Perhaps you have heard the saying “possession is 9/10ths of the law”? People are beginning to realize just how true this statement is, particularly in regards to financial assets. For instance, the stock that you own in a corporation represents fractional ownership of the company.
At this point, most people don’t even get a pretty paper stock certificate. Instead your fractional ownership is represented by virtual digits somewhere in a server farm. The corporation’s appointed transfer agent is actually the entity that keeps track of who owns what. So why does all this matter?
It matters because sometimes, even in developed nations, owning an asset theoretically doesn’t always translate into owning it a real, permanent way.
For example, if the company you hold shares in goes bankrupt, the most likely outcome, after a lengthy bankruptcy reorganization, is for your common shares (fractional ownership) to be cancelled. Poof! Gone! Just like that. There is no compensation.
Don’t think it can happen to you? It happened to shareholders in previously illustrious companies such as Kodak, GM, Borders and Lehman Brothers. These were all well-known companies that were at one time leaders in their respective industries. It didn’t matter. All of their outstanding shares were eventually cancelled without restitution. This tragedy will undoubtedly repeat – quite legally – in the future.
Maybe you believe this warning doesn’t apply to you because your retirement account is stuffed full of bonds? Well, bondholders almost always take write-downs on their holdings during corporate bankruptcy proceedings as well. Sometimes unsecured creditors, like junior debenture (bond) holders, take losses of up to and even exceeding 90%! This is the unfortunate fate that RadioShack’s unsecured bond holders encountered in 2016.
But, you protest, I only invest in the safest bonds: government, state and municipal debt. Well, these conservative financial instruments aren’t as safe as they used to be either. Puerto Rico is currently in the process of trying to declare bankruptcy. Its triple tax exempt bonds, a perennial favorite with individual investors, are sure to receive haircuts (losses) in the near future.
Greece too, is struggling again with imminent bankruptcy after writing down its debt just a few years ago. While Puerto Rico and Greece are trailblazers today, many other local and national sovereigns are sure to follow in the tumultuous years to come. And unsuspecting investors are the ones who will suffer the loss.
Even savings accounts are no longer sacrosanct. The concept of “bail-ins” has been floated for banks under extreme duress in some countries. Under these circumstances, depositors would forfeit some percentage of their checking and savings accounts to help recapitalize the banking system.
Think it can’t happen? It already did in Cyprus and looks like a near certainty in Greece as well. Sure, it is the last strategy that politicians embrace when they can’t beg, borrow or steal anymore funding from anywhere else. But the fact remains that when things get rough, it is definitely still an option.
What is a prudent investor to do? Sell all your stocks and bonds? Withdraw your life savings from the bank and horde it under the mattress? I wouldn’t do that.
But I do believe that art and antiques offer a sophisticated, safe alternative to the legalized theft that can occur in financial markets. While the market value of any particular artwork will fluctuate, particularly in times of economic dislocation, the chance of it declining in value to zero is nil. And if you wait until any economic chaos subsides you have a good chance of recovering any theoretical losses. An antique can never be cancelled or restructured in bankruptcy. Art and antiques, unlike stocks and bonds, are forever.
