Collectibles and tangible assets
Watches, art, wine and classic cars can rise in value. But they're hard to sell, trading them is expensive, and the return figures you read about them are often flattering.
Learning objective: After this lesson you can judge why watches, art and other collectibles are trickier as investments than they seem.
Stories about collectibles sound fantastic because they only report on the pieces that became expensive. The watches nobody wants anymore don't show up in any statistic.
Costs of collectibles
Then there are the costs. Auction houses often charge double digit percentages to both buyer and seller. Storage, insurance and care cost extra. If Tobias wins a watch at auction for €10,000 and pays a 12.5 percent buyer's premium, he's at €11,250. If the auction house takes another 12.5 percent when he sells, the watch has to fetch almost €12,900 just for him to get his money back. At five percent growth a year that takes a good five years.
Selling takes time
And selling takes time. You can get rid of a share in seconds. For a collectible you need someone who wants exactly that piece. That can take months, and at the wrong moment it doesn't work at all.
Hobby or investment
As a hobby all of this is perfectly fine. As an investment you need expert knowledge built up over years. Anyone who buys without it usually pays to learn.
Return figures for collectibles markets are often too rosy. The indices are usually based on the same piece being sold several times. Pieces nobody wants to buy anymore simply drop out. What remains are the winners. Experts call this survivorship bias. The return you could actually achieve is therefore often well below the published figure.
Trading costs in detail
The second big factor is trading costs. The buyer's premium and the seller's commission often add up to twenty to thirty percent of the hammer price at auctions. If the value rises by a mid single digit percentage each year, you need several years just to earn those costs back.
Unique items without income
Economically, collectibles are one off pieces that are hard to sell and not standardized. Dealers almost always know more than you. Where authenticity and condition are hard to check, a problem arises that the economist George Akerlof described using used cars as the example. Because buyers can't reliably tell quality, the price carries that uncertainty, and whoever knows less ends up paying for it.
Summary
- Return figures for collectibles show almost only the winners.
- Trading costs of twenty to thirty percent eat up years of value growth.
- Without expert knowledge, the dealer almost always knows more than you.
Did you get it?
Why are return indices for collectibles distorted?
Because they're based on resales. Pieces nobody wants anymore don't appear in them.
How high are trading costs at auctions usually?
Buyer's premium and commission together are often twenty to thirty percent.
What's the problem when dealers know more than you?
Authenticity and condition are hard to check. The buyer who knows less pays for that uncertainty.
Check your understanding
Your task
A print is knocked down at $5,000 and you pay a 10 percent buyer's premium on top. When you sell, the auction house keeps 10 percent of the hammer price. Work out the lowest hammer price at which you only get your money back, and by how many percent that is above $5,000.
Sources and further reading
- Economists Jianping Mei and Michael Moses (NYU Stern, creators of the Mei Moses art index) show in their study of repeat-sale artworks that such indices tend to be skewed toward pieces that retained value, so the reported return should be read as an upper bound rather than a realistic average. View source ↗