Wednesday, October 04, 2006

Is Coin Collecting a Good Investment? Even the Experts Can’t Agree!

Is coin collecting also a good investment? This is a question I hear a lot about coin collecting. First, whatever I say on this topic is going to have plenty of people who disagree. This is one of those topics where a room full of very smart people will have one thing in common, they all disagree on the answer to this question. Second, I am looking at this question in the context of collecting non-bullion coins. Bullion as an investment is a much different topic worthy of a discussion on its own.

So, is coin collecting also a good investment? The simplest answer I’ve heard to the question is that, first and foremost, coin collecting is a hobby and not an investment. If you have to ask the question in the first place, then your experience with coin collecting is probably not enough to overcome the pitfalls of coin collecting as an investment. As a collector, you’re better off just keeping it a hobby and having fun with it.

Coin Collecting: A Good Investment

Does that mean all coin collections are bad investments? Absolutely not! Many of us have heard the story about John Jay Pittman, who with limited resources, amassed a collection that was eventually sold for over $30 million. Or how about the Philadelphia 1861 $20 Liberty Head Paquet that recently went for $1.6 million in the Heritage auction at the ANA convention in Denver? Apparently the coin was purchased by the seller only 5 years ago for $345,000. In hindsight, these were obviously good investments.

Recently, there has been a plethora of media articles in financial papers and magazines touting how investing in rare coins can help an investor to diversify their portfolio. These articles usually quote some obscure rare coin index that purportedly shows how rare coins have forever outperformed stocks as an investment. According to these articles, you really can’t lose investing in rare coins.

Coin Collecting: A Bad Investment

There have also been a large number of articles that tell you how bad coins are as an investment. These articles claim that there is no way for an investor to win. They talk about how buyer’s and seller’s fees create too much of an obstacle to overcome. They state that if it’s not the dealer’s markup that gets you, it is the tendency of dealers to overgrade coins that will. Or altered coins. Or counterfeits. The pitfalls are many and there’s no way to avoid them.

So, who is correct? I believe there is some truth to both sides of the story. How do you navigate all the pitfalls and have the best chance to both enjoy the hobby and realize a profit if and when you sell? I could list all the usual items that books and articles tell people such as:

· Find a reputable and knowledgeable dealer to work with.
· Acquire coins in the best possible grade that you can afford.
· Never stop learning about the coins that you collect.
· Condition, rarity, and demand affect a coin’s value.
· The economy and inflation can affect a coin’s value.
· Understand retail prices versus wholesale prices, auction fees, etc.
· Inexperienced collectors should stick with 1st- or 2nd-tier third party graded coins.
· Etc., etc.

What Makes a Coin’s Price Move?

The one thing that all these books and articles fail to really point out is what makes a coin’s price move. Yes, rarity and condition are important components in a coin’s value. Yes, the economy and inflation are factors. But what really makes the price move? Supply and demand! At the most basic level, a coin’s price is simply dependent on supply and demand, nothing else.

Supply and demand are the only factors that cause fluctuation in a coin’s price. If there is more demand than supply, then the coin’s price will rise. If there is more supply than demand, then a coin’s price will fall. It’s as simple as that. What is not so simple is predicting where supply and demand will be in the future for any given coin. Today, collectors may favor Buffalo nickels, tomorrow it may be Indian Head cents. If you knew where the increased demand would be in the future, then your collection would have a better chance for appreciation.

Things that Affect Demand

I believe publications have a huge impact on demand. For example, how many $20 Liberty Head Type 1 Double Eagle collectors would include the 1853/2 Overdate or 1854 Large Date varieties if they were not listed separately in the current Red Book? How many Hard Times Token collectors would there be if it were not for Low or Rulau? Collectors use references as guides to their collecting. A new publication on a neglected area of numismatics can have a huge impact on future demand.

I have heard it said that when the stock market does poorly, the coin market does well. When the stock market is doing well, the coin market still does well. However, when the stock market does phenomenal, the coin market suffers (i.e. 1990-2000). I haven’t really analyzed the validity of this theory, but I don’t doubt that there is some truth to it.

An influx of counterfeit and altered coins would surely have a negative impact on demand for the coin market as a whole, or at least that series or type of coin where the problems are most prevalent. This is one of the many reasons that I support third party grading companies, such as NGC and PCGS. However, I feel some lesser third party grading companies actually hurt demand through their inconsistency in grading or just flat out failing to abide by ANA grading standards. People hurt by purchases of coins in these holders will surely be turned off to the hobby in the future which could lessen demand.

Things that Affect Supply

Even if you knew which coins would have the greatest increase in demand, you still run the risk of an increase in supply that outstrips demand. A case in point would be the 1857-S $20 Double Eagle. This coin was considered to be very scarce in mint state. But that was prior to the recovery of thousands of mint state examples from the shipwreck of the S.S. Central America. Any coin collections that had a mint state 1857-S $20 Double Eagle as a large part of the value of their collection took a big hit when the thousands of shipwreck coins hit the market.

A few years ago, what was thought to be the only surviving collectible 1933 $20 Double Eagle was sold at a Sotheby auction for $7.6 million (Two other examples are held by the Smithsonian Institution). Just this past year, ten more examples have come to light. Can you imagine how the buyer of the Sotheby coin must have felt when he heard about the increase in supply? What price would that coin sell for if it were to come up for auction today? My guess is that it would be significantly less than the $7.6 million.

The population reports of the third party grading services, particularly PCGS and NGC, are frequently used for judging supply. There is a definite risk with using these reports. At times, the reports may overstate supply making a rare coin appear more common. This is due to people “cracking out” the coin from its holder and resubmitting it with the hopes of getting a higher grade. If the “cracked out” holder is not returned, then the population of graded coins increases by double counting the coin. In general, however, the reports make a coin appear more rare than it actually is. This is because, in general, the counts of graded coins will only get higher, not lower, as more coins get graded. So what you think is the finest known example of a coin always runs the risk of a finer example eventually being found and graded.

How can you minimize market risk?

One of the suggestions that I constantly read is that collectors should concentrate on a single series of coins for their collection. The idea is that you can never learn everything there is to know about numismatics, therefore you should specialize in a series that you can learn very well. The more you know about that series, the better decisions you will make with regards to your acquisitions.

In general, I think this is very good advice if you are strictly looking at your collection as a hobby and don’t care about the future value. But, if you are also hoping that you will realize a profit when you sell your collection, then this may not be the best advice. It’s the same as putting all your eggs in one basket. What would happen if the series in which you specialize goes out of favor and the demand lessens? Or what if a hoard is found containing many examples of the key dates in your series thereby increasing supply?

I believe that the best way to minimize market risk is through type collecting. Type collecting avoids the pitfall of concentrating your collection in a single series that goes out of favor. It also avoids the pitfall of having a large increase in supply for a given series or key date affecting the value of your collection. But minimizing your risk does not eliminate your risk. There is still the potential that demand could go down in coin collecting as a whole. If the entire coin market is affected, then most likely any collection that you put together will be affected.

Conclusion

However you decide to collect coins, the most important aspect is to have fun and to use common sense. If a coin just doesn’t look good to you, it most likely doesn’t look good to others, regardless of the grade assigned by the dealer or the grade on the holder. A collection where every coin you can look at with pride and satisfaction is definitely a goal worth achieving. But, if you are also looking for the best possible return on your collection when you eventually sell it, I believe that type collecting provides the best possible return with a minimum of risk.


Recommended Reading:
United States Coinage: A Study By Type

The Experts Guide to Collecting & Investing in Rare Coins

A Guide Book Of United States Type Coins: A Complete History And Price Guide For The Collector And Investor (The Official Red Book)

4 Comments:

At 6:02 AM, Blogger Jonh Neo said...

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At 2:56 PM, Blogger Scott said...

By definition, anything that is an investment involves risk. In rare coin collecting, the risk has many factors that are difficult to predict. These risks include the fluctuating prices of the precious metals, rarity of the coin, the coins state of preservation, and the demand. With the risk in so many uncontrollable and unpredictable factors, this places investment capital at a great risk.

One of the problem with the risk is that it is purely market generated and does not have any regulation. While some may see this as a good thing, the risk added to rare coins with those who have the propensity to defraud others (see Tom Noe). While the numismatic industry is probably more honest than most other industries, the bad apples do more damage than in other industries because of the lack of oversight.

Also, the overall market for rare coins is smaller, thus making market trends not a good indicator of potential future performance as it is with a mutual fund. Its a market where the auction houses and grading services have a lot of influence that hobbists and collectors have adjusted to, but may turn off investors.

I want to wish investors luck, but I cannot. As a collector/hobbist, I would rather see "us" drive the market and not investors looking to inflate prices for their own self-interest. But alas, I'll live with it as long as I can get MS-65+ Ikes for a good price to complete my registry set!!

Scott

 
At 11:15 AM, Blogger A.C. Dwyer (aka The Arlington Collection) said...

Thanks for the great comment Scott. Your points are very well put and I totally agree with you.

Somewhere I read that years ago there was a survey in Numismatic News that showed around 40% of all survey respondents said that their coin collection was also an investment. I haven't seen the survey but it doesn't sound far fetched either. So the definition of hobbyist and investor sometimes gets blurred.

My simplistic view is that as long as the hobby continues to draw in more new collectors than it loses, prices in general will be on the rise. As long as that is true, non-hobbyist investors (and scam artists) will also be drawn to the hobby. But the reverse is true too. Less new collectors can cause a decline which also sends investors running for the door. The result is the hobbyist is left holding the bag.

So if you are a hobbyist, enjoy what you collect and use the down cycles to your advantage and add to your collection. If your an investor, you better be able to stomach the risk.

 
At 10:57 AM, Blogger Chuck Stevens said...

It's all about defining how much risk you are willing to take and what types of rewards you are looking for. For example I do a lot of trading and when discussing what moves ill be making with my Forex broker- risk is always at the forefront of what we are talking about. If the buyer or collector thinks the risk is worth it, they should go for it.

 

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