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Myth Busting - Part 1

Brian Wolfe

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Myth Busting, Part 1

 

I do hope no one will feel like I am being condescending with the way I have written this blog.  My intention was to treat the reader like a fellow GMIC member and therefore more like a friend than a stranger.  With this in mind treat the following in the manner in which it is intended and that is as a conversation between friends.

 

Myth Busters, a popular television program takes popular myths and “puts them to the test” and awards a rating of “Confirmed”, “Plausible” or “Busted”.  The show often concludes with something from the episode being blown to oblivion.  This is NOT one of those blogs.  We are prohibited from the use of explosive devices here in cyberspace as the resulting shock wave may cause damage to sensitive computer components.  Besides, you know if we started with lower grade controlled explosives it would only be a matter of time when someone from here at the Home Office would ramp it up to a thermo nuclear device and the magnetic pulse would undo all of Nick’s hard work getting the new server up and running smoothly. 

 

What I thought we’d take a look at is some of the commonly or uncommonly held beliefs, or myths, in the fields of collecting and within history itself.  Let’s start with collecting and specifically the myth that collecting anything, short of precious metals, is an investment.  First let me state that I am not economist or investment banker and my opinions are based on a good number of years of experience and observation.  Further, unlike many who will wax prophetic, I base my observations and resulting conclusions not on my mistakes in life but mainly on a few successes.  That should be somewhat of a refreshing change from, “don’t do what I’ve done”, (break into the music and lyrics from “The House of the Rising Sun”), to here’s what I found works and the mistakes of others. 

 

Collecting, and we will stick to militaria, should only involve disposable income.  Disposable income is the money you have left over after all the bills are paid and an appropriate amount has been invested (at least 10% of your income) into non-collectables investments.  For most people the concept of personal disposable income is more myth than reality.  If you have a mortgage, or more than one, or if you owe money for a vehicle or two, and after the bills are paid you have little to no money left over I can pretty well tell you that you DO NOT (yes I am shouting here) you DO NOT have disposable income.  If you are working two or more jobs to make ends meet... you may have guessed it...you don’t have true disposable income. Working yourself to death just so you can collect is a whole new set of problems – seek help. The credit card is not a form of disposable income either and certainly should never be used to finance a collection. 

 

I’ve often read or even heard first hand that a person is collecting as an investment.  An investment?  Perhaps that person should look up the definition of an investment. The last time I checked our investment portfolio and spoke with our investments banker there were no options for investing in collectables.  Hmm, should that perhaps be telling us something?  It’s a little like the myth of the ninja; if there had been ninjas as portrayed in films and books wouldn’t there be authentic ninja swords being offered for sale.  Ninja swords NOT made in China that is.  The clues are there just look for them...oh yes; they’re ninjas so I suppose their artifacts would also be invisible.  I knew I should have used zombies as an example!

 

It is a really a stupid thing to tell your wife that the purchase of the latest sword, firearm or medal etc. is a good investment.  She’s really not that dumb, or at least there will be a day of awakening when she realizes that the so called investment won’t bring in much more the 25 cents on the dollar of “investment”.  Think I’m mistaken?  Seriously, speak with an established dealer and see what he or she is willing to pay for your collection.  You will be most unpleasantly surprised; likely as not the offer will fall between 15 to 20 cents on the dollar.  That doesn’t mean you will realize $1.20 for every dollar “invested” but rather 20 cents, period. 

 

I recently sold a geological collection that took fifty years to amass, though I have not been seriously collecting for the past decade.  I offered it to a dealer at 25 cents on the dollar and at first he was hesitant, until he actually viewed what I had.  He usually pays the 15 to 20 cents on the dollar for collections but much of my collection was no longer available on the market due to many countries deeming the specimens as national treasures.  They are illegal to collect at the source now but previously collected specimens may be bought and sold.  I did manage to break even on some of the specimens I collected decades ago but for the most part I let them go “cheaply”.  Could I have sold them one piece at a time and realized more in the long run?  Sure, however, considering it took three trips with his van, packed floor to ceiling and wall to wall, in order to ship them to his warehouse, I would have to live to be 175 years old in order to sell the collection off piece meal.  Most large militaria collections fall under the same category.

 

I’ve heard of collectors claiming to keep their collection in a safety deposit box in the bank due to the value.  Ok, so you have purchased, as a source of investment, and rather than enjoying the collection it is hidden away in the bank.  What do you have, $20,000 tucked away in the bank vault, on which you need to pay a fee?  So in the end you might realize $4,000 to $5.000 dollars in total when you sell?  If that was going to put your child through university, I think little “bonzo” will be out looking for a job to foot the costs of schooling.  Here’s a tip. Let the kid work his (or her) way through university; this will accomplish a couple of things.  It will keep them focused on the goal and not on the parties. Plus they will have a better chance of a useful degree rather than a Masters in Norse Mythology and Interpretive Ancient Babylonian Folk Dancing if they are working to pay for their own education.  Yep, I’m a cold hearted bastard. 

Here’s a thought.  Once the last child has graduated you can give them all cheques for the amount of their initial student loan, provided you can afford it, and haven’t “invested” in cornering the market on WWI Polish Victory Medals. 

 

I hope that those reading this blog are indeed in a position that they have their youth and have true disposable income now. It took me a long time and a lot of work.  I also hope that you are collecting because it makes you happy and you have kept the investing myths out of the hobby.

 

Next time I won’t be so preachy and we’ll discuss some of the myths attached to history and the artifacts themselves.

 

Happy collecting.

Regards

Brian

 

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Brian disposable income is what you buy beer with, overdrafts or credit cards are what you fund your collection with, as every collector knows must have items only turn up when you are broke..

Paul

 

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Hi Paul,

 

Thanks for your comments.  I was contemplating touching on “financing” certain additions to a collection and then thought that I may end up sounding like I was contradicting what I had earlier said about not collecting “on the card”.  If an item comes up and the only way you can obtain this rarely offered specimen then the only option may be to “finance” it.  This doesn’t mean put the cost on the credit card and then at month’s end, when the amount comes due, pay the minimum and continue adding more “once in a life time” finds.  I had (emphasis on the word “had”) a friend who tapped out his Visa purely by collecting and making payments through the card.  His answer, once it was maxed out, was to get a Master Card; and so started the cycle all over again.

 

I have made larger purchases on the credit card, from time to time, and then paid it off before the amount came due, thereby saving the interest, which can be quite high.  I remember when a “loan” at 20% was illegal and called “usury”.  Now it has been legalized because a bank is doing it.  Ethically it’s still usury; the difference is that now it is legalized theft.

 

A less expensive option may be to actually take out a bank loan which carries a lot lower interest rate.  Remember I am talking about a true “once in a life time” find; not simply the current find that would have been available at a later date; albeit from a different source.   Once in a life time is exactly that, a figuratively “never” offered piece; in that case go for it.

 

Regards

Brian

 

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Hi,

when you figure that German stuff is mainly collected in Western countries... and the modern Generation is not really that interested in WW1 and WW2... you have to be a real Die Hard to think the stuff will hold its value over the next 20 years....

Added to that... the changing demographics in Western Europe and North America.... Lower caucasian birth rate and higher immigration, means that pretty rapidly the % of the population that has any connection to this stiff dwindels...

and anyone who does not see that has his head in the sand ;-)

 

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Hi Chris,

Thanks for an insightful comment, one that to which I wish I was in opposition; however I do fear you are correct.  I believe I have mentioned that I attend two different types of shows, “Gun Shows” and “Militaria Shows”.  The gun shows have a large percentage of sporting weapons with a smattering of militaria and the militaria shows are exclusively military themed.  There seems to be a good number of young people at the gun shows but if you pay attention there is little being purchased by them or anyone in fact.  This has gotten so prevalent that this year the number of these types of shows has been cut by the organizer.  Militaria shows seem to have the majority of attendees in the over 50 generation.  Everything, even collecting trends, evolve and it looks like collecting militaria could well be in danger of extinction.  

 

Hi Paul,

 

A good friend of mine, who lives and collects in the Punjab, tells me that it seems that the once prolific supply of British Campaign medals named to Indians (of course) has just about dried up.  What is still available has been priced out of reach of sane collectors.  I suppose this was to be expected since dealers used to travel to small and remote villages purchasing any medals they could, from the veterans and their families, mainly for the Western market.  We’ve all heard the horror stories of the unscrupulous buyers taking advantage of these villagers and the shady families who will sell a named group and then claim it had been stolen.  Once they get it back they will sell it again and pull the same scam.  I had heard of one family that got away with this three times before they were charged with fraud.

 

Thanks to both of you for your comments.

 

Regards

Brian

 

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I once had a friend tell me you invest in the stock market and collect for the fun of it. That is what I do. However once in a while I will buy something for my collection because I think it is a good investment. I usually don't make any money on it. I think if one got into the hobby 30-40 years ago and bought wisely they could make money if they sold now. For example a near mint 1939 Iron Cross first class in a case could have been purchased 15 years ago for under $200, they now sell for near $400 the last time I checked.

 

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Hi Paul,

I would have to agree with you as far as these rare cases, however, is doubling your money in 15 years really a good investment.  I ask this as an honest question and not a "round-about" statement.  I think such military collectables, like fine art, probably holds its value and even increases with time if one can figure which ones will do well and won't do well.  I've heard many collectors much older than me say that if they had known even what German helmets of either war would be bringing today they would have a warehouse full. 

To my way of thinking an investment should have the potential of providing a living for the investor or at least a part of one's living expenses, in time.  The problem with any collectable is that you must sell it in order to realize a profit, and that is a one time, per item, prospect.  If only collectables would pay annual dividends I would be one very happy camper.  :cool:

Regads:beer:

Brian

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I tend to look at collectables as a way of not spending all my money on, as Hank Williams would have said on cigarettes, whisky and wild, wild women, they get you zero financial return, while with my medal collection I may not make a profit on it but hopefully there will be a reasonable amount of money when I decide to sell.

Paul

 

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That's a healthy attitude, perhaps on several levels.

As has been lamented, far too often a young man's money is spent on slow horses and fast women.:D

Regards

Brian

 

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Brian  -  a very insightful article  -  and the sort of advice and guidance that the older, experienced members, should be giving to the new collectors.   We all know from our own experience that some pieces can rightly be called 'investment items'  -  however, the great majority on the market are collectables.   These will appreciate and give pleasure to the collector  -  however, very few are worth a really great value.

Keep-up the good work.    Mervyn

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Collectables can be viewed as investment into art. There are numerous individuals and investment funds who use art and antiques as supplemental investment vehicles. They also can be effective diversification instrument.

For example, some Russian banks have dedicated professionals who search for and invest into Russian Imperial awards. I've seen some of them at the military fairs and auctions buying Russian awards for their investment portfolios. It's quite profitable as well, as since beginning of 2000s until 2008-09 prices of Russian awards increased several fold. The prices came down during last credit crisis, but they still at very nice levels.

But of course this applies only to some awards, not all awards realized such profits.

 

 

There's a special class of investments, called Alternative Investments. Many private and hedge funds invest into them.

There are some studies of the market, for example:

ART    AS  AN   INVESTABLE    ASSET    CLASS

There are several reasons why art has become increasingly popular as an investable asset class. These reasons include:

- High net worth individuals see investing in art as a strategy for accumulating wealth. Newly wealthy investors in countries such as China, Brazil, India, and Russia demand art and as a result have driven up auction prices for art.
- The demand for art has been generally strong through  time.
Investors may profit from inefficiencies due to private valuations and illiquidity in the market for art. In addition, there is a lack of transparency in auction markets because while auctions are public, clearing prices for works of art are not.
- Art values are typically independent  of financial market asset values.

It is difficult to construct  an art index to measure performance because art markets are characterized by infrequent  transactions. Also, the assets themselves are quite unique
and prices tend to be smoothed  due to infrequent  trading. In these ways, art is a bit like commercial real estate. Additionally, there might be great demand in one sector of the market, leading to incorrect assumptions about demand  and prices in other sectors.

Two index construction  methods  exist that attempt  to   deal with the issues of illiquidity and heterogeneity. They are:
Hedonic  price estimators.  This regression method  creates a continuous price series by controlling for the unique characteristics of art that changes hands (i.e., actual prices from infrequent transactions).
Repeat sales estimators.  The repeat sales methodology is a technique used to determine price trends and returns for idiosyncratic assets. This regression method  focuses on art that changes hands more than once (i.e., the method uses pairs of observations on the same asset).
These methods are also used to construct  real estate indices because, like works of art, real estate assets are heterogeneous and illiquid.

Studies of art returns are normally based on hammer  prices. The hammer price is the final auction price, but does not take the commission to   the auction house into consideration. Commissions  are quite high and can amount  to up to 25% on a round-turn transaction (i.e., commissions are paid when you buy and then when you sell the artwork). Assuming
25% total buy and sell commissions, it can take an investor 10 years of price appreciation
to recover the commission charges, based on the 2.2% long-term median real rate of return on art. The financial returns are low but some argue that it is the combined financial
benefit with the non-financial  benefits of ownership (i.e., the joy of owning, viewing, and
controlling the art) that drive some investors to hold art.

There are two interesting idiosyncrasies of the art market that might help investors develop an investment strategy based on purchasing art. First, there is the masterpiece  effect. This theory argues that expensive art is different from the rest of the market and returns will differ as well. However, ex ante there is no clear indication  of whether masterpieces should perform better or worse than the market. In a review of the related academic literature, only one study out of six found a positive masterpiece effect.

Second is the question of whether a law of one price in art markets is important  to the investor's strategy. There is only weak evidence to reject the law of one price in art markets. In other words, prices do not vary significantly across geographic markets. A Picasso in London is priced similarly to a Picasso in New York. This means investors cannot arbitrage differences across locations and auction houses.

Spaenjers (2010)4 considers more than one million art transactions across 13 countries beginning in the 1960s. He finds that holding period returns average approximately 2% annually, the standard deviation of returns is approximately  17% annually, and prices do not vary much across markets. He also finds that currency fluctuations  are not a significant driver of art returns. Higher quality paintings  (i.e., the quality effect) earned higher returns and had higher volatility of returns in the Spaenjers study. In the study, Spaenjers finds that art prices are significantly explained by wealth effects (proxied by GDP growth), income inequality, and lagged equity market effects. Unfortunately,  high net worth individuals are already exposed to these factors, reducing the diversification benefits of art.

Spaenjers, C. 2010,  "Returns   and Fundamentals  in International  Art Markets." American Art.
http://www.hec.unil.ch/documents/seminars/ibf/430.pdf

 

 

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Hi New World,

Thank you for your comments, they certainly give one pause for thought. There may well be financial gain in collecting some items and one of the problems with many collectors, especially ones like me, is that they (we) tend to want to collect the full spectrum, the easily found and the rare.  In the end the cheaper more easily collected items will bring the profit margin on the investment down, as an over all consideration.

Thanks again for your well written and thought-out comments, they are aprerciated.

Regards

Brian

 

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Hey folks,

 

I have been thinking about the economics of collecting a lot lately, so I thought I'd chip in my thoughts. Several months ago, I decided to sell off the majority of my collection within the next year, keeping all of my most prized items but eliminating all the pieces that did not fit with my current collecting tastes. There were several reasons for this. The clearest reason was that I will almost unquestionably earn higher long-term returns, and assume lower risk, by investing the money I make from the sale of that part of my collection along with the rest of my portfolio, rather than keeping the material in my collection, insuring it, and hoping its value increases. It was also a very good time for me to sell. I was living in the United Kingdom where the parts of my collection I was no longer interested in were more valuable, and found an excellent local dealer in London to handle the high-end items and an auction house to handle the rest. Finally, since I am a junior Army officer who was living in the UK in September, is currently on extended temporary duty in the US, and is moving to Asia in a few months, I decided that I was better off without an bulky personal goods shipment following me around.

 

It would be interesting to think through the ramifications of the decline of the "Baby Boomers" on the prices of WWII militaria. I think in the long run those prices will decline.

 

Best,

T.S.

 

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For some reason, I have never really thought about the "economics of collecting" other than how it fits into my budget.  Militaria fits into my category of disposable income (that not spent on life necessities - and for the record, beer is a necessity!).  I keep track of what I pay for every item more out of curiosity than out of any hope of achieving any return.  Rather than an investment, I tend to see my costs as overhead.  Then again, I don't have anything all that valuable in my collection.  I can only hope my heirs make enough off the liquidation to fund good whiskey for my wake!

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Hi Irish Gunner,

Thanks for your comments.  I too spent little time concerning myself with the economics of collecting in times past and must admit that money is not an object presently.  Before readers think I am saying that I am wealthy or anything approaching riches I will clairify the statment by saying I never worried about what an item cost only whether I wanted/needed it.  Certainly this is not in keeping with my blog's message except that the amount I purchase these days is a fraction of the past.  What I do see happening is the amount of time required to collect and write about collecting has become rarer as time passes.  I made the decision to reopen my wood working shop on a full time bases startig in 2016 with an increase in orders accepted starting a few months ago.  I am now so occupied with keeping up with the work that I find it difficult to find the time for my military interests. I know things will level out ijn time but what has become evident is that time, not money, is the hardest commodity to come by.  

Regards

Brian

 

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1 hour ago, Brian Wolfe said:

what has become evident is that time, not money, is the hardest commodity to come by.  

Might I recommend Pink Floyd ...

Every year is getting shorter; never seem to find the time.
Plans that either come to naught or half a page of scribbled lines
Hanging on in quiet desperation is the English way
The time is gone, the song is over,
Thought I'd something more to say.

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