For men of a certain age, a fantasy likely sprung into your little mind thirty, forty, or fifty years ago, that eventually, one day, your baseball card collection would be worth something. Shoeboxes were enlisted in the preservation effort and carefully stowed away under beds, in closets, up in attics, there to wait until some sensible female relation, or just plain sense, exiled them to the dump, a garage sale, or the storage shed.
My 1977 “Burger King” Yankees baseball card collection goes for $300 on eBay. I haven’t seen it in a decade, but I’m certain that when I dig it out of storage, I’ll fulfill every American boy’s dream of actually going and selling my baseball card collection for a poor financial return given the holding period and the performance of the relevant indexes. It’s as American as apple pie.
But the question is why do collectibles have value? Why do my Burger King Yankees cards go for $300? Why is the Reggie Jackson in this seris now worth $56? If the value of an asset is the value today of all the dollars you’ll expect from that asset over the years ahead, why do collectibles have any value at all?
They can’t be consumed, don’t produce anything, cost money to store, have zero nominal returns and therefore negative real returns*, and are remarkably fragmented, sporadic, illiquid marketplaces. With those investment characteristics, you might expect that their value would trend towards zero. So why does a zero-return market for collectibles exist?
Considering three possible explanations, they each come up short: intrinsic non-financial return, money flows, and signalling.
There are intrinsic rewards to owning collectibles. There is the enjoyment derived from time spent with expert people, the stories swapped with comrades-in-collecting, the luscious meetings in soft rooms at the dealer’s townhouse, and the experience of deference before the auction block. It could be that perks, privileges, and honors drive the collectibles market.
As one paper on Chinese stamp collecting asserts, it is these intrinsic rewards, the psychological and social return to owning collectibles, that provide a meaningful portion of the return to collectibles ownership. The lower financial return becomes, in effect, a price paid by the buyer for the psychological benefits of collectible ownership. Other academics agree and describe these lower returns:
“On the one hand, collectibles should provide a high rate of return to compensate the owner for the objects’ relative illiquidity, high holding costs, and variability of return, including the possibility that a once-popular item might fall into disfavor. On the other hand, collectibles could provide a low rate of return because the non-pecuniary returns from their ownership will mean that investors require lower ﬁnancial rewards; for example, you get to hang your Picasso on your living room wall and show it off to your friends.
Because of the nonpecuniary—perhaps even non-rational—rewards from owning
collectibles, there is reason to think it may be possible to make extraordinary proﬁts in
this area. Collectibles are estranged from cost fundamentals, since production concerns are irrelevant once you are in the resale market, and the numbers of buyers and
sellers involved may be relatively low.
These results imply that the non-pecuniary return to at least some forms of collectibles may in many cases be substantial; indeed, one can approximate the non-pecuniary returns by subtracting the return on equity or debt from the pecuniary rate of return on the object at hand.”+
But this explanation is not persuasive. Many assets purchased for financial reasons also meet deep human emotional needs. Housing is the most obvious. A US government bond offers peace of mind along with its coupons. At the other end of the risk spectrum, start-up investing provides fantastically interesting cocktail party chatter along with highly variable outcomes.
In any event, as a collectible provides the same non-pecuniary characteristics to its past, present, and future owners, the non-financial, intrinsic rewards are priced into the asset. Negative real returns can’t be the result of non-financial pay-offs.
There are macro-economic considerations in growing economies. As incomes increase, cash seeks new diversions. Expenditures on sports teams, pets, entertainment, vacations, hobbies and healthcare all increase with GDP per capita. The satiated wealthy and the satisfactorily affluent will find ways to use uncommitted mental bandwidth to expend ready money. Idle hands are the devil’s workshop and the dealer’s meal ticket.
With rising productivity, lower relative expenditures on staples absorb less of an increased income. Money earned needs to go someplace, and whether it is the rare fountain pen or pursuing Fountain-of-Youth medical cures, people dedicate an increasing portion of their income to pursuits trivial and profound.
But the availability of discretionary money flow does not explain why dollars flow to non-productive collectibles assets instead of real estate, capital equipment, or consumables such as automotive, clothing, and iPads. Competitive investment dispersion across asset classes ought to reduce money flows into collectibles until real returns rise, but they do not.
Perhaps collecting serves as an effective social signal. The movie character displaying his art collection is never the rude hayseed or rough bumpkin. Collecting activity signals elevated intellect, status, taste, or ability. Even the Soviet calculator collection or the world’s largest collection of Charlie’s Angels memorabilia signal attractive characteristics of vision, determination, and an ability of a certain type.
Yet it’s difficult to see the efficacy of such signalling expenditures, as most observers won’t share the collector’s aesthetic appreciation – de gustibus non est disputandum. Further, an entire luxury goods industry exists to provide readily-purchasable tokens of wealth and taste and itself expends significant dollars to ensure that audiences receive the intended messages regarding the owner’s sophistication, discernment, and desirability. The collectibles industry would seem to be a weak competitive threat as purveyor of social signals.
With three unsatisfactory answers, how then can we explain the negative real returns to collectibles? The rational buyer isn’t buying collectible assets for a financial return, to park idle money, or for social signalling. What then does she hope to buy for her purchase price?
More on that tomorrow.
* Wine being the exception on consumable collectibles. Baumol (1986) found an annual compounded rate of return of 0.55 percent for art for the period 1652 to 1961. Meta-analyses such as Burton & Jacobsen find instances of positive return, but do not systemically call into question Baumol’s findings.
+ Burton & Jacobsen (1999)