My favorite historical anecdote—and one that every investor should be forced to acknowledge reading before opening a brokerage account—dates to the era of the South Sea Bubble. A charlatan whose name is lost to history, published a prospectus for “A company for carrying on an undertaking of great advantage, but nobody to know what it is.”
Yes, some 18th-century two-bit hustler launched an IPO for a company with a “top secret” business plan, and British investors actually gave him money. If contemporary accounts are true, he took the money and fled to Europe, never to be seen or heard from again.
As a student of market history, I’ve come away with one enduring observation: investors can bephenomenally stupid. Whether it is profitless social media stocks, Miami condos, or, if you want to go old school, decorative tulip bulbs, there seems to be no limit to the force with which otherwise sane people will suppress rational thought in order to throw away their hard-earned money.
- Warren Buffett Recent Buys
- Warren Buffett's Current Portfolio
- This Powerful Chart Made Peter Lynch 29% A Year For 13 Years
But as crazy as stock market bubbles can be, they really don’t compare to collectibles crazes. A share of stock represents a claim of ownership in a business that, however implausibly, could someday generate real profits. A collectible’s value, on the other hand, rest entirely on your ability to someday sell it to a greater fool.
In some cases—think Renaissance paintings—collectibles have maintained their value over time and proven to be fantastic investments. Others…well, let’s just say that Star Wars Happy Meal toys might not be as good of investments as Old Masters.
Let’s take a look at two high-profile collectible bombs of recent decades, and then I’ll offer a little guidance on how not to fall victim to the next collectible fad.
I’ll start with one that I myself fell victim to in my late childhood: baseball cards.
I loved baseball as a boy and would subject my poor father to hours of inane player statistics. (He showed remarkably patience…a virtue I hope I can repeat when my own sons get old enough to badger me with meaningless statistics from the hobby of their choice.)
In the days before the internet, baseball cards were the perfect way to access years’ worth of player statistics, and I legitimately enjoyed organizing my cards into albums…and spending hours thumbing through the albums.
Then, somewhere around the late 1980s, it all got adulterated. Baseball cards ceased to be a little boy’s objects of adoration and become “investments.” I stopped touching my “valuable” baseball cards for fear of degrading their mint condition, choosing instead to encase them in hard-shell plastic cases. I subscribed toBeckett Baseball Card Monthly, the authority on baseball card prices, and read it religiously. I also stopped buying packets of cards as prices rose, choosing instead to buy individual cards of the most valuable players. Not my favorite players, mind you, but rather the players whose cards were the most valuable at that time.
By the ’80s, baseball card values were rising beyond the average hobbyist’s means. As prices continued to climb, baseball cards were touted as a legitimate investment alternative to stocks, with the Wall Street Journal referring to them as sound “inflation hedges” and “nostalgia futures.” Newspapers started running feature stories with headlines such as “Turning Cardboard Into Cash” (theWashington Post)…
Precious few collectors seemed to ponder the possibility that baseball cards could depreciate. As the number of card shops in the United States ballooned to 10,000, dealers filled their storage rooms with unopened cases of 1988 Donruss as if they were Treasury bills or bearer bonds. Shops were regularly burglarized, their stocks of cards taken as loot. In early 1990, a card dealer was found bludgeoned to death behind the display case in his shop in San Luis Obispo, Calif., with $10,000 worth of cards missing.
It was a full-blown speculative mania. And like all speculative manias, it didn’t end well. High prices encouraged a massive increase in supply of the “investment,” no different than in the internet mania of the 1990s or the South Sea Bubble I mentioned at the beginning of this article, when companies couldn’t dilute their stock fast enough to meet investor demand . As Jamieson continues,
Unfortunately for investors, each one of those cards was being printed in astronomical numbers. The card companies were shrewd enough never to disclose how many cards they were actually producing, but even conservative estimates put the number well into the billions.One trade magazine estimated the tally at 81 billion trading cards per year in the late ’80s and early ’90s, or more than 300 cards for every American annually.
At some point, something just clicked in my mind and collecting baseball cards lost its appeal. There was nothing enjoyable about having to elbow my way past sweaty, bearded, middle-aged men to bid for a piece of cardboard encased in glass. The massive influx of new “premium” card series were hard to keep track of and, in any event, out of my price range. And frankly, as I entered my teenage years, I discovered girls and pretty well lost interest in anything related to baseball statistics. The baseball card bubble crashed soon thereafter, and my “valuable” investments became all but worthless.
New baseball card sales were a $1.5 billion industry in 1992. Today, the number is closer to $200 million, a drop of nearly 90%, and that does not include the effects of inflation. The number of baseball card shops has shrunk from over 10,000 to less than 200. And the value of all of those premium Upper Deck baseball cards? You’d be lucky to get a couple cents for them.
I was thankfully too old to have ever played with a Beanie Baby and too young to have ever purchased one for my kids. But I remember the Beanie Baby Bubble well, and it is as baffling to me today as it was in its mid-1990s heyday.
Beanie Babies were adorably cute bean-bag toys for babies and small children, and I understand their appeal—as toys for children. How this became an investment fad for otherwise sane adults is something sociologists are no doubt still studying, but one family famously lost $100,000 when the bubble burst about 25 years ago. And that’s $100,000 in late 1990s dollars. Tack on another 30%-40% to get an estimate in today’s dollars.
John Aziz gives a nice telling of the Beanie Baby Bubble story here. Beanie Babies were originally marketed as affordable toys for children, usually priced around $5. But because they were originally sold at smaller stores and had a certain aura of exclusivity about them, they quickly became an object of speculation. And the enabling tools of speculation soon followed: baseball cards had Beckett Baseball Card Monthly; Beanie Babies had Mary Beth’s Bean Bag World, which at one point had a circulation of 650,000 readers.
What made people believe that Beanie Babies had value? Part of it was artificially constrained supply. The manufacturer intentionally kept production down to create an air of exclusivity (yes…in a beanbag toy). Beyond this, it was a case of rising prices begetting rising prices. The high prices attracted new speculator, who in turn sent prices even higher.
At some point, there were not enough new buyers to keep prices rising, and the bottom fell out. Today, “investment grade” Beanie Babies that once sold for hundreds or thousands of dollars can be had for less than $10. Which, after all, is a fair price for a cute toy made to be played with by young children.
So, how can you know ahead of time if a collectible is an enduring masterpiece or a ridiculous fad that will make you an object of ridicule among your closest friends and family?
There are no hard and fast rules here, but I would give two broad guidelines to consider:
- The rarity of the object in question, and
- What drives its perception of value.
I’ll start with rarity. Rarity is not a guarantee of high prices, but it is definitely a precondition. The mass-produced baseball cards from the late 1980s are all but worthless, but truly rare baseball cards have actually held their value surprisingly well. A 1909 T206 Honus Wagner card can be expected to clear well over $1 million at auction.
This brings me to perception of value. Rarity alone does not make the Wagner card valuable; there has to be something that makes the object special. Among baseball aficionados, Wagner was considered to be one of the all-time greatest players. And there is a mystique about the card itself because Wagner ordered its production stopped; he was uncomfortable with the fact that his image was being used to sell tobacco to children.
The same is true of paintings. And Old Master is priceless because of its rarity but also for its beauty, the quality of the artwork, and legendary status that the painters have acquired with the passing of time.
So, before you consider investing in collectibles, ask yourself: Is the object sufficiently rare, and has its perception of value withstood the test of time?
But beyond this, I would offer one last piece of advice. Don’t view a collectible as an investment at all or you lose that “special something” that make it valuable to begin with. Buy it because of the way it makes you feel, with the assumption that, even if its monetary value fell to zero, it’s still something you’d proudly display in your home.
About the author:
Mr. Sizemore has been a repeat guest on Fox Business News, quoted in Barron’s Magazine and the Wall Street Journal, and published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures and Options Magazine, and The Daily Reckoning.