Early in my teaching career, a student named Jon told me about an exciting investment. All through high school, he had been collecting plate blocks of postage stamps. At the time, postage stamps were printed fifty stamps to a sheet and the four stamps in a two-by-two block next to the sheet’s serial number were called a plate block.
Plate blocks were rare because no one had ever thought to save them. Why would anyone want the two-by-two square of stamps next to the serial number? How often does anyone use four stamps to mail a letter?
Then, unexpectedly, plate blocks became a collectible. People began buying and selling plate blocks the way they might trade stocks. Some printed lists of what different plate blocks were “worth,” so that collectors could keep track of how their “investments” were doing.
Prices rose rapidly and Jon joined in the gold rush. Every time a new stamp came out, Jon went his local post office and bought several plate blocks. Sometimes, he bought complete 50-stamp sheets in case these, too, became collectibles. He kept his stamps in mint condition by storing them in protective plastic sleeves in binders. He proudly told me that he had several thousand dollars “invested.”
I told Jon that this was speculation, not investing, because his stamps didn’t generate any income. He was counting on the Greater Fool Theory, hoping to make a profit by selling his stamps to some fool who would pay more than he paid. Jon insisted that his stamps were an investment because prices had been going up. Indeed, the plate-block market was doing better than the stock market. Seeing that I was getting nowhere, I said, “Twenty years from now, let me know how it works out.”
Roughly twenty years later I got a large envelope in the mail from Jon. He told me about his career as a portfolio manager and thanked me for the class he had taken from me. The postage on the envelope consisted of dozens of stamps. The plate-block market had collapsed and this was Jon’s way of saying that I was right.
When Jon tried to liquidate his stamp collection, dealers offered him $9 for every $10 of face value. Nobody wanted to buy the stamps for anything other than mailing letters and dealers didn’t want to tie their money up in inventory that wasn’t moving. Jon was stubborn, so he kept his stamps and was liquidating his collection letter by letter.
Some people collect nonsense because they enjoy collecting nonsense. They like looking at hundreds of toy penguins or thousands of bottle caps. They enjoy the challenge of acquiring a complete set of Alfred Hitchcock movie posters or license plates from all fifty states. There is a lot to be said for cheap thrills. I had a friend, Bill, who collected keys and sea shells. The walls of his house were covered with thousands of keys Bill had bought at garage sales. He also had dozens of file cabinets stuffed with boxes of sea shells, each box carefully labeled with the date and the beach where the shells were collected. Visitors were astonished and Bill was happy that they were astonished. When Bill died, his children threw it all in the trash.
Bill wasn’t harming anyone and he didn’t have any illusions about his collections. It was just a hobby. The garage sales gave him something to do on weekends. The sea shells gave him something to do at the beach.
The collectors who need wake-up calls are those who think that their collections will make them rich. It’s fun to fantasize—to imagine what it would be like to be a famous athlete, singer, or movie star—as long as our fantasies don’t interfere with our lives. Dropping out of school to become a rock-and-roll star is seldom a good idea. Buying worthless objects and hoping that they will become valuable collectibles is seldom a good idea.
Wikipedia says that collectibles, “can be viewed as a hedge against inflation. Over time, their value can also increase as they become more rare due to loss, damage or destruction.” Well, yes, they can be viewed that way; but they shouldn’t.
One problem is our selective recall. We remember the few collectibles that bubbled, and we forget all the potential collectibles that turned out to be rubbish. A second problem is our willingness to believe that things that are rare must be valuable.
Bonds, stocks, homes, and businesses are not rare, but they are valuable because they generate income—coupons, dividends, rent, and profits. Conversely, a pair of beat-up soccer cleats I wore 20 years ago is rare, but worthless, because they generate no income. They have sentimental value for me, but there is no logical reason for anyone else to want them. Anyone who buys my cleats with the expectation of making money suffers from the delusion that an even bigger fool will pay an even higher price.
And so it is with all collectibles, but that won’t stop some people from dreaming of a long line of bigger fools.
For example, baseball cards were once wildly popular collectibles, much like postage stamps, the main difference being that you can’t use baseball cards to mail letters.
For many years, baseball cards were advertising giveaways or sold with cigars, cigarettes, and bubble gum. Children traded cards, played games with them, and stuck them in their bicycle spokes to make motorcycle sounds. Then, grownups decided that baseball cards were a collectible, too valuable to be touched, let alone played with. They were convinced that they could get rich buying baseball cards for pennies and selling them a few years later for dollars. They bought tens of thousands of cards, sorted and protected them, and studied price lists to value them.
Eventually, the market crashed. Today, you can buy cards online for a penny apiece, or even less. One online seller says that he is downsizing his collection of over 4 million cards, which is taking up four rooms of his house, by selling boxes of 2,000 to 2,500 cards for $25, with free shipping.
Old cards are still considered valuable—simply because they are rare. In 1991, Wayne Gretzky and Bruce McNail paid $451,000 for a 1909 Honus Wagner card that had originally been included in a cigarette pack. Wagner reportedly did not smoke and asked the company not to distribute the cards because he did not want children to buy cigarettes. Only about 200 cards were printed and, of these, only 50 or so were distributed. After the Gretzky-McNail purchase, this card passed from fool to fool for the next 25 years, selling $3.12 million in 2016 (an 8 percent annual rate of return, compared to 10 percent for the S&P 500).
Does a baseball card’s rarity make it worth millions of dollars? No. Baseball cards have no intrinsic value because they generate no cash whatsoever. Yet some people believe that rare cards have value because they are rare. It’s sort of like people being famous for being famous. There is no rational explanation.
A former student sent me a collection of cards that are rarer than baseball cards thought to be worth thousands of dollars. These are economics trading cards distributed by the economics club at the University of Michigan, Flint. Each card has a picture of a famous economist on the front and some lifetime statistics on the back. The James Tobin card says he was born in Champaign, Illinois, in 1918, and received his bachelors and PhD degrees from Harvard in 1939 and 1947 (interrupted by military duty during World War II).
There is a summary of his research and a memorable quotation:
I studied economics and made it my career for two reasons. The subject was and is intellectually fascinating and challenging, particularly to someone with taste and talent for theoretical reasoning and quantitative analysis. At the same time it offered the hope, as it still does, that improved understanding could better the lot of mankind.
If you are interested, make me an offer. Remember, this card is VERY rare.
Some people believe in the Latin saying, res tantum valet quantum vendi potest: a thing is worth only what someone else will pay for it. That’s like many of the quotations attributed to former baseball player and manager Yogi Berra; for example, “it’s not over until it’s over.” It is literally true, but so circular as to be meaningless. Yes, something is worth what someone is willing to pay for it, if by “worth” you mean the price people pay is the price they are willing to pay.
Value investors think differently. As John Burr Williams, the original value investor, said, “A stock is worth only what you can get out of it.” For stocks, investors get dividends. What do you get from a postage stamp, a baseball card, or any other so-called collectible? A collector who paid $250,000 for an early Batman comic explained that he keeps the comic in an airtight bag in a bank vault. “I’ve been toying with the idea of reading it, but I haven’t yet.”
Another fanciful collectible was Beanie Babies, small stuffed animals with heart-shaped hang tags. The beanie name refers to the fact that these toys are filled with plastic pellets (“beans”). Around 1995, the same time the dot-com bubble was inflating, Beanie Babies came to be viewed as collectibles because buyers expected to profit from escalating Beanie Baby prices by selling these silly bears to an endless supply of greater fools. Delusional grownups stockpiled Beanie Babies, thinking that these would pay for their retirement or their kids’ college education. Ah, good plan.
What is the intrinsic value of a Beanie Baby? It doesn’t pay dividends. It doesn’t pay anything! You can’t even play with a Beanie Baby. To preserve its value as a collectible, Beanie Babies must be stored in air-tight containers in a cool, dark, smoke-free environment. Yet, the hopeful and greedy paid hundreds of dollars for Beanie Babies that originally sold in toy stores for a few dollars. They saw how much prices had increased in the past and assumed the same would be true in the future. They had no reason for believing this, but they wanted to believe.
The Princess Beanie Baby honoring Diana, the Princess of Wales, sold for $500 in 2000. Then the bubble popped. I bought a Princess Beanie Baby on the Internet in 2008. The shipping cost more than the bear.
On the other hand, someone is currently trying to sell a Princess Beanie Baby online for $60,000. One of the reviewers (who sounds completely fake) wrote,
This will cover the cost of my retirement and more.
These are incredibly rare. At the time of this review, there were only 1500 listed (some with multiple bears) and 2400 completed listings for this GHOST rare limited edition Beanie. Where these can sell for upwards of $350,000, it’s good to know I have a couple in case anything happens to me. My family can sell my few to cover the costs of my funeral and get me a nice headstone and come visit me from time to time when they are overwhelmed with gratitude that I had such foresight to spend most of my money on commemorative Beanies.
I hope you laughed as much as I did when I first read this.
Real investments generate regular income, like dividends and rent, which means that the average investor makes money, no matter what happens to the price. Value investors don’t have to predict prices—which is a good thing because they cannot be predicted reliably.
Don’t buy collectibles. Buy income.