Contemplating Collectible Investments

If you have much space for storage, your attic and garage might be stuffed with old furniture, books and other items you've held onto over the years. If this is the case, you may be sitting on a few valuable collectibles just waiting to make you money.

That said, you are just as likely to be looking at little more than a pile of junk. In this article we'll take a look at collectibles as an investment and help you decide whether this emotional market is a good place to park your money.

140,000,000 B.C: A young Allosaurus missteps and finds itself mired in a sink hidden beneath the underbrush. Millions of geological ages later, an amateur paleontologist helps him out – or at least what was left of his head. In 2005, the Allosaurus' restored skull sells for the high price of $600.

1908: Honus Wagner of the Pittsburgh Pirates hits his tenth home run and ends the year with a .354 batting average, marking one of the best years of his career. The next year, the American Tobacco Company commemorates Wagner by putting a trading card inside its cigarette packages. Less than 60 make it into stores before it is discovered that Honus is vehemently against smoking. In 2000, Wagner's cigarette trading card is sold on EBay for $1.1 million.

1962: Stan Lee creates a superhero who has to worry about rent, his ailing aunt and passing his next test – all in addition to saving the world. Peter Parker's misadventure with a radioactive spider hit the stands with a $0.12 cover price. And, in 2006, the first edition of The Amazing Spider-Man is among the most valuable comics with a price around $6,000 or more, according to Wizard: The Guide To Comics pricing guide.

These are all examples of the strange and wonderful world of collectibles. While there is no denying the thrill of owning a juvenile Allosaurus skull, is collecting really a form of investment?

The reason we began by discussing a fossil, a comic and a baseball card is that people have no qualms about calling them collectibles. However, when you speak about diamonds, gold and other precious materials, people tend to call them investments. In theory, these materials – and even stocks – could be termed collectibles because their price is based more on what people are willing to pay for them (or market value) than on their actual intrinsic value. But in the practical world, precious metals and stocks have an intrinsic value.

For metals, this value is based on rarity and the fact that if you melt it, burn it or bend it, you still have the same atomic substance in the end. For stocks, the value is produced by the underlying brick and mortar company that the share represents – a company that is generating earnings to justify the prices you pay for its stock.

What makes collectibles different is that even a little damage can erase all of a collectible's value. This is because a collectible's value is based on emotional factors like nostalgia. These emotional factors can be as erratic as they are powerful. If you were asked whether people would be willing to pay more for a dinosaur skull or a baseball card, even if you chose one over the other you would give them both a higher value than, say, a torn up baseball card or a box of bone fragments. Those items you would probably call worthless (unless you are an archaeologist or a fan of papier-mâché).

It is said that nostalgia runs in 20-year cycles. In other words, the things that are popular now will become collectibles in 20 years when people want to reconnect with their past. This doesn't mean that you can buy the top 10 items from consumer polls, incubate them for 20 years and then sell them for a fortune. It means that some items this year will become collectibles if they meet two conditions: rarity and appeal.

Rarity is becoming a harder thing to find as mass production methods allow companies to (over)fill demand without incurring that much extra cost. Beanie Babies have devalued as more and more product lines are introduced. It is profitable for a company to sell as many products as it takes to satiate demand, and that mentality destroys a future collector's profits.

Appeal is also a difficult thing to nail down. To make money at collecting, you have to predict what will become popular in retrospect – perhaps something that is not in high demand now will become popular in the future, either because they are rare or they were not fully appreciated at the time. For example, in the 1950s and 1960s, wing-tipped plastic sun glasses with glass lenses were sold for a few dollars in drugstores, but they can now fetch hundreds of dollars in collectors' markets.

Mark-ups

When you buy a collectible from a dealer, that dealer is usually marking up the price to make a profit. Unlike collectors, dealers do not have the luxury of holding an item for years and years while the value may or may not increase – they have sales to make and a business to run.

Maintenance
Many collectibles require special care to keep them in top condition. These can range in cost from the $1 plastic cover used to keep hockey cards safe to a special room with moisture, heat and light monitors to lengthen a painting's life. On top of the storage costs, there are the added costs of buying insurance for the more valuable types of collectibles as well as paying to have professionals, appraisers, restorers and dealers look at the collectible before you sell it. A collectible doesn't produce income while you hold it, and it may actually eat income while you wait for it to increase in value.

Wear
Most categories of collectibles – from Pokemon cards to antique plumbing fixtures – have a manual classifying how much an item is worth in pristine condition and what sorts of damage degrades it by what percentage of value. For example, a well-read copy of the aforementioned Amazing Spiderman #1 may only be worth 30-60% of the $6,000 list price, depending on what type and what degree of wear it shows.

Counterfeiting
Most museums display dinosaur fossils models - not the real thing. Can you tell the difference between an Allosauras skull made of plaster and cement and one made of fossilized bone? No matter how experienced the appraiser, forgeries do make it to the dealers and then through to the collectors, which could leave you holding a very expensive piece of criminal art.

Low Returns
Collectibles tend to have lower returns than a stock market index fund, a money market account and most bond funds. If you took an average of the returns on all collectibles – which is practically impossible to do given some have little or no market to measure – it would be dismal compared to the S&P 500. Even if you took only the ones with the best returns, diamonds and stamps, you would still find a sizable gap – a generous estimate is that stamps return 5% to 10%.

In light of the low returns collectibles bring it would seem the only reason to buy collectibles is for your own interest. As shown above, people don't invest in collectibles, they spend money on collectibles. If they are lucky, they will be able to sell that same object in the future and beat the inflation for the period during which they owned it.

Tips Keep Heirlooms It may smell like cats and tobacco, but you never know what people will pay for Uncle Harold's snuffbox. If you have inherited antiques or collectibles from relatives, check around and see whether they are worth something before you throw them in the moldy corner of the attic. When you pay nothing for a collectible, the profit margin goes way up. Compare and Call If you have your eye on a collectible, take the time to call other dealers and price out similar items. Yes, there will always be "two interested buyers" coming back the next day, but you should not make snap decisions under pressure from the dealer. The best method is to browse the store and call the dealer when you get home. You'll think more clearly and have fewer regrets in the end. If possible, purchase from other collectors (better yet, trade). They will be less likely to mark-up items because they will assume you have the same pricing guide they do. Ask for a Written Guarantee If a collectible is really an "unbelievable buy" with "several interested buyers," ask the seller to write a buy-back guarantee for an agreed period of time. After all, the dealer can buy it back at the same price and then sell it again to all those interested buyers banging on the windows. Use the Resources Available and Do Your Own Research Pick up "Kovels' Guide To Selling, Buying And Fixing Your Antiques And Collectibles" (1995) (or any of the other guides written by Ralph and Terry Kovel) or another collectibles publication and read up on the items you want. The literature will tell you the pricing guides as well as how to care for your collectibles and what kind of markets to buy and sell them in.

If you want to hedge against inflation, there are more reliable ways to go about it. A collectible is an illiquid, taxed investment that produces no income and can lose its value if you drop it. If you are going to buy one, make sure it is one you will be happy to own forever, rather than counting on some big money sale in the future (See also: The Pros And Cons Of Alternative Investments.)