Investing In Collectibles - Are NFT's Digital Beanie Babies?

The Beanie Babies Bubble is a particularly entertaining story which highlights all the hallmarks of a mania. Mass delusion. Speculation. Out of control expectations. The herd mentality.

Right now, it might appear that we are in another collectibles boom, in February this year, a Michael Jordan basketball card sold for $738,000 at auction. The exact same card had traded for more than half a million dollars less just a few weeks earlier. A Klon Centaur guitar effects pedal is being sold for half a million dollars. At Monterrey car week a McLaren F1 just sold for over $20 million dollars, and a pair of Kanye West’s trainers that he wore to the 2008 Grammys - became history's most expensive sneakers after selling for $1.8 million

So, should you as an investor buy beanie babies, Kanye west’s old shoes, NFT’s, meme coins or any other collectables? These are all running up in price right now, grown men are discussing their collections of Pokémon cards here on YouTube. Children’s entertainers like Logan Paul are selling cryptocurrencies and NFT’s to their audiences.  Are these items a good investment, and if so - which are the best investment?  We look at the long term returns of collectibles to see what your expected return might be?

Patrick's Books:
Statistics For The Trading Floor:  https://amzn.to/3eerLA0
Derivatives For The Trading Floor:  https://amzn.to/3cjsyPF
Corporate Finance:  https://amzn.to/3fn3rvC

Patreon Page: https://www.patreon.com/PatrickBoyleOnFinance

Visit our website: www.onfinance.org
Follow Patrick on Twitter Here: https://twitter.com/PatrickEBoyle

Patrick Boyle On YouTube

Transcript

In November 1999, right before the dot com bubble burst, Frances and Harold Mountain were all over the newspapers.  Four months after their divorce the couple had shown themselves unable to agree on how to split up their Beanie Baby collection. The Las Vegas Judge ordered them to bring the entire collection into the courtroom, spread them out on the floor, and go back and forth choosing beanie babies until the collection was split.

Frances told the press, "I don't agree with the judge's decision. It's ridiculous and embarrassing." Nonetheless, she did crawl around the floor picking out Beanie Babies. Her first choice being Maple the Bear.

At the time the pile of stuffed animals was worth a few thousand dollars, but prices were already in freefall.

The Beanie Babies bubble is a particularly entertaining one and it highlights all of the hallmarks of a mania. Mass delusion. Speculation. Out of control expectations. The herd mentality.

Right now it might appear that we are in another collectibles boom, in February this year, a Michael Jordan basketball card sold for $738,000 at auction. The exact same card had traded for more than half a million dollars less just a few weeks earlier. A Klon Centaur guitar effects pedal is being sold for half a million dollars. At Monterrey car week a McLaren F1 just sold for over $20 million dollars, and a pair of Kanye West’s trainers that he wore to the 2008 Grammys - became history's most expensive sneakers after selling for $1.8 million – which (for all I know) might be a good price – I’m not really in the market for secondhand celebrity shoes...

A big part of what we are seeing, relates to there being so much money sloshing around right now. On top of that, consumerism might be a side effect to people being bored during a pandemic. But there are plenty of psychological and behavioral aspects we can discuss.

So, for those of you who don’t remember the beanie baby bubble, Ty Warner was the creator of beanie babies, he was also was a master of marketing and a manipulator of supply and demand. He priced Beanie Babies below $5, setting an affordable entry price for anyone who wanted to get in on the trend. He only sold them to small independent stores rather than giant chains and he limited the number these stores could buy. Buyers could never find the whole collection in one place, and the toys always seemed like they were sold out.  This turned collecting beanie babies into a bit of a treasure hunt, and it got people who might never have bought a stuffed animal out searching for them.

Ty would quickly, and randomly retire certain Beanie Babies after a short period of time, creating an illusion of scarcity (in reality, millions of them were being pumped out in overseas factories – ones that were scarce in the USA were easily found at toy stores abroad).

Ty was able to quickly jump on cultural events that were happening, things like the deaths of Jerry Garcia and Princess Diana, quickly releasing bears named after them. 

Once a beanie baby was retired, it would often spike in price — and on the newly launched website e-bay, some sold for as much as $13k. Around the time of the e-bay IPO, around a quarter of the goods listed for auction were beanie babies.

A Beanie Baby collector at the time was quoted in the press comparing them to Picasso paintings, pointing out that people were shocked when Picasso’s first hit the million-dollar mark and that a painting had recently sold for $25 million. Why shouldn’t a beanie baby achieve a similar price – in particular one whose ear tag was in excellent condition?

The Beanie Baby Handbook, which was a directory of the stuffed animals and their ebay auction prices became a regular on the New York Times Best-Seller list.

Greed was running high in the late 90’s with the dot com bubble in full roar. Excitement, greed and FOMO can be contagious in these environments.

So how did the bubble end? Well, in late 1999, to further boost the market, Ty announced that all Beanie Babies would go out of production at the end of the year… Collectors were surprised when absolutely nothing happened. There was no market impact. Prices didn’t rise. Nothing.  Today you can find beanie babies trading on ebay for less than their initial cost price, but i’m told that prices are on the rise again.

Maple, the bear that was Frances Mountains first choice in the Las Vegas courtroom 22 years ago can be found online with prices ranging between $5 and $5k dollars today. I’ll note that there are zero bids at either of those prices.

So, should you as an investor buy beanie babies, Kanye west’s old shoes, NFT’s, meme coins or any other collectables?? Collectibles are running up in price right now, grown men are discussing their collections of Pokémon cards here on YouTube. Noted children’s entertainers like Logan Paul are selling cryptocurrencies and NFT’s to their audiences.  Are collectibles a good investment, and if so - which collectibles are the best investment?

Some of the price rises that we are seeing right now might relate to the fact that central banks have been supporting markets for years with low interest rates and quantitative easing — and investors are convinced that this will continue for quite a while going forward. Negative real interest rates extrapolated forever into the future can justify pretty much any valuation of any asset.

An argument that is frequently put forth is that many items have value simply because of their rarity. But it is worth noting that rarity alone does not confer value — lots of things are rare but not even slightly valuable. There may be only a few dozen of your child’s drawings in existence, but that does not mean they have any financial value whatsoever. Sorry…

To illustrate the false equivalency between rarity and value, let’s use the example of a fifth edition of the book Dubliners by James Joyce. Finding a fifth edition might be a rare occurrence, but this rarity, doesn’t make this edition more valuable than a first edition as it doesn’t have any other significant characteristics to enhance its value. Rarity is just not enough to make something collectible; specialness matters too.

Well, how big is the market in collectibles and other non-financial assets? A recent report from Knight Frank shows that ultra-high net worth individuals have more than half of their wealth in non-financial assets.  Things like real estate, art, jewelry, wine and other collectables. This means that for the wealthiest people in the world – what we might call private assets are almost as important as traded securities or the businesses that they own.

If we strip out real estate, we see that ultra-high net worth individuals have around 6% of their wealth in collectables (or what are often called treasure assets.) They buy fine wine, classic cars, musical instruments, rare books, and so on. Although financial benefits might not be the main reason people buy collectibles, many collectors do hope for financial gains as well as personal enjoyment. To the owners, these are beautiful and collectible items, even if they don’t generate any cash flows. Collectors point to cultural and artistic investment not only as a pleasurable activity but also as a contribution to financial diversification.

Long-term price data for these assets is difficult to find for a variety of reasons a big one being that often no two collectable items are the same. Back in 2018 Dimson Marsh & Staunton of The London Business School assembled a high-quality time series of 118 years of the investment performance of wine, stamps, violins, art, collectible books jewelry and classic cars and compared them to the returns of global equities.

Based on the data, you can see that classic cars were the best performing collectable asset, followed by jewelry, books, fine art, violins, stamps and then fine wine. All of these assets did however underperform a world equity index over the 118 year time period.  I was a little surprised to see that these assets were not very highly correlated to the stock market meaning that they appear to provide some diversification benefits.  Equally I wouldn’t guarantee that these things won’t fall in price should the stock market crash.

This series of returns is the highest quality data available, but it is worth noting that costs like storage, insurance and maintenance are not included in the time series. These costs are significant. Storage costs for fine wine are estimated to be $1.40 per bottle per year.  Anyone who has owned a classic car can probably tell you how expensive maintenance and repair costs can be.

Transaction costs can be extremely high too, investing in art can bring transactions costs of up to 30% of the sale price and stamps are estimated to have transaction costs of 25% on average.  When we take all of these costs into account the majority of the returns are wiped out.  In addition just because fine art in general increased in price, this doesn’t mean that the painting you chose went up in line with the index. You might have terrible taste.

Collectibles bear many risks that you do not find in traded financial assets, they are often subject to imitation. Fakes and forgeries for some pieces are often the rule rather than an exception. Camille Corot for example made 3000 artworks in his life, but in the United States alone it has been claimed that there are 8000 authentic paintings.

Collectibles run the risk of falling out of fashion. As a given generation ages, their collections can seem less relevant to the following generations.  At a car show, you will see boomers gathering around a Steve McQueen Mustang and Millennials gathering around a Fast & Furious Toyota Supra. Antique furniture and Stamps have not done well in recent years as younger buyers have less interest in collecting these items.  Stamp collecting has lost its luster, as few people send letters in the mail anymore. To an older generation a letter covered in exotic stamps from an uncle living abroad drove enthusiasm for the hobby, now an email or text is received to celebrate a birthday.

Classical paintings have not risen in price in line with contemporary art. This is just due to changes in taste and the way people decorate their homes.  If your retirement plans hinge on your Pokémon card collection, you should recognize the real risk that when it comes time to sell, the next generation may not be as excited about Pikachu as your generation was.

Sometimes collectors lose interest in their collections over time too.  The actor Nicholas Cage was a passionate collector of Elvis Presley memorabilia, going so far as to marry Elvis’s daughter in 2002.  Three and a half months later they divorced.

When we look at the investment returns of durable nonfinancial assets like real estate or art. It is worth noting that these investments are important both emotionally since they include peoples’ owner-occupied homes and their treasured collectables and important financially, as the value of these assets is, in aggregate, larger than the overall value of financial assets that people own.

Most of these assets should not be bought with the expectation of huge financial gain, but instead the enjoyment you get from owning a collectable.

I’m not saying today’s boom in collectibles is a bubble, but there are some striking similarities between certain items we see running up in price and the beanie babies bubble from twenty five years ago. Speculative bubbles rely on constant upward price movement; once the momentum slows, the bubble collapses. By 1999 everyone who could become a Beanie Baby collector already was one. Once casual collectors could no longer count on a quick price pop, they lost interest—and then prices fell as the market contracted, driving out more collectors.

Most of the items that became very collectable over time were not initially designed specifically to be collectables. Modern mass-produced collectibles are almost always terrible investments. Thomas Kinkade paintings, Hummel figurines, Logan Paul’s Dink Doink, anything from the Franklin mint – these things are probably best avoided if you are trying to grow your wealth.  Equally I would say that if owning a particular object would really make you happy, go ahead and buy it, as even if it falls in value it might still spark joy in you.  And that is after all the whole point of owning nice things.  

Have a great day and see you next week, bye!