Traders Guide To Alternative Investments and Collectibles

Many people learned the hard way that money in the bank are now at risk not only because of cash depreciating quickly. It is also now a fact that banks and central banks are punishing people with negative interest rate. Worst yet, banks no longer guarantee the money you deposit with them. Alternative investments used to attract wealthy investors only are now of interest to many people who prefer to park their money somewhere other than stock markets or other financial markets.

I am no expert in collectibles per se. I consider myself an amateur antique watch collector. But I have many friends who collect interesting things that not only make money on the side for them, they also learned many things along the way which they shared with me. I am going to talk about the basics of collectibles and the nature of these alternative investments.

Collectibles Are Different From Financial Markets

There are many kinds of collectibles. Some people collect stamps. Some collect antique jewellery. Others may be interested in antique watches. Each one of these collectible markets are quite different from the other ones. Comparing to structured financial markets where you can easily pull up the price charts, you would be surprise to know that collectors do not behave quite the same way. Hence many rules one have learned from trading the financial markets are not applicable to collectible markets at all.

In general, the value of collectibles fluctuate a lot depending on the time period whether the society is stable or not. A piece of history that is kept in pristine condition is priceless and can command a lot of money when they are people out there wanting to own a piece of that history themselves. Yet, during unstable times, especially war times, you will hardly find anyone to appreciate the value of the same item.

In this sense, collectibles are no different from the local currency you see in a war torn country or gold in a place where food is scarce. However, collectibles have an advantage over paper bank notes and gold bars – the collectibles will return to extremely good value and often more valuable than before when peace has returned. This makes collectibles a very good storage of value for passing down from generation to generation.

Short Term Goal and Long Term Planning

With the basic understanding of the nature of collectibles, it is not difficult to understand that anyone who wants to profit from their collections must keep two objectives in mind.

The short term goal is to flip things that are trending so that you can generate positive cash flow.

The long term goal, however, is to keep the rare finds so that one can cash out the items at the most suitable time, which I have to remind you here that such time can be several generations later.

Some collector items, especially the ones with no historical significance, do not have long term value. Hence they are pure short term play very similar to scalping sports tickets or penny stocks that are going through its breakout phase. One has to understand that and have good sense of money management to protect yourself from losing excessive amount of money on just one trendy play.

A good example of trendy play was the Beanie Babies euphoria. The Beanie Babies were the hottest collectibles during the late 1990s. Some of these plush toys rise to several hundred dollars each at the peak of the euphoria. Several factors contribute to the good run including intentional limited production. Many people spotted the opportunities to profit from the craze. Those who understand that these things come and go all the time profited handsomely while those who thought they are collecting for the long term without proper money management were burned badly when the euphoria ended.

Affordability Matters

Many people are attracted to the idea of becoming a collector and next thing you know they sink all their money on one single item. Well, there are many lucky individuals who bet it right. But there are a lot more who lost everything on their first collection. Remembering the word collect means you are gathering multiple items, not just one, is an important motto for savvy collectors.

Good judgment is to make sure you have a fixed budget for your amateur pursuit. It should not put you in debt. It should not affect your lifestyle much. In another words, the best strategy is to direct the part of your income that is truly disposable into a focused hobby. For example, you may spend significant part of your money on expense type entertainment. If instead you put those money into your collecting hobby, you will be able to build a decent collection in a few years.

Affordability is not only about money. It is also applicable to time. If you are very busy all the time, developing a collecting hobby can be difficult. Yet it is not impossible. If there are something that interest you much, you will make time for it. Hence the key is to find something that interest you and start by reading up on the subject say 5 to 10 minutes a day on the Internet. Once you have started, maintaining the hobby may only cost you a few hours a month and you will probably not notice that because you make it part of your habits.

Secure Storage Being A Necessary Evil

Security never enters the mind of an amateur collector until much later. As you only have a few items on hand, it is difficult to imagine why there is a need of secure storage. What is important though, is that you need to know what is necessary down the road when your collection grows to the point that you need specialized storage. As the cost of special storage can varies a lot depending on the type of collection you have, knowing what the expected cash layout will be can help you plan your hobby budget properly.

A friend of mine whose father is an avid collector of Chinese antiques. He started out doing it as a hobby only. Many years later he needed a whole condo to store his collection. He found it to be cheaper than storing the items at a secure storage facility. He loves to play with his collection so safe keeping at a secure facility is also not as convenient.

Stamp collectors often install high-grade safe at home to protect their collections.

A friend of mine who collect red wine has to build a room that occupy his whole basement for the collection.

My personal interest is mainly limited editions of antique mechanical watches. Due to the size of these watches. It is quite easy for me to store them with a reputable secure facility company.

Some people choose to use safety deposit box with a local bank to store their collections or expensive jewelleries. It is a viable option but as we witnessed over these years that banks may not be as safe as they once were.

Being A Collector Requires Experience and Knowledge

Due to the illiquidity of collector items, it takes effort to study the collectibles you are interested in. Over time, if you develop a passion for the collectibles, your knowledge about these items and their market values will improve quickly. This knowledge of the collectibles and the experience you gained from trading with the other collectors are essential to your success in becoming a profitable collector.

As explained earlier, there are times when certain collectible items becoming hot in their respective market. If you are holding items that has a sudden surge in market value you need to consider whether you would sell at least some of the collection. This takes experience and understanding of the specific market to make the proper judgment call. You will make mistakes along the way but as long as you learn from your mistakes, you will eventually become a seasoned collector.

Just like trading, some people can turn their collector hobbies into a full-time business. A good example I can offer here is an older friend of mine, as a market maker for many years, has developed an interest in collecting red wine. Over the years, he learned many things about the red wine industry and started to collect red wines that have good potential in increase in valuation. He derived a plan and started his collection some 20 years ago.

He figures he like those better aged red wine himself anyway. By buying them in bulk when these wines are first produced and store them away for several years, he get to enjoy them at a lower price. As a bonus, if he get to sell some of the collection at the higher price, it is as if the collection pays for his red wine drinking habit.

Fast forward to current time, as he has retired from trading and enjoying life travelling around the world, his wine collection hobby is now his business providing him a decent income. Over the years, he has developed direct contacts with European vineyards and local restaurateurs. The wine producers know he is a dependable collector while his clients find that he is a reliable source for good wine when they needed something rare and expensive. In his own words, if he has not developed the hobby in the first place, he would have blown half his net worth on good wine by now.

Power of Networking

Having a collecting hobby can open doors to many things. One of them is opening you to people you may otherwise never meet in your life. Unlike the traditional networking among professionals where the focus is development of your career and business, the collector scene put you in a different situation where friendship can develop more easily because almost everyone has to start from scratch with their hobby and the more experienced collectors know. If you are interested in meeting new people, having a collecting hobby is a sure way to make it happen. You will be surprised how far the reach can be with a regular collection hobby.

In my case the most awkward moment was being contacted by someone who said he was referred to me from a jewellery store owner whom I know that sells high-end watches. He had been looking for a rare tourbillon watch made by a small Swiss company. Only after talking to the gentleman for a while I figure that he was talking about one of the watches I have. Making a long story short, I ended up selling the watch at cost and I made a friend, a very important one that affects my life greatly when I was introduced to a number of financiers in Europe.

The Tax Advantage

Depending on the country you are legally liable to pay tax to, the tax treatments varies a lot on collectibles.

Some countries simply tax on collectibles as if it is normal personal income. Or if you purchase the item under your company’s name, the gains on the selling of the collectible is recognized as business income.

But, many countries with special treatment of capital gain tax, which is at a lower rate comparing to personal income, would tax the gain from selling collectibles as capital gain if the item is held for more than a year (or certain period required by that country). Hence, it is very important to focus on the taxation angle when you decided to start a collectible hobby.

Remember, as long as you have not sell the collectible, there is no market to evaluate the item hence you are keeping them tax free. This is a major advantage over stock holdings as many countries now choose to tax your stock holdings by marking them to the market price at year end.

Estate Planning

If you expect to transfer the ownership of your collections to your kids or someone you know that you wanted to have the collections, do not put the collection in your will. If you do so, and unluckily some tax and/or liability issues lead to lawsuit against your estate, the collection could be jeopardized. Imagine what could happen when the legal battle lead to full blown liquidation of your assets first before distribution. It can mean that the assets are being liquidated at the worst possible time.

A smarter way to do it is setting up the storage facility, be that a safety deposit box or secured storage, with co-ownership between you and the designated person you wanted to have the collection after you pass away. The survivor clause in majority of security storage contracts will automatically past the complete rights to the survivor of the account. You can easily choose what to put into the secure storage beforehand, thus ensuring the collections are protected the way you wanted it to be.

Please consult your estate lawyer to make sure the law in your country works the way I described above. You may have to twist the arrangement a bit but the overall principle is applicable to majority of Western countries.

The usual disclaimer applies here – I am not an estate lawyer so please consult one in your country for proper legal advices.

Summary

There are many similarities between traders and collectors. Both take time to learn the market you are dealing with. Both can be financially rewarding if done right. And of course both are risky with money at stake. For developing a collecting hobby, however, it can be done in a controlled manner so that you can learn slowly and steadily without too much risk involved. Even if you ended up being a hobbyist collector only, I am sure the time and effort you spent on the hobby will provide many fascinating stories to tell your friends, kids and grandchildren.

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