Wednesday, September 11, 2013

Are collectibles good long-term investments? "The Investment Performance of Emotional Assets"

On Monday we posted a short bit on collectibles, riffing off a Quartz piece:
Cars, coins and stamps are now more profitable luxuries than art, wine and jewelry (there's an ETF for that)

Which we got timestamped just before Izabella Kaminska had three FT Alphaville posts:
A classic car bubble?
The art of myth-making
The growing scarcity of scarce markets
Addressing respectively 1) the Knight Frank luxury investment index; 2) the intangibles that go into valuation with a look at contango in the market for water from the Grotto of Massabielle in the Sanctuary of Our Lady of Lourdes, France and 3) a meta-analysis of the attributes of markets in non-standardized goods.

She is such a show off.

So today we visit with Elroy Dimson, one of the few economists I've ever come across who has the market feel of a trader and the soul of a poet intellectual chops to be the Chairman of the Strategy Council for the Norwegian Government Pension Fund, you know, the big one.

In his spare time he is part of the hot new boy band Dimson, Marsh and Staunton who do the Global Investment Returns Yearbook for Credit Suisse.

Via the Social Science Research Network:

 The Investment Performance of Emotional Assets
 Elroy Dimson
London Business School; University of Cambridge - Judge Business School

Christophe Spaenjers
HEC Paris - Finance Department

September 2, 2013

Risk and Uncertainty in the Art World, Forthcoming

Abstract:     
We assess the long-term financial returns from high-quality collectible real assets, and review the unique risks that are associated with such investments. Over the period 1900-2012, art, stamps, and musical instruments (violins) have appreciated at an average annual rate of 6.4%-6.9% in nominal terms, or 2.4%-2.8% in real terms. Despite the similarity in long-term returns, short-term trends can vary substantially across these different types of emotional assets. Collectibles have enjoyed higher average returns than government bonds, bills, and gold. However, it is important to recognize the quantitative importance of transaction costs in collectibles markets. In addition, price volatility is larger than is suggested by conventional measures of risk, and these assets are also exposed to fluctuating tastes and potential frauds. Yet, despite the large costs and many pitfalls, investment in emotional assets can pay off, because of the non-financial yield they provide. 

Free download (19 page PDF)

Professor Dimson is not a newbie when it comes to collectible markets, in one of his papers:
Ex post: The investment performance of collectible stamps
Elroy Dimson and Christophe Spaenjers
he looks at returns based on Bill Gross' $100 million collection.

Speaking of not being a newbie to the subject, a couple weeks ago Ms Kaminska preceeded the three posts linked above with a deep dive into the scarcity/abundance questions raised by advances in mechanical reproduction and 3D copying and how the answers to those questions intersect via pricing while touching on the metaphysical, almost spiritual regard some people have for provenance and authenticity:
What is the value of unique?
and which reminded me of the most valuable automobile in the world, a Rolls-Royce motorcar, insured for $57 million, and another Roller which sold for £168,000. I leave it to you to decide which is the better value.
See: "How Do You Value Value?":

http://www.autoportal.hr/slike/2010/6393/03_15a.jpg

and

http://carpictures.us/wp-content/uploads/2013/01/1923-Rolls-Royce-40-50-HP-Silver-Ghost-AX-201-Roi-de-Belges-Recreation.jpg

In "What is the value of unique?" Izabella goes on to say:
...Of course, if you can convince more people to agree that your version is the best version, this can give your object superior value.

But, at its heart, this is an unstable sort of value, for it’s based on fad and cult-like, or even bubble-like, social responses and confidence tricks. It’s value that can evaporate as soon as the will and belief of the crowd is distracted by something else, or as soon as someone can tell a better narrative. Which is why the value of objects and resources which hold little utility, such as gold, tulips and art, are entirely mood-related. Their value, at best, is best explained by the Emperor’s New Clothes effect as well as boom and bust behaviour....
Which is about as close to Dimson's title, "...Emotional Assets", as you're going to find and which ties this post into a nice little package.