specialist gem dealers.  I think too many people caught onto this strategy and the supply of these pieces was quickly absorbed by the smart money.

In the end, I opted to modify my existing strategy.  Instead of exclusively buying pre-World War II pieces, I expanded my criteria to include more recent Retro, Mid-Century and Modernist styles.  I even started looking at jewelry from the 1970s and 1980s.  After all, these pieces will soon become the antiques of tomorrow.  In addition, I relaxed my constraints regarding intrinsic value.  I now consider and occasionally purchase pieces that have a higher proportion of connoisseur’s or artistic value.

Choosing high quality jewelry with strongly defined stylistic features is still paramount in my decision making, but now I have a significantly larger investment universe from which to choose.  It is possible to argue that my new strategy is higher risk than the old one.  While I certainly believe that is true, I don’t think the risks are significantly higher.  But by the same token, my old strategy was simply not functional anymore.  All the cheap, high intrinsic value, pre-World War II jewelry is gone now, and it is never coming back.

Investing, Compound Interest and the Ancient Lie

Investing, Compound Interest and the Ancient Lie

There is a vicious lie about investing that periodically makes the rounds in financial circles.  It goes something like this.  If, at the height of the Roman Empire around 100 AD, you were to have put one day’s wages into a savings account that earned a mere 2% interest, you would have an unimaginably large sum of money today.  This thought experiment is ostensibly supposed to impress the financially illiterate with the power of compound interest.  Instead, it demonstrates how out of touch denizens of Wall Street and other financial con artists are with the real world.

Let’s begin by dissecting the myth.  In the ancient Imperial Roman world, one day’s wages was approximately equal to a single denarius, a silver coin weighing about 3.4 grams.  This coin later became a unit of account that eventually turned into the medieval silver penny and, subsequently, the modern day copper penny most of us are familiar with.  In fact, before the decimalization of British currency in 1971, pennies were still abbreviated as “d”, short for denarius – a nod to their distant Roman ancestry.

So there are three ways to think of a day’s wages in Roman times.  First it can be viewed literally as 3.4 grams of silver.  We’ll round this down to 3.0 grams of pure silver to account for other, alloying metals in the denarius.  Second, if one is stingy, it can be viewed as a single, modern-day penny ($0.01).  Lastly, it can be conceived of as today’s dollar equivalent of a (non-skilled) day’s wages.  For this sum I’ll use 8 hour’s work at $8 an hour, equaling $64.

If you had invested $64 back in 100 AD at a 2% compound interest rate – never mind that the dollar wouldn’t exist for another 1700 years or so – today you would have the unbelievably large sum of $1,923,574,759,697,820,000.  That’s almost two quintillion dollars – enough to buy the entire world’s real estate (a mere $217 trillion dollars) 8,864 times over.  That is a nice way of saying that this scenario is a complete fiction.  If you had this much money you could theoretically buy everything and everyone on Earth and still have enough left over to buy Mars and some other planets as well.

So let’s be a little more conservative with our next calculation.  Let’s assume that you banked one modern day penny way back in Imperial Roman times and then let it compound for the next 1900 years straight.  Under this scenario you would end up with $300,558,556,202,784, or about $300 trillion dollars.  This is about 3.7 times the total amount of money in the world today – around $80 trillion dollars worth.  Once again, our parable is from a world of fiction.  There is no way such a large sum of money could ever be accumulated.

We have one more calculation to perform.  This time, we’ll deposit a modest 3 grams of pure silver into our fictional Roman era bank account and let is accrue at 2% per annum for the next couple millennia.  When we finally withdraw our deposit, we will find that it has grown to 90,167,566,860,835,300 grams of pure silver or just over 90 billion metric tons.  We should be elated by this good turn of fortune, until we realize that the total amount of extant silver in the world today is estimated at only 777,275 metric tons – not even one million metric tons.  It might be tough for our theoretical bank to pay out 116 times the amount of silver currently in existence.

So we are left with an excellent question.  If compound interest is so powerful, why didn’t any of our smart Roman, Celtic, Indian, Chinese, Persian or Mayan ancestors deposit a single day’s wages into a conservative bank account a couple thousand years ago so that we could all be obscenely rich today?  The answer is rather obvious.  There were no interest-bearing bank accounts in ancient times, and even if there were, the bank would have gone bankrupt long ago trying to satisfy our ancestor’s claim.

This is one of the reasons I’m leery of long-term, high return, pie-in-the-sky compound interest projections made by the Wall Street mafia.  You won’t get your 10% a year in stocks over the next 30, 40 or 50 years for a very simple reason – you can’t get it.  It is a physical impossibility.  And the charlatans who make you these dubious promises will be long gone – their pockets stuffed full of commissions and fees – by the time anyone figures out their game.

On the other hand, tangible assets like bullion, gemstones, art and antiques have a lot of excellent attributes absent from traditional financial assets.  Being physical, they cannot evaporate in the mathematically inevitable busts that must periodically occur in paper financial markets.  Nor can they be easily confiscated via government decree, provided you hold them personally.

And although they may not always earn phenomenally – and unrealistically – high returns, you can rest assured that tangible assets will generally earn you a fair return.  And they will do so steadily and predictably over the course of decades and even centuries.  Don’t fall prey to the lies of paper asset alchemists.  Ultimately, physical wealth is real wealth.  And real wealth is wealth you keep.