Forbes Looks at Passion Investments

Forbes takes a pretty good look at art as an investment, while quickly analyzing long term performance,  Costs, illiquidity, and Other risks. It also compares and charts returns for a mix of assets including stocks, bonds, gold, inflation, art, stamps, wine and violins. The overall conclusion of art as an asset is mixed.  It contains the usual statements for alternative assets such as illiquidity and finally concludes that additional research is needed.

The good news is the idea of art as an investment continues to take hold, and while there is certainly resistance to the concept, with many wishing to keep art as an alternative investment passion investment, it is certainly clear from the numerous articles in the financial trade publications that the idea is trending in the right direction. And, that is good news for appraisers, as more and more financial analysts and planners think of art as an asset, the more business can be developed for qualified appraisers.

Forbes reports
Collectibles are also known as “emotional assets,” “investments of passion” and “treasure” by various sources and are not an insignificant portion of net worth for wealthy investors. A Barclays’ report in 2012 estimated that global high net worth households hold an average of 9.6% of their wealth in collectibles with readings in one country (U.A.E.) at 18% of net worth. With this in mind, this article will look at the historical returns of a number of collectibles along with discussing some of the common investment characteristics that should be considered.

Long-term Performance

Using the impressive work of Dimson and Spaenjers (2014) and Dimson, Rosseau & Spaenjers (2013), we can analyze the long-term returns of art, stamps, violins, and wine. Interestingly, the returns both in nominal (Table 1) and inflation-adjusted (Table 2) terms for all four types of collectibles are in excess of bonds, bills and gold. However, the estimated returns on collectibles can differ greatly. For example, Mei and Moses (2002) estimate the real annualized return on art to be 5.2% from 1900-1999 which is much closer to the S&P 500’s return of 6.7% during that period than noted in the Dimson and Spaenjers data. Index construction is an important determiner of the difference in returns reported by various collectible indexes, but those details could fill an article by themselves and will be beyond the scope of this discussion.

Table 1

Nominal Returns to Collectibles (1900-2012)

Annualized Return           Standard Deviation

Art                          6.4%                      13.2%

Stamps                   6.9%                      13.5%

Violins                    6.5%                      10.1%

Wine                       8.2%                      26.9%

Stocks                     9.4%                      21.6%

Bonds                     5.5%                      11.9%

Bills                        4.9%                      3.8%

Gold                        5.1%                      18.7%

Inflation                  3.9%                      6.5%

Source: Dimson and Spaenjers (2014) & Dimson, Rousseau and Spaenjers (2013)

Table 2

Real Returns to Collectibles (1900-2012)

Annualized Return        Standard Deviation

Art                        2.4%                      12.4%

Stamps                 2.8%                      12.3%

Violins                  2.5%                      8.5%

Wine                     4.1%                      26.3%

Stocks                   5.2%                      19.8%

Bonds                   1.5%                      13.7%

Bills                      0.9%                      6.3%

Gold                      1.1%                      16.6%

Source: Dimson and Spaenjers (2014) & Dimson, Rousseau and Spaenjers (2013)

It should also be noted that risk-adjusted returns for collectibles while trailing stocks were still attractive relative to bonds, bills and gold as well. The correlation between collectibles and equities are also low, so they also seem to provide some diversification benefits.

So now that we have built the foundation to analyze collectibles in terms of historical risk and reward, it is time to look at a few characteristics that make them distinctly different from financial assets. While there are quite a few important distinctions, this article will focus on:

Costs, Illiquidity, and Other risks.

There is little doubt that the transaction costs associated with collectibles are considerably higher than that of typical financial assets. Though these costs differ by type of asset, Dimson and Spaenjers (2014) estimate that auction house transaction fees can be more than 25% of the asset’s price. Campbell (2008) estimated the cost at up to 30% of the sale price. These costs obviously necessitate a long expected holding period in order to overcome the transaction cost.

In addition to transaction costs, collectibles can have additional expense for storage, insurance and other maintenance.


In my opinion illiquidity is the most distinguishing and important feature to consider when analyzing collectibles as an investment. This illiquidity has wide-ranging and important implications, but I will touch on just a few main ones here.

So after noting the relatively low price volatility of collectibles in Tables 1 and 2 according to conventional measures, investors should take heed that these are likely just a mirage. Due to the non-continuous nature of transactions in the collectibles market and the existence of positive autocorrelation in the returns from the collectible indexes, prices are sticky and underestimate the actual volatility of returns. Volatility results for art adjusted for these illiquidity effects were found to be higher than that of stocks by Renneboog and Spaenjers (2011) and Mandel (2009). Lest one think this only applies to art, Dimson and Spaenjer (2011) found similar results for stamps. This is important because the historical worst performance of collectibles shown in Table 3 almost certainly understates the true decline in value if one needed to liquidate in times of market stress.

Table 3

Best & Worst Annual Real Returns (1900-2012)

Worst Return         Year

Art                         -29.7%                  1915

Stamps                 -19.2%                  1915

Violins                  -25.9%                  2011

Wine                    -37.1%                  1949

Stocks                   -57.1%                  1974

Bonds                   -30.7%                  1974

Bills                      -15.7%                  1915

Gold                      -30.5%                  1975

It also follows that due to the return smoothing inherent in collectibles attributable to the sticky prices, the low correlations with equities are suspect at best. In fact, the evidence in Dimson and Spaenjers (2014) does point to a higher correlation between equities and collectibles when equity returns are lagged to allow for the smoothing effect. Further, high net worth and in particular ultra-high net worth investors drawn to collectibles looking for an asset that provides defense against the collapse of financial asset prices are also likely to be disappointed by the true returns from collectibles in that event. Goetzmann, Renneboog, and Spaenjers (2011) found that art prices were linked with the income of the wealthy and in fact art prices benefitted from income inequality. Dimson, Rousseau & Spaenjers (2013) also found a link between wine prices and financial wealth.

Other Risks

Collectibles, because they typically have little relative or no intrinsic value, are more susceptible to changes in taste than other assets with cash flows. Collectibles depend on future demand or interest in them to sustain or grow their prices over time. There is a danger (and in my opinion high likelihood) that survivorship bias overstates the returns from some of these collectibles, because only primarily those still of interest today were likely selected for inclusion in some of these collectible indexes. One need only to research the history of seashell and tulip bulb prices to learn that it does not pay to underestimate this risk.

As the price of collectibles rise the risk of fakes or forgeries also increases. All the collectibles categories in this article have seen their share of forgeries, so this is not an insubstantial risk. A recent documentary film, Tim’s Vermeer, chronicled an inventor’s efforts to duplicate the painting techniques of Johannes Vermeer so these techniques are not out of the reach of a determined individual with significant monetary motivation. As a personal anecdote, the preponderance of very advanced forgeries in one of my own collectible hobbies caused me to all but abandon it for fear of making a costly mistake.


The Chartered Alternative Investment Analyst Association (CAIA) website states that alternative investments are “often defined not by what they are, but by what they are not. That is, an alternative investment is a position in something other than a long position in either equity or debt.” Certainly by that definition, collectibles would qualify as an alternative investment in the portfolio context. This definition though might be considered by some to be a low bar, so I would further state that collectibles share many of the characteristics, namely illiquidity and smoothing, found in some other investments widely considered to be alternative investments.

Investors considering collectibles need to look beyond the claims of attractive performance and be aware of the unique characteristics and risks involved in these asset class which I hope this article helped illuminate. It also seems clear to me that skill and investment competence in these specific areas of collectible investments will likely be necessary to garner attractive financial returns. Further, it is likely that investors considering collectibles also are drawn to the emotional or passion aspect of these purchases. This discussion focused almost completely on the financial returns from the investments in collectibles, but many buyers also are likely drawn to the psychic returns or the pleasure the owners derive from these purchases. In addition, one could argue that some collectibles provide societal benefits such as when art is loaned to museums and sometimes bequeathed to the public.

Despite the challenges and risks already outlined in this article, collectibles look like a space fertile for additional investment research. I look forward to sharing future observations in this area as this research continues.
Source: Forbes

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