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Better International Investing through Antiques

Better International Investing through Antiques

International investing is a theme that has been relentlessly pushed by financial professionals over the last 25 years. Many financial advisors have jumped on the bandwagon too, advising their clients to invest a portion of their investment portfolios overseas. And there are plenty of investments to choose from. Mutual fund giants, like Vanguard and Fidelity, have dozens of funds and ETFs dedicated to everything from emerging market small cap stocks to foreign sovereign bonds.

According to the experts, the main advantage of international investing is diversification. It gives you exposure to other countries that may be experiencing much faster economic growth than your home country. In addition to gaining outsized growth abroad, foreign investments may also be non-correlated to your domestic investments, thus reducing your portfolio’s overall volatility.

But there are substantial risks in international investing that most asset managers don’t like to talk about. Foremost among these is political risk. This is the possibility that a foreign government might change its laws in ways that disadvantage a business operating in that country. Revised laws can be relatively minor changes, like new certifications or filing requirements, or they may be major impairments, such as the imposition of heavy new taxes or strict environmental standards.

In its most extreme form, political risk manifests as nationalization or state-sponsored confiscation. This is actually a far more common occurrence in history than many people might first believe. Wikipedia lists literally dozens of major nationalizations that have occurred since the beginning of the 20th century, and this catalogue is by no means comprehensive. While some of these nationalizations only occurred after companies had already failed, many others were outright confiscations, with either no, or utterly inadequate, compensation paid to foreign shareholders.

For today’s international investors, uncompensated nationalization may seem like a distant and unrealistic threat. But it would not be wise to be too sanguine. Such sovereign confiscations were absolutely commonplace in the politically tumultuous 1930s and 1940s. However, after the end of World War II, a new global trade system was established with the United States at its core. This new system has become known as the Pax Americana and it has reduced the number and severity of international property disputes to negligible levels in the modern era.

Unfortunately for those wishing to diversify through international investing today, the Pax Americana is slowly dying. This means that the world will experience far more international turmoil, trade disputes and political maneuverings over the next few decades than most of us have experienced in our lives to date. In this sort of environment, the partial or complete confiscation of assets by foreign governments will undoubtedly become a fact of life.

The terminally optimistic may counter that investing in foreign debt does not carry the same risk of nationalization that foreign equities have. While this assertion is largely true, international investing via bonds has its own unique problem – currency exchange rate risk.

There are two different kinds of foreign bonds that an investor can buy. The first is local-currency denominated bonds. These are bonds issued in a country’s home currency. So, for example, the Indonesian government might issue bonds denominated in Indonesian rupiah, or Brazil might offer debt denominated in Brazilian real.

The second kind of foreign bond is called hard-currency debt. These are bonds issued by foreign governments or businesses in an internationally accepted currency, like the U.S. dollar, British pound or euro.

The value of local-currency denominated debt is highly dependent on the goodwill of the foreign government in question. A foreign central bank can, at its government’s direction, print large quantities of the local currency, thus radically reducing the foreign exchange value of your local-currency bond.

Hard-currency bonds aren’t perfect either. Foreign countries that run into financial problems can easily print their own currency, but can’t print hard currencies. Although this preserves the foreign exchange value of hard-currency debt, it doesn’t help the issuer get any more dollars, pounds or euros to pay its obligations. As a result, some foreign issuers of hard -currency debt, especially those from emerging market countries, have a tendency to default.

While traditional international investing may sound hopelessly risky, antiques are an often overlooked way to enjoy the benefits of foreign diversification without the twin political risks of nationalization and currency depreciation. If you purchase antiques from a foreign country, you will have physical possession of tangible assets that will fluctuate in value based, at least in part, on how well their country of origin performs economically.

The theory behind this unconventional approach to international investing is not idle speculation either. Anyone who purchased high quality Chinese antiques on the cheap in the 1980s and 1990s is now sitting on a veritable fortune. As China became progressively richer over the last couple of decades, newly wealthy Chinese entrepreneurs and businessmen have begun buying back fine Chinese antiques that were exported overseas a century or more ago.

Investor behavior in other foreign countries works much the same way. As a nation’s population becomes wealthier, they typically develop a keen interest in their own history and culture. Antiques from a country that is economically successful will naturally benefit from this trend. In fact, a very similar relationship between national GDP and collector’s coin prices has already been well established.

Antiques grant a tremendous amount of flexibility to the aspiring overseas investor. For instance, an international investor interested in diversifying into the dynamic Mexican economy could target Mexican sterling silverware. Silver has been mined commercially in Mexico for 500 years. As a result, Mexican silversmiths have had ample time to perfect their art. Ravishingly gorgeous Mexican sterling silver is both functional and beautiful simultaneously.

Those excited by the rising economic presence of the Indian subcontinent might be interested in antiques from the Mughal Empire. The Mughals ruled India for 200 years, from the mid 16th century until their kingdom disintegrated in the 18th century. I especially like silver Mughal rupee coins as Indian-oriented investments due to their rich history, elaborate calligraphy and reasonable prices.

Of course, more developed economies like Great Britain, Germany and France are also well represented in the field of overseas antiques. Vintage European items are a mainstay of the global antiques market because of their superlative quality and enduring beauty. Good quality European antique jewelry, silver, art medals and objets d’art are all highly desirable pieces that could add safe international diversification to a traditional asset portfolio.

I believe that international investing is a sound strategy. But I also think it is wise to mitigate investment risks whenever possible. Antiques allow the savvy investor to reap the substantial benefits of international asset exposure without the worry of foreign political risks like nationalization or rapid currency depreciation.

 

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China and the End of Nice Things

China and the End of Nice Things

Last week my dishwasher broke. A 10 cent piece of plastic that held one of the baskets in place did what all plastic eventually does – it shattered. Disbelief quickly turned to anger when I remembered that I bought the appliance only 3 and 1/2 years ago. All I could think about was that if the manufacturer had spent a few extra cents on that inadequate plastic bit, my dishwasher would still be completely functional.

Unfortunately, the present-day trend toward poorly made consumer goods doesn’t look like it is about to end anytime soon. And there is one nation at the epicenter of this problem – China. China is by far the world’s largest producer of cheap and nasty consumer goods. The Western World, particularly the United States, imports container ship after container ship of their substandard products onto our shores every year. China is the reason we don’t have nice things anymore.

I realize that this assertion is a bit of an oversimplification. After all, giant multi-national corporations have moved their manufacturing capacity to China because it is generally the cheapest place to produce goods. If China didn’t exist, our corporate overlords would have relocated to some other sweatshop country, like Vietnam or Bangladesh.

And yet, the idea that Chinese manufacturing and nice things are mutually exclusive isn’t so farfetched. Since 2013, China has been the world’s largest producer of manufactured goods, with over 23% of global output. In spite of its manufacturing prowess, however, China is nowhere to be found when it comes to finely crafted luxury goods and other high quality items.

This is a shocking revelation when one considers that China became the world’s largest market for luxury goods in 2012. But wealthy Chinese generally don’t purchase Chinese-made luxury goods. Instead, they buy foreign branded and manufactured nice things.

Foreign brands, like Burberry, Cartier, Piaget, Louis Vuitton, Bulgari and Coach, are snapped up by Chinese citizens because they are considered to be the best quality luxury goods available. And these international luxury brands are inevitably not made in China. Rather, they are generally produced in traditional luxury goods production centers, like Italy, Switzerland, France, Germany, the U.K. and the U.S.

It isn’t a coincidence most global luxury brands have opted to keep their manufacturing capacity in developed countries intact. The Western World has a strong and unbroken tradition of fine craftsmanship stretching back hundreds of years. If you want the best of the best, the very nicest of nice things, then you want something from a small Italian or Swiss workshop where techniques have been passed down uninterrupted from generation to generation. What you don’t want is a cobbled-together, not-quite-luxury-item assembled by an overworked Chinese peasant slaving away in a Shanghai sweatshop.

Now there are a handful of exceptions to this rule. There are a few Chinese jewelry companies, like Chow Tai Fook and Chow Sang Sang, that produce very high quality goods. However, it should be noted that most of these Chinese luxury goods companies were founded in Hong Kong. This is notable because Hong Kong was a British colony for more than 150 years, from 1841 until 1997. As a result, the native population of Hong Kong absorbed certain British cultural traditions, including a healthy respect for high quality craftsmanship and a general appreciation of the effort and pride necessary to create truly nice things.

Chinese jade carving is another luxury tradition that 40 years of oppressive communist rule on the mainland managed to decimate. Even today, most jade carving in China takes place in the city of Shenzen, which is located immediately adjacent to that most culturally distinct of Chinese cities, Hong Kong. While some jade carvings that come out of China today are truly superb, far too many are derivative and uninspired. This is in stark contrast to the amazingly skilled and inventive jade carvings that are becoming the norm among Western artists.

The fact is that most goods, particularly mass-produced goods, from China are junk. A handful of wonderful Chinese luxury goods float in an endless sea of cheap Chinese garbage. But these sparse Chinese luxury goods are all too often exceptions to the rule.

Most of the time the Chinese response to Western luxury brands is to create knock-off, unlicensed imitations. China has become a global byword for poor quality control and shoddy goods. No wonder the Chinese buy foreign luxury goods!

It is not that the Chinese people are genetically incapable of making nice things. To the contrary, Chinese civilization perfected some of the world’s most enduring art forms many centuries ago. These masterpieces have ranged from ancient Shang dynasty ceremonial bronzes to superlative Qing dynasty jade carvings to instantly-recognizable Ming dynasty blue and white porcelain.

The problem is that modern Chinese culture does not value attention to detail, artistic excellence or customer satisfaction. Instead, the prevailing Chinese business culture views customers as a resource to be exploited. Any sales technique, regardless of how unethical, is deemed acceptable by Chinese suppliers bent on separating naïve Westerners from their money. Slipshod mass-production of aesthetically boring, derivative works is the order of the day in China.

As terrible as it sounds, the relocation of global manufacturing to the Middle Kingdom has led to the end of nice things for most Western consumers. I believe that this makes high-quality, well-constructed antiques even more desirable. Savvy investors should take note.

 

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Spinel – The Most Desirable Gemstone You’ve Never Heard of

Spinel - The Most Desirable Gemstone You've Never Heard of
Photo Credit (CC 2.0 license): derricojewelry

Let me tell you the story of how I came to fall in love with spinel, the single most underrated gemstone in existence.  Years ago I was visiting a gem dealer in downtown Boston.  I was looking around his display cases when I came across a visually stunning parcel of red gemstones.  When I asked the dealer what variety of jewel these gemilicious fiery red pomegranates were, he said one word: “spinel!”

I asked him how much he wanted for the smoldering red firecrackers.  “Normally, I would ask $200 a carat for the stones” he responded dejectedly.  “But since I can’t move them easily, I’ll sell any of them for $150 a carat.”

Luckily, I was smart enough to realize a great deal when it smacked me in the face.  I carefully looked over the grouping before choosing one of the largest, cleanest, finest specimens.  A vivid, deep cherry-red, 1.01 carat spinel for one and a half C-notes?  Sign me up!

Spinel is a gemstone that almost no one has heard of.  Neither celebrities, nor movie stars nor super models clamor to wear spinel jewelry.  And yet it is one of the most desirable gemstones in the world.

Now, I had been collecting gemstones for many years before my magical encounter at the gem dealer’s shop, so I already knew about spinel.  But I had never gone out of my way to buy any.  They had always seemed distant somehow, like a gemological footnote.

But as I stared at that parcel of nearly flawless, cherry-red stones in front of me, I realized what I had been missing.  You see, red spinel is, chemically speaking, the kissing cousin of ruby.  Ruby is made from the mineral corundum, or aluminum oxide (Al2O3), while spinel is composed of magnesium-aluminum oxide (MgAl2O4).  This means the two gemstones share very similar physical properties.

For example, both gems share nearly identical densities and hardnesses.  Their refractive indices are similar too, resulting in both gems possessing a strong, vitreous luster.  Due to their related chemical compositions, both ruby and spinel are extremely tough gemstones, making them perfect choices for jewelry that is often subjected to hard knocks or shocks, like engagement rings.

In fact, ruby and spinel are so similar to each other that throughout most of human history they were considered the same gemstone!  Two of the most famous gems in the British Crown Jewels, the 170 carat Black Prince’s Ruby and the 361 carat Timur Ruby, are actually spinels.  However, it was not until the mid 19th century that it was definitively determined that these legendary gemstones were not, in fact, rubies at all.

Unfortunately, the realization that ruby and spinel were completely separate gem varieties didn’t do anything good for the reputation of the latter gem.  While ruby spiraled ever higher in terms of value and esteem, spinels came to be viewed, quite unfairly, as inferior imitations.  Even today, a high quality red spinel can be purchased for only a tenth of the price of a similar quality ruby.

 

Natural Red & Flame Spinels for Sale on eBay

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However, the price disparity between ruby and spinel is one of the great injustices of the gem trade.  You see, rubies are incredibly rare, and that rarity is reflected in their price.  It also means that the gem industry has explored every avenue available to artificially “enhance” lower quality rubies in an attempt to increase the supply of salable material.  These treatments include dying, glass-filling, flux-filling and vanilla heat treating.  It is estimated that less than 1% of rubies on the market today are completely natural, with no treatments whatsoever.

Spinels however, do not respond well to the treatments that are commonly used on rubies.  Spinel also has little name recognition in the jewelry trade.  These two facts mean that there is little incentive for the jewelry industry to offer spinels to their customers.

As a result, any (non-synthetic) spinels available in the marketplace today are all-natural, completely untreated stones.  These gorgeous gemstones possess exactly the same color and clarity as when they were originally pulled from the ground as rough gems.  This is a shockingly authentic precious stone in a modern world largely driven by industrial scale manufacturing and synthesis.

Unsurprisingly, spinel comes in a variety of colors, which tend to mirror those available in the corundum family.  Cobalt, or blue spinel, is one of the most valuable types.  Cobalt spinel is named after the element, cobalt, which gives the gem its intense, deep blue color.  Prices for this cobalt-hued super-gem can easily run into the several hundred dollar range per carat.  Very fine examples can exceed $1,000 per carat.

 

Natural Cobalt Blue Spinels for Sale on eBay

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Red spinel, along with its lighter colored pink variants, is another color commonly encountered.  There is also a unique color combination known as flame spinel, where the red is modified by a strong secondary orange hue.  As discussed above, a good quality, pure red spinel can appear amazingly close to a fine ruby, except that it will 1) be completely untreated and 2) sell for a fraction of the price of a ruby.

Red spinels can have prices ranging from around $100 a carat to over $1,000 a carat for the very finest specimens.  In my opinion, red spinel is one of the most undervalued gemstones out there right now.

The third color that I believe merits special mention is purple spinel.  Although purple is a tremendously beautiful gemstone color, it gets no respect in the modern world.  This is puzzling, considering that purple has traditionally been associated with royalty.  In any case, purple spinel is nowhere to be found on today’s cultural or fashion radar, meaning you can pick up intense, richly hued specimens for about $100 a carat (or occasionally even less)!

 

Natural Purple Spinels for Sale on eBay

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There are other colors of spinels available, including greens, yellows and oranges.  But in addition to being rather uncommon, these miscellaneous colors also tend to suffer from strong grayish overtones that render the stones dull and unattractive.  If you are interested in buying a spinel for either jewelry purposes or as an alternative investment, I recommend sticking to the more vibrant blues, reds, pinks, and purples.  Remember, the purer and more intense the color, the more valuable the spinel.  But this rule of thumb only holds as long as the color doesn’t become so dark that it leads to extinction, or black patches in the gem.

I find it amazing that you can pick up these natural, vivid gemstones for such ridiculously low prices.  Right now you can purchase a fine blue, red or purple spinel for the same cost as a single share of Tesla ($351), Netflix ($290), Alibaba ($188) or Goldman Sachs ($268).  Of course, the key difference between the two investments is that a high quality spinel will undoubtedly gain in value over the next decade, while it is quite uncertain if any of the companies I’ve mentioned will still be in business.

 

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Are Antiques the Perfect Financial Legacy for Your Heirs?

Are Antiques the Perfect Financial Legacy for Your Heirs?

As we grow older, most of us eventually come to terms with our own mortality.  One of the fundamental truths linked to this realization is the fact that you can’t take it with you when you die.  As a result, many people are interested in leaving a financial legacy to their heirs.  That can mean bequeathing assets to your children, grandchildren, nieces, nephews, or perhaps just a good friend who was always there for you.

Of course a financial legacy can come in many different forms.  Real estate, like the family home or vacation house, is always a popular option.  Retirement accounts, like traditional and Roth IRAs, can also be given to a beneficiary upon the passing of the owner.  Annuities and life insurance policies are a third possibility for leaving a financial legacy for your loved ones.

And yet, all of these different wealth vehicles have drawbacks when estate planning.  Real estate is inherently cash flow negative unless it is rented out.  This leaves open the possibility that the recipient of an inherited property will be forced into the role of accidental landlord in order to support the maintenance and tax expenses on the property.  In a worst case scenario, your beneficiary may be forced to sell the property, defeating the purpose of bequeathing it in the first place.

Retirement accounts are (usually) cash flow positive, but suffer from complex distribution rules once inherited.  For example, IRA beneficiaries must generally drain the account within 5 years of the death of the original owner.  Alternatively, they can elect to receive regular distributions from the IRA based on their life expectancy.

As you can probably guess, a tax advisor or accountant is almost a necessity when dealing with inherited retirement accounts.  In addition, those accounts will most likely be stuffed full of conventional financial assets like stocks, bonds and mutual funds.  This exposes this type of financial legacy to the unpleasant prospect of an unexpected market crash or economic dislocation.

Annuities and life insurance policies are perhaps the most straightforward way of leaving a financial legacy to your heirs.  Life insurance makes a tax-free, lump-sum payment to your designated beneficiary upon your death, while annuities pay an annual income stream.  But these investment vehicles are only as good as their issuing institutions.  Yes, insurance companies are ostensibly regulated to ensure their financial health, but I would not put a great deal of trust in this fact.

AIG was one of world’s largest insurance companies, but that didn’t stop it from almost collapsing in the financial crisis of 2008-2009.  It was only due to herculean efforts on the part of the U.S. Federal Reserve that AIG was able to survive.  In the end, insurance companies pay policies off from their stock and bond holdings – investments from the same markets that are currently grossly overvalued.

This situation leaves many of us with a conundrum.  On the one hand, we want to give a meaningful gift to our heirs – a financial legacy that will help them achieve their life goals.  But many of the conventional choices available to us are deeply flawed, particularly in light of the financial markets’ extreme valuations.  Are there any financially stable estate planning options that will stand the test of time?

There is a simple answer to this question; antiques may just be the perfect financial legacy for your heirs.  These compact treasures have been coveted by the wealthy and powerful for centuries.  They are often crafted from the very finest materials known to man, including sparkling precious metals, glowing gemstones and lustrous hardwoods.  And perhaps best of all, many fine pieces are available for shockingly modest prices.

Of course, antiques have other estate planning advantages as well.  For instance, because they are physical objects, antiques can help keep less disciplined loved ones from foolishly squandering their inheritance.  This is an omnipresent problem with a traditional inheritance of cash or easily liquidated securities, where the temptation to spend on that new luxury car or fabulous European vacation always beckons.

In addition, most investment quality antiques are incredibly durable.  Regardless of whether it is antique sterling silverware, old designer jewelry or vintage mechanical wristwatches, these items are already 50, 100 or even 200 years old.  If they are properly cared for, there is every chance that they will last a few more centuries.  In fact, it is possible your heirs may eventually bequeath your fine antiques to their own children or grandchildren!

There are a few things you should be aware of before considering antiques as a financial legacy, however.  First, it is important that the item you wish to give an heir is something he or she would be interested in.  Don’t try to leave an expensive Art Deco platinum and diamond ring to your daughter if she only wears costume jewelry.  Likewise, an ancient coin collection would be lost on a grandchild who has no interest in ancient history or numismatics.

It is also vital that you make a list of who gets what.  The last thing you want is for your family members to fight over who inherits your treasured 14 karat gold Waterman Ideal No 552 fountain pen.  Better yet, consider slowly giving away choice pieces to chosen family members while you are still alive.  That way you can be certain that the right person gets the right piece.

Otherwise, it is critical to record your wishes in your will, or attach an addendum to your will listing your prized possessions along with the intended recipient.  It is also wise to keep meticulous records of each antique, so that your heirs understand just how special the items you are giving them are.  Remember, many people will not recognize an outstanding antique by sight alone.  A written catalogue identifying your antiques will help your family understand how special and meaningful your financial legacy really is.

But maybe the best reason to consider using fine antiques in your estate planning is because they are discreet assets.  In today’s digital world, any holdings of conventional financial assets, like stocks, bonds or real estate, should be thought of as public knowledge.  Your stock brokerage firm and its employees know about them.  The securities transfer agent knows about them.  The lawyer who prepared your will knows about them.

Even the government knows about your paper assets, or can find out about them with trivial effort.  Fine art and antiques, on the other hand, are one of the last forms of wealth that are almost completely private.

 

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