reality and sensible valuations.)
Markups are huge. The spread between the price that a dealer pays for an object and the price he then sells the same object for is often around 100 percent. Sometimes the difference is even greater, particularly if a dealer is the second or third middleman in the chain of purchase. So at a minimum, your purchase must typically double in value just to get you back to even. And a value may not double for 10 to 20 years or more!
Lots of other costs add up. If the markups aren’t bad enough, some collectibles incur all sorts of other costs. If you buy more-expensive pieces, for example, you may need to have them appraised. You may have to pay storage and insurance costs as well. And unlike the markup, you pay some of these fees year after year of ownership.
You can get stuck with a pig in a poke. Sometimes you may overpay even more for a collectible because you don’t realize some imperfection or inferiority of an item. Worse, you may buy a forgery. Even reputable dealers have been duped by forgeries.
Your pride and joy can deteriorate over time. Damage from sunlight, humidity, temperatures that are too high or too low, and a whole host of vagaries can ruin the quality of your collectible. Insurance doesn’t cover this type of damage or negligence on your part.
The returns stink. Even if you ignore the substantial costs of buying, holding, and selling, the average returns that investors earn from collectibles rarely keep ahead of inflation, and they’re generally inferior to stock market, real estate, and small-business investing. Objective collectible return data are hard to come by. Never, ever trust “data” that dealers or the many collectible trade publications provide.
The best returns that collectible investors reap come from the ability to identify, years in advance, items that will become popular. Do you think you can do that? You may be the smartest person in the world, but you should know that most dealers can’t tell what’s going to rocket to popularity in the coming decades. Dealers make their profits the same way other retailers do: from the spread or markup on the merchandise that they sell. The public and collectors have fickle, quirky tastes that no one can predict. Did you know that Beanie Babies, Furbies, Pet Rocks, or Cabbage Patch Kids were going to be such hits (for however long they lasted)?
Nothing is wrong with spending money on collectibles. Just don’t fool yourself into thinking that they’re investments. You can sink lots of your money into these non-income-producing, poor-return “investments.” At their best as investments, collectibles give the wealthy a way to buy quality stuff that doesn’t depreciate.
Collect for your love of the collectible, your desire to enjoy it, or your interest in finding out about or mastering a subject. In other words, don’t collect these items because you expect high investment returns, because you probably won’t get them.
Keep quality items that you and your family have purchased and hope will be worth something someday. Keeping these quality items is the simplest way to break into the collectible business. The complete sets of baseball cards I gathered as a youngster are now (30-plus years later) worth hundreds of dollars to, in one case, $1,000!
Buy from the source and cut out the middlemen whenever possible. In some cases, you may be able to buy directly from the artist. My brother, for example, purchases pottery directly from artists.
Check collectibles that are comparable to the one you have your eye on, shop around, and don’t be afraid to negotiate. An effective way to negotiate, after you decide what you like, is to make your offer to the dealer or artist by phone. Because the seller isn’t standing right next to you, you don’t feel pressure to decide immediately.
Get a buyback guarantee. Ask the dealer (who thinks that the item is such a great investment) for a written guarantee to buy back the item from you, if you opt to sell, for at least the same price you paid or higher within five years.
Do your homework. Use a comprehensive resource, such as the books by Ralph and Terry Kovel or their website at www.kovels.com, to research, buy, sell, maintain, and improve your collectible.
Chapter 2
Weighing Risks and Returns
IN THIS CHAPTER
Awoman passes up eating a hamburger at a picnic because she heard that she could contract a deadly E. coli infection from eating improperly cooked meat. The next week, that same woman hops in the passenger seat of her friend’s old-model car that lacks airbags.
Risk is in the eye of the beholder. Many people base their perception of risk, in large part, on their experiences and what they’ve been exposed to. In doing so, they often fret about relatively small risks while overlooking much larger risks.
Sure, a risk of an E. coli infection from eating poorly cooked meat exists, so the woman who was leery of eating the hamburger at the picnic had a legitimate concern. However, that same woman got into her friend’s car without an airbag and placed herself at far greater risk of dying in that situation than if she had eaten the hamburger. In the United States, more than 35,000 people typically die in automobile accidents each year.
In the world of investing, most folks worry about certain risks — some of which may make sense and some of which may not — but at the same time, they completely overlook or disregard other, more significant risks. In this chapter, I discuss a range of investments and their risks and expected returns.
Evaluating Risks
Everywhere you turn, risks exist; some are just more apparent than others. Many people misunderstand risks. With increased knowledge, you may be able to reduce or conquer some of
