Every day someone asks me what is a good investment. The answer is simple – unless you know the products and the market, you are groping around in the dark. Stamp dealers are philatelic investment specialists – they buy and sell – and live off the margins they get. It’s as simple as that.
The not so simple issue – is choosing what to buy. So much depends upon condition, relative scarcity and demand – it’s a bit of a minefield for those who are not well versed in what to buy, how to buy, where to buy … and what is selling, how to present it and where to sell it. In my opinion, there are three types of investor:
- an investor who is genuinely interested in and knows the market
- an investor who is new to the market and bidding blind but is guided by experts
- an investor who knows little about the market or its products and it, effectively, guessing
The recent sale of the world’s rarest stamp and now most valuable item in the world by weight – the British Guiana 1c on magenta – for US $9.5m highlights the plight of the investor. This is a very special kind of stamp – one of a kind and only one person can own it at a time. On 5th April 1980 it was sold to an anonymous bidder for US $935,000 (incl. fees + taxes).
- The buyer was in the room, but had left bidding instructions with the auctioneer prior to the sale
- He was able to watch the auction without drawing attention to himself
- In 1986, the new owner displayed the 1856 1c black on magenta as part of an exhibition of classic stamps of British Guiana at the Ameripex ’86 International Stamp Show in Chicago and was awarded the Grand Prix International.
- The owner of the stamp used a pseudonym (Rae Mader – an anagram of Demerara), it was later revealed that the owner was actually John E. du Pont, heir to the eponymous chemical company fortune
As an investment, the stamp proved successful:
- Bought in 1980 for $935,000
- Sold in 2014 for US $9,500,000
- Gross profit = US $8,565,000
- Gross margin = over a tenfold return on investment over a 24 year period
- Actual profit = US $8,565,000 minus the costs of security, insurance and auctioneer’s fees + taxes
Yes, the stamp proved very profitable and stayed well ahead of inflation.
The investor could have directly or indirectly lost money in any or all of the following financial crashes or speculative bubbles since 1980 :-
- 1980s – Latin American debt crisis – beginning in Mexico in 1982 with the Mexican Weekend
- 1983 – Bank stock crisis (Israel 1983)
- 1987 – Black Monday (1987) – the largest one-day percentage decline in stock market history
- 1989–91 – United States Savings & Loan crisis
- 1990 – Japanese asset price bubble collapsed
- Early 1990s – Scandinavian banking crisis: Swedish banking crisis, Finnish banking crisis of 1990s
- Early 1990s recession in the USA
- 1992–93 – Black Wednesday – speculative attacks on currencies in the European Exchange Rate Mechanism
- 1994–95 – 1994 economic crisis in Mexico – speculative attack and default on Mexican debt
- 1997–98 – 1997 Asian Financial Crisis – devaluations and banking crises across Asia
- 1998 Russian financial crisis
- 1999-2002 – Argentine economic crisis (1999-2002)
- 2000-01 – the crash of the dot-com bubble
- 2000 – early 2000s recession
- 2001 – Turkish economic crisis
- 2001 – Bursting of dot-com bubble – speculations concerning internet companies crashed
- 2007–08 – Global financial crisis
- 2007-2008 – the still-deflating United States housing bubble and its causal Financing bubble
- 2008-2011 – Icelandic financial crisis
- 2010 – European sovereign debt crisis
Investing in collectibles is still not a safe haven for your money, i.e. some areas of collectibles have suffered badly as the number of “discretionary cash investors” has declined resulting in less competition at auction and in the dealers’ showrooms which has, in turn, resulted in lower prices. So, how does one get around this conundrum?
Like a lot of things in life – its simple in theory and difficult in practise. Some stamps are simply not worth investing in, whereas others have short, medium and long term potential. There is no simple formula. There is no point is starting off an industry wide speculative rush – the answer is to quietly buy large lots, break them down and sell them on a regular basis. Unlike the banking and financial services system, collectibles is not subject to massive downturns because everyone is doing the same thing for the same reasons at the same time.
Bankers use the same small number of economic theories, analyse the same data from a the same small number of sources on the same small number of software suppliers’ apps. This is why they behave like a murmuration of birds, i.e. they seek safety in numbers and accept a certain amount of casualties but do not appear to see the risks involved in ever greater financial product inter-dependence. A global financial system that is “too big to bail out” is a risk too far. It has gone from the metaphorical murmuration to something that more closely resembles a “bait ball” where the predators and scavengers wipe it out completely.
We have arrived at a point where financial investors need to diversify away from financial service providers.
We have arrived at a point where financial investors are trying to be in a place where the competition (and associated pack instincts) do not apply.
If I was approached by investors, I’d say … employ one good dealer and set up an investment syndicate.
- no more than 10 investors in one syndicate
- equal amounts (€50,000 each) invested for a five year term
- we keep it very quiet (no publicity) and limit the fund to €500,000
- we adopt a mixed short, medium and long term investment strategy with annual profit share from Y2 forward
- opportunity to re-invest original stake for second 5-year term, or exit the syndicate at the end of Y5
I would avoid the big ticket items like the British Guiana 1c black on magenta since everyone will want to buy a piece of it from now on. With the new word record in place, I wonder if the current owner of Sweden’s famous “Tre Skilling Banco Yellow” will be tempted to put their unique error of colour up for auction? What about a USA Inverted Jenny or a Mauritius Post Office single or the unique pair on cover (the Bordeaux letter) – how much would these rarities now make at auction now that investors are hearing about the auction results at Sotheby’s last week?
Investors from a non-philatelic background will be taking a keen interest in stamp auctions from now on.
They need to be careful – the speculative price inflation of the late 1970s where relatively common stamps (e.g. the GB £1 UPC were selling at over GB £1,000 each in 1978 and they sell now for less than GB £250 each) should be a reminder that an “uninformed” speculator is a very dangerous elephant to have in a room – particularly an auction room.
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