Friday, March 23, 2012

Stamp Collecting for Fun and Profit (PIMCO's Bill Gross and his $100 Million Collection Swing By)

I've referred to Profs. Dimson, Marsh and Staunton and their work on Equity Risk Premium more than once.
Here's Dimson with another co-auther on a slightly lighter subject.
Via NYU the 2009 draft:

Ex post: The investment performance of collectible stamps
Elroy Dimson and Christophe Spaenjers
This paper uses stamp catalogue prices to investigate the returns on British collectible postage stamps over the period 1900–2008. We find an annualized return on stamps of 6.7% in nominal terms, which is equivalent to 2.7% in real terms. These returns are higher than those on bonds but below those on equities. The volatility of stamp prices approaches that of equities. Stamp returns are impacted by movements in the equity market, but the systematic risk of stamps remains low. Estimates of average after-cost returns for individual investors show that stamps may rival equities in terms of realized performance.

1. Introduction
Belk (1995) describes collectors as individuals who passionately, and sometimes even obsessively, search and shop for unique but in essence useless items, such as obsolete postage stamps. Stamp collecting has been an established pastime almost since the introduction of the Penny Black, the world’s first prepaid adhesive stamp which was issued in the United Kingdom in 1840 (Johnson, 1920). The first professional dealers started business in the 1850s. Not much later, stamps were also sold through different types of auctions: Lucking-Reiley (2000) presents evidence of the use of conventional English ascending-bid auctions and both first-price and second-price sealed-bid mail sales in the nineteenth century stamp market.

By the early twentieth century, international expositions were attracting philatelists from around the world, and collectible stamps could possess significant financial value. At the 1913 International Stamp Exhibition in New York, art dealer Henry J. Duveen’s collection was valued at more than $0.25 million (The New York Times, 1913), and by 1955 the world’s most valuable stamp collection was worth an estimated $2.5 million (Time, 1955). To put these valuations in context, if invested in US equities, $0.25 million in 1913 would by start-2009 be worth $1.4 billion (with dividends reinvested), while $2.5 million in 1955 would be worth $374 million. Moreover, the ever-high popularity of stamp collecting, the extensive global network of auction houses (now joined by online auction sites) and dealers (more than 600 in the UK alone), the existence of catalogues containing reference prices, and the ease of storage and transfer have ensured a relatively high liquidity of stamps throughout modern times.

According to Gelber (1992), the philatelic literature has long suggested that “deliberately making money from one’s hobby was a perversion of the proper reason to collect”. However, while pecuniary benefits may not always be the primary motive for acquiring collectibles such as stamps, Burton and Jacobsen (1999) show that many collectors also hope for financial gains. More than a century ago, journalist and stamp collector Edward Nankivell (1902) argued that “it is impossible to get away from the necessity of regarding stamps as an investment”. Today, it is no longer taboo to think of stamps as an asset that may contribute to a diversified investment portfolio. Satchell and Auld (2009) draw the distinction between the demand driven by the intrinsic pleasures of ownership, and the demand forstamps as an alternative financial asset. An individual with possibly the finest stamp collection in private hands is the chief investment officer of PIMCO, who has spent more than $100 million on stamps from all over the world based on top-down philatelic valuation techniques, and who noted after the 2007 sale of his $9 million collection of British rarities that the return had been “better than the stock market” (Gross, 2008)....MORE (35 page PDF)
And the 2011 Journal of Financial Economics link.

Here's the 2006 Washington Post article on Bill Gross' career in philately.

The September 13, 2008 Economist article:

How one man's theory took the guesswork out of the stamp market, and made him a legend ...

William Gross started collecting stamps because his mother made a mistake. When he was small, she had bought sheets of newly issued stamps in the belief that when young Bill was 18, they would be so valuable that they would pay for his college education. But when he tried to sell them, he found they were worthless. Still, the story has a happy ending.

Mr Gross won a scholarship to college, studied math and applied his learning to the card table, where he concluded that the best policy is to not to buy and hold, but to trade. He went into the bond market and traded so successfully that the PIMCO Total Return fund that he manages became the world's largest bond fund.

Forbes lists him at number 897 among billionaires, a ranking that will presumably change when his collects his share of PIMCO's $1.7 billion profit from its massive bond holdings in Fannie Mae and Freddie Mac, which rose in value after last weekend's bailout. It seems odd, then, that at present Bill Gross's principal activity as a stamp collector is as a seller rather than a buyer.

He never forgot his mother's adventure in stamp collecting. "She had the right idea," he says. "She just bought the wrong stamps. When I was 40 and I'd made some money, I got the notion that I would do it right." He developed his own system, designed to take the guesswork out of the stamp market.
Mr Gross's theory is that prices of all collectibles are heavily influenced by a nation's wealth: therefore a stamp's price should rise in tandem with the GDP. He studied auction catalogues going back 60 years to trace the relationship between price and prosperity. "No one had ever tried to value stamps this way," he says.

Applying his system meant that he bought stamps that were undervalued because their price had risen more slowly than GDP, and he bought on a grand scale. After almost 20 years of collecting, he has become a legend. He admits to spending more than $100m on a collection that includes stamps from America, Britain and the British empire, and Scandinavia....MORE
Finally the website and catalog for the 2010 auction of a small part of the William H. Gross Collection.