A Failure of Investment Imagination

A Failure of Investment Imagination

I regularly read a website about overpriced West Coast real estate called Dr. Housing Bubble.  The site had an interesting exchange in the comments section of one of its recent posts.  One commenter encouraged people to contact their congressional representative and ask him (or her) to ban the foreign purchase of U.S. real estate.  A regular commenter then responded with this:

First of all I think any law like that would be thrown out by [the] courts. If Trump can’t ban radical Muslims from entering the country, good luck banning rich Chinese from buying homes.

Second, it is ridiculous to tell foreign people who want to bring money and invest it here “sorry we don’t want your money”. Actually ridiculous isn’t the right word…downright insane is a better description.

I wanted to highlight this quote because I feel it is emblematic of one of the greatest investing conceits of our age – a complete failure of investment imagination.  Investors gripped by this dread disease cannot fathom the possibility of a world that is significantly different than the one we currently inhabit.  To them we have reached the end of investment history, where current investing trends, tax laws and economic policies must inevitably persist forever.

But a failure of investment imagination can be hazardous to your wealth.  In fact, we are already beginning to see the slow disintegration of the old financial regime as economic pressure ratchets ever higher.

For example, in August 2016, the Canadian city of Vancouver instituted a 15% transaction tax on foreign real estate buyers.  In April 2017, the entire province of Ontario followed suit with a similar surcharge.  New Zealand has just instituted an even more radical policy than Canada, by completely banning the sale of existing homes to foreigners.

To believe that California real estate is somehow immune from these global developments is unrealistic.  Yet this Dr. Housing Bubble commenter, along with hordes of property buyers, thinks that U.S. real estate policies cannot possibly change.  And while this particular failure of investment imagination is about real estate, it is obvious that a similar mindset is ensconced in all asset classes.

In some ways this is a very natural, very human reaction to the post-Great Financial Crisis investing landscape.  For the last decade, markets of every description – stocks, bonds, real estate – have gone nowhere but up.  This has made investors complacent and entitled.  They cannot imagine a different world, because today’s world is the one they are getting rich in.  And they never want to stop getting rich.

The future, however, is likely to be far less forgiving than the present, particularly in capital markets.  The metaphorical ground underneath our collective economic feet is likely to shift in a profound, and possibly disturbing, way.  Due to a widespread failure of investment imagination, few people are prepared for this brave new world.

What changes will take place in the economy over the next few years?  To be honest, nobody knows.  The world’s central bankers are currently conducting the largest, most ambitious monetary experiment in human history.  As a result, we are in completely uncharted economic territory, and anybody who says otherwise has an agenda.  However, I do think there are a few events that we can reasonably assert will happen in one form or another.

First, I think it is highly likely that what has worked for investors over the past 10 years will stop working rather suddenly.  Risk-oriented paper assets, like stocks, REITs and high-yield bonds, which have marched relentlessly higher over the past decade, will abruptly lose favor.  This will be a tremendous shock to professional money managers and financial advisors, who have built their portfolios around these traditional investment classes.

Second, it is clear that the world will become increasingly localized as globalization at least partially reverses.  Money and goods will not flow across borders as easily as they once did, and, in certain situations, they may not flow across borders at all.  Neither major corporations nor mom and pop investors are prepared in the least for this eventuality.  I detail this concern at greater length in an article titled “Hard Assets in a World of Capital Controls“.

Finally, I believe the future will see a wave of corporate defaults as over-levered companies finally hit the limits of financial market credulity.  This will undoubtedly catch large numbers of sanguine investors off-guard.  Losses will be steep and the damage will be distributed across a wide range of historically “safe” investment strategies.

The flip side of today’s ubiquitous failure of investment imagination is that alternative assets, like bullion, fine art and antiques, have generally been overlooked.  The recent performance of these tangible assets has been rather modest compared to market darlings like crypto-currencies and technology stocks.  But then again, you won’t wake up one random Monday morning to discover that half the value of your bullion stash has been wiped out over the weekend.

This nightmare scenario, where the bid for stocks and bonds dries up suddenly, is called a discontinuous market.  And it could cause the major market indices to gap down by 10%, 20% or even more in a very short period of time – perhaps minutes.  Stop-loss or trailing stop-loss orders which would normally protect your brokerage portfolio would actually be detrimental in this situation, as they would force you to sell into the teeth of the panic.

These dark circumstances in which the previously unthinkable suddenly becomes fact, are, unfortunately, not just possible, but probable.  They are the natural side effects of highly distorting central bank policies that have gutted the middle class while simultaneously creating a new gilded age for the ultra-wealthy.  As frightening as this bleak future sounds, there is a way to protect yourself.  Undervalued hard assets represent a great opportunity to hedge market risks.  Don’t let a failure of investment imagination hobble your portfolio.

 

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Junk Collectibles – The Bane of the Antiques Connoisseur

Junk Collectibles - The Bane of the Antiques Connoisseur

One of the reasons I collect antiques is because I love high quality items.  Fine antiques are often made from some of the most durable, beautiful and desirable raw materials known to man.  This not only grants them an unmatched look and feel, but also a far longer useful life than whatever clutter you can buy at Walmart or Amazon.

But I don’t want to talk about fine antiques today.  Instead, I want to discuss the other end of the spectrum – the junk collectibles made from the nastiest materials conceivable.  Junk collectibles are the kind of banal stuff you’ll find piled knee-deep at almost every flea market, garage sale and swap meet in the country.  And they all have one thing in common.  They are almost always made from one of the unholy trinity of garbage materials: plastic, plywood/chipboard or cardboard.

Of these three undesirable materials, plastic is perhaps the most offensive.  Because it is cheap and versatile, plastic has been gradually repurposed to fill every niche in our lives over the last 50 years.  Whereas during the mid 20th century it was employed with a modicum of aesthetic and engineering care, plastic has since metastasized into a modern-day plague.

This trend has been especially apparent in the junk collectibles segment of the antique market.  A growing influx of collectibles into the marketplace are invariably made of plastic, as items from the 1970s, 1980s and 1990s slowly gain the attention of collectors.  For example, innumerable vintage toys, from Legos to action figures to Lite-Brites, were all made of plastic.  Other vintage collectibles as varied as movie memorabilia, wristwatches and kitchenware were also often made from plastic.

Now, you may ask why I hate plastic so much.  The reason is very simple: it doesn’t last.  Plastic ages very poorly over time, becoming brittle and often discoloring.  Sunlight and temperature extremes accelerate this process.  Plastic items don’t have to be used for very many years before they are covered in chips and cracks, or even deteriorate into a gummy mess.

So if you have an interest in late 20th century junk collectibles, you had better make sure to keep them in strictly climate controlled storage, far from the rays of the hated sun.  And you should definitely handle them as infrequently as possible too.  Most old plastic collectibles are fragile flowers, metaphorically speaking.

In contrast, fine antiques made from comparable organic materials, such as amber, bone, ivory, wood, tortoiseshell or antler, are surprisingly tough.  These kinds of antiques are often 100 to 200 years old, and despite having been dropped, mishandled or neglected for much of their lives, are often still in remarkably good shape.

Sadly, I wish I could restrict my diatribe to only junk collectibles made from plastics.  Alas, cheap composite wood products like plywood, MDF and chipboard have also done their part to contribute to the poor quality of vintage furniture.  Before the 1980s, pretty much all furniture sold was assembled in a factory by skilled craftsmen before being shipped as completed units to furniture stores.

However, it wasn’t long before IKEA burst onto the scene with its ubiquitous “flat-pack” or “ready-to-assemble” furniture.  What began as a good idea quickly devolved into a race-to-the-bottom in term of furniture cost, quality and looks.  Self-assemble furniture from the last few decades is yet another junk collectible, ultimately fit for little else than the landfill.

And then we come to the last of the three horsemen of the junk collectibles apocalypse – cardboard.  Cardboard has traditionally been used as a packing or container material.  In many ways, despite the obvious drawbacks of cardboard – fragility, coarseness and a lack of aesthetic appeal – I find it to be the most forgivable of substandard materials.  After all, cardboard rarely pretends to be something that it isn’t.

Huge swaths of junk collectibles incorporate cardboard in some way.  Any vintage item described as “new in box” by online sellers is invariably encased in a cheap cardboard sarcophagus.  Other collectibles, like vintage baseball cards, board games and select advertising media, use cardboard in a more central role.

Of course, even when dealing with lower quality materials, a distinction should be made between the better implementation of these materials before the 1970s and the horrifically cheap standards in place today.  Plastics are the best example of this trend.  From the late 19th to the early 20th century, plastics were considered the pinnacle of human scientific achievement.

Because of this, early plastics, like celluloid, Bakelite and Galalith, were judiciously used in some very high value items, where appropriate.  Likewise, plywood might be discreetly deployed as an unseen, purely structural member in a piece of otherwise fine Mid Century furniture.  Even cardboard was generally fabricated to a higher standard before the 1970s, although this material definitely has its limits.

But since the 1970s, cost cutting has emboldened product manufacturers to progressively cheapen products in every dimension possible.  Striving to shave a few pennies off the unit cost of goods eventually led to the pervasive use of cheaper, thinner plastics and cardboards.  Plywood, along with other wood composites, became far more widespread in furniture, as well.  As a result, the last few decades of the 20th century have left us an abominable legacy of junk collectibles.

The really sad thing about all this is that many people under the age of 40 have never experienced high quality consumer goods.  While unfortunate, this situation is unlikely to change anytime soon.  Of course, that only makes high quality antiques all the more desirable.  Once you see and touch true quality, you’ll never want to go back to using junk goods ever again.

 

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Limited Edition Landscape Woodblock Print Titled “Snow Day”

Limited Edition Landscape Woodblock Print Titled "Snow Day"
Photo Credit: starkeyart

Limited Edition Landscape Woodblock Print Titled “Snow Day”

Asking Price: $250 (price as of 2018; item no longer available)

Pros:

-This captivating limited edition winter landscape woodblock print was made in March 2015 by the artist Andrea Starkey and is titled “Snow Day”.

-This contemporary landscape woodblock print measures 21 inches (53.3 cm) wide by 10 inches (25.4 cm) tall, with an additional one inch (2.5 cm) wide border around the entire work.  By the time you frame it, this work will be impressively large, perfect for hanging over the living room couch or the fireplace mantle.

-Andrea Starkey is a self-taught artist from Dayton, Ohio who took up printmaking in 2008.  Since then she has become accomplished at Moku Hanga style reduction prints.

-Moku Hanga is the Japanese term for woodblock printmaking.  Most contemporary Moku Hanga style prints created by Western artists concentrate on traditional Japanese themes, such as landscapes, animals or nature scenes.

-A reduction print is made in several discrete steps using a single block of wood (or other printmaking material).  The artist carefully carves the wood with razor-sharp printmaking tools until the first pass is ready.  Then the woodblock is inked and impressed on the paper.  This process is repeated for each different color, shade or tint applied.  The “Snow Day” print pictured above involved at least 15 separate reduction steps.  A good visual representation of the reduction process can be found on this website.

-It is hard for a monochromatic or grayscale print to have that eye-popping “wow” factor.  Color inherently holds the human gaze more easily.  However, this contemporary winter landscape woodblock print by Andrea Starkey is a grayscale masterpiece that up-ends that logic.

-“Snow Day” is an award winning artwork, having won 1st prize at Kettering, Ohio’s 2016 landscape art competition, The View.

-This winter landscape woodblock print was limited to a very small edition of only 28 total copies: 20 examples with a margin and 8 without a margin.  This small original print run increases the chances that this work will appreciate in value in the future.

-Because it is a destructive process by its nature, reduction prints are always limited edition.  Unlike most types of prints, once a reduction print has been finished, it is impossible to go back and make more.  There will never be anymore “Snow Day” prints made.

-I love the flowing composition of this work.  It draws the viewer’s eyes through the forest and along the wooden footbridge.  In addition, the adept use of light and dark, combined with the exquisite level of detail, make this a compelling landscape woodblock print.  And, apparently, other people agree with me.  The artist only has a single copy of this print left for sale (out of 28 originally) in her Etsy shop.  At only $250, it is a steal.

 

Moku Hanga Style Prints By Andrea Starkey for Sale on Etsy

(These are affiliate links for which I may be compensated)

 

Cons:

-Buying contemporary art for investment purposes is always a gamble.  I love this work and think it has a lot of investment potential, but I would only advise you to purchase it if you are aesthetically drawn to it.

-If you intend to hang this stunning winter landscape on your wall, prepare to pay anywhere from $100 to $250 for framing costs.  This would raise the total cost of the piece to $350 to $500, which is still a bargain, in my opinion.

 

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Art and Antiques as Perpetual Assets

Art and Antiques as Perpetual Assets

Most of us are looking to invest our retirement funds in asset classes that stand the test of time.  When we access our money 10, 20 or 30 years in the future, we not only expect it to still be there, but to have also grown.  In other words, we want to buy perpetual assets.  This investment philosophy is best summed up by the famous Warren Buffett quote, “Our favorite holding period is forever.”

In order to achieve this end, Warren Buffett invested primarily in common stocks.  And an entire generation of investors eagerly followed his lead without really understanding the mechanics behind it.  Both Wall Street and the general public have completely embraced the idea of “stocks for the long run.” As a result, we are currently overrun with stock-oriented mutual funds, ETFs and hedge funds.  In fact, there is a very good chance that your workplace 401-k plan is dominated by equity funds, with only a single money market fund and maybe one or two bond funds as alternatives.

But the idea that you can robotically dump your retirement savings into stocks and expect eternal 10% returns as if it were a fundamental law of nature is hopelessly misguided.  The sad truth is that a great deal of the success of stock-based investing over the course of the 20th century is attributable to an accident of timing.  Simply put, the mid 20th century was a great time to buy the broad U.S. stock market.  Valuations were modest and the country had many decades of strong economic growth ahead of it.  This combination of variables essentially assured the stellar stock market returns we have seen over the last several decades.

But, unfortunately, stocks are not the perpetual assets that most of us were hoping for.  The Dow Jones Industrial Average lays bare this truth.  Founded in 1896 by Charles Dow, the DJIA is one of America’s oldest and most venerable stock indices.  Of its original 12 components, only one, GE, is still in the index today.  All the rest of the original DJIA companies have either been acquired as their business prospects declined or gone bankrupt.  In fact, the DJIA’s constituents have changed 51 times since the index’s inception.

The DJIA’s high turnover isn’t exceptional either.  Stocks in the S&P 500 index only have an average lifespan of around 15 years today, a massive decline from the 67 year average lifespan of a listed U.S. company in the 1920s.  And there have been a parade of bankruptcies over the past 30 years involving formerly iconic American companies, including Eastman Kodak, General Motors and Texaco.  And this list excludes the slew of storied financial firms that disappeared during the Great Recession of 2008-2009.  The idea of treating stocks as perpetual assets suddenly doesn’t look so smart anymore.

However, there is an asset class that doesn’t face the prospect of bankruptcy.  It has been treasured and coveted by the elite of society for hundreds of years.  This asset class has been a reliable store of value for the wealthy and powerful for century after century.  I am talking about real perpetual assets – fine art and antiques.

The famous Sancy Diamond illustrates this point superbly.  This faintly-yellow gem of just over 55 carats was most likely mined at the renowned Golconda diamond mines in medieval India, although its true origins are lost to the mists of time.  It’s first recorded historical appearance was in 1570, when the diamond came into the possession of its namesake, the French diplomat Nicolas de Harlay, seigneur de Sancy.

Over the centuries the glittering Sancy Diamond has passed through the hands of much of Europe’s royalty, while simultaneously escalating in value.  It sold for £25,000 in 1657, £80,000 in 1828 and £100,000 in 1865 before finally being sold to the Louvre Museum for $1,000,000 in 1978.

The gem’s long term performance is made all the more impressive by the fact that the British Pound suffered almost no inflation between the early 18th century and the 1930s.  In addition, I strongly suspect that the diamond’s final sale price of $1,000,000 might have been discounted as a gift to the most famous museum in the world!  In any case, as perpetual assets go, the Sancy Diamond has an impeccable 400 year long (and counting) investment track record!

Of course, less expensive antiques and fine art also enjoy all the benefits of perpetual assets.  Ultra-rare pattern coins, antique silver cigarette cases, and vintage fountain pens are just a sampling of the fine antiques that are accessible to savvy investors right now at reasonable prices.  Once purchased, these perpetual assets will continue to accrue value for decades and decades to come.

Although it is little recognized in the investment world, fine art and antiques behave a lot like zero coupon bonds.  A zero coupon bond makes no interest payments during its life, but is issued at a discount to its face value.  The difference between its discounted purchase price and the bond’s ultimate redemption at full face value is the investor’s profit.

Antiques replicate this zero coupon bond effect, albeit without any explicit face value.  Investment grade art and antiques have a tendency to gradually and steadily rise in value over long periods of time.  This means that an antique purchased today will most likely sell for a higher price tomorrow.  And the longer you hold an item, the higher its eventual sale price will probably be.  As an added bonus, fine art and antiques also possess implicit inflation protection – a vital attribute when looking for perpetual assets to invest in.

Whether we realize it or not, most of us are looking to place perpetual assets in our investment accounts.  Most people don’t want to be bothered with having to constantly check on their investments to make sure they haven’t spontaneously combusted.  And, unfortunately, spontaneous combustion, otherwise known as bankruptcy, is an unsettlingly common feature of the modern stock market.  The Sancy diamond might be forever, but publicly listed companies are decidedly not.  Fortunately, you can avoid the modern-day stock market casino by investing in fine art and antiques.

 

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