A View Through Glass

Rants and ravings of a curmudgeon of Generation Y

Month: August 2013

Don’t buy collectibles as an investment

Collectibles as an investment is an interesting idea, but ultimately they fall prey to one of the major rules of any financial endeavor and economics 101: things are only worth what someone else is willing to pay for them. You might spend $100,000 on Beanie Babies hoping to put your kids through college, but if that market goes away, or more likely, people aren’t willing to pay thousands of dollars for a Beanie Baby, then you are going to end up taking a major loss. Never mind the fact that $100,000 in and of itself could easy pay for a college education at a state school.

If you do a search on the internet it is not uncommon to find articles such as the following:

Which are just two that were grabbed doing a very short search that basically say the same thing in that you might make money if you are diligent and don’t get attached to what you are collecting you might be able to make money, but more often than not, you will lose money or break even. Also, as both articles point out, collectibles tend to have an attraction that causes you to what to collect them in the first place and that attraction can cause you to hold onto something past the best time to sell it. In this case though, I’m attempting to address people that are seeking out collectibles as an investment vehicle as opposed to monomaniacal collectors such as those described in “Collecting: An Unruly Passion: Psychological Perspectives

Now, none of this is to say that you can’t make money via collectibles and I’d be lying to say that I haven’t done so myself. Back when the BioShock video game (a good one by the way that I recommend playing if you have not) was released, there was a collectors edition that included a statue. Due to defects in packaging a large number of them were damaged and 2K Games sent a print copy of the art book, “Breaking the Mold: The Art of BioShock“, to purchasers as an apology. As it turns out, this art book now sells for over $100 on eBay in mint condition and I recently sold a lightly worn copy for $71. Had I have kept the copy of the collectors edition of the game instead of donating the statue to charity I could have sold that on eBay as well. This is where the warning in the title to this entry comes into play though, I believe that I paid around $70 for that collectors edition game back in 2007 and according to eBay and open but complete copy is selling for around $50 to $75 on eBay and a sealed copy is selling for around $125. Obviously in the this case you are losing money with the open copy, but it’s a video game and is meant to be played.

However, these are newer games and the markets tend to fluctuate a lot. Even more so since BioShock Infinite was recently released (another good game by the way). So what if we look at the historical picture with regards to video games, one fairly famous game when I was younger was Valkyrie Profile. This wasn’t a very high profile game back in the day, but among players of RPGs it was known and generally recommended as a good game to play. When sold used at specialist stores it could routinely be found for a price of about $100. So how is the game trending these days?

Valkyrie Profile Price Chart

 

Well, it appears that the price has gone down over the years and right now copies can be found on eBay for between $60 and $100. So that means that if you bought it 2002 (when I remember seeing it for $100) then you would have lost $29.85 to inflation assuming you are able to resell it for $100. Granted you have the conundrum that sealed copies sell for major money, but the questions is, will it last?

A lot of this entry has been focused on video games, but that is in part because I have been selling off some of the video games that I have accrued over the years. Another item that I recently sold off? Mint and proof sets of coins that I got a box of at an estate state. Now coins are billed as an investment, i.e. The Expert’s Guide to Collecting & Investing in Rare Coins: Secrets Of Success and countless other books out there, but the sad fact is that when coins are sold as an investment, they usually aren’t. If you examine the issue price versus the average value of mint sets and proof sets you will find that they just don’t hold their value. I might have been able to get a box of them and sell them on eBay at a nominal profit, but that is largely because I didn’t pay much for the box and I did a lot of hard work to list them all individually. Had I had bought those sets direct from the US Mint or from a dealer over the decades that were represented in the box, then I would have netted a substantial loss.

However, what about just coins in general? Well, this is another situation where a lot of issues come into play:

  • How rare is the coin?
  • What is the coin made of?
  • Is it a popular coin?

Obviously the rarer the coin the more a collector might be willing to pay for it; however, the composition of the coin also plays a role. As you might suspect, a common gold coin can be worth substantially more than a very rare copper coin due to the value of the gold. Finally, the popularity of a given coin also has a lot to do with things, an uncommon coin from a popular series (i.e. Morgan Dollars) can actually sell for more than a rare coin from an unpopular series. At the end of the day, the value of coins are highly subject to the whims of collectors along with commodity traders. In fact, most of the investment advice you find when it comes to coins is to buy high grade key dates and leave things at that unless you are interested in it as a hobby.

This is just two examples in a very vast field given how many things people collect, but one item to note is that people also for pretty much everything that you can collect, you can find a price guide on Amazon for it. This is something at I have always found interesting because compiling those books cannot be easy to compile and yet, there they are. So clearly there must be money to be made in publishing them.

So where does that leave us? At the end of the day, the title of this article is “Don’t by collectibles as an investment” and I generally stand by that bit of advice for a number of reasons:

  1. Collectible markets can be very volatile and can go away, as shown by the Beanie Babies.
  2. Collectibles are illiquid, selling them is easier with the internet, but can still be hard.
  3. Collectibles don’t provide a source of income while you are in possession of them.

Incidentally, these reasons are very similar to the ones that Investopedia list. However, if you think about it, they do all make sense, just because something is popular today doesn’t mean it will be tomorrow at which point your investment might not be worth anything. Furthermore, you can’t really retire off of the income that collectibles offer while you own them. A painting by Monet might be worth several million dollars, but you aren’t going to see that money until you sell the painting. Collectibles with a long track record (e.g. art, coins, etc.) might hold their value over time due to continuous demand for them but outside of very limited situations, I’ve yet to hear of anyone getting rich in this day and age because of collectibles.

So at the end of the day, collect something because it brings you enjoyment, not because you think you might be rich selling it in the future at some point. Odds are you will not.

 

Generation Y and the housing recovery

Anyone that has been paying attention the past couple years knows that the has been a Great Recession which has had a highly variable recovery. By “highly variable” we mean that real salaries have been shrinking versus inflation and nobody is quite sure how things will be affected when the Affordable Care Act is fully implemented couple that with unemployment that is still somewhere around 7.4%.

So what prompts this particular rant? Articles such as the following:

Which, of course, leads to such comments as the following by Christopher Mims:

Millennials are holding back the housing recovery. Is there anything they can’t mess up?

Umm, yeah, if people can’t afford to buy a house because real salaries have been going down, unemployment is high, and don’t forget those student loans that need to be serviced, clearly they must be screwing something up.

Now don’t get me wrong, it’s not exactly a secret that members of the Generation Y cohort are living at home with their parents for longer than other generations a lot of us are also graduated from college straight into a recession or a weak job market at best. For that matter, I worked to pay for my Bachelors degree and was a contractor when I finished, going into the recession I was glad to be offered a full time position… with a 20% pay cut.

The housing market is all over the place, but there appears to be a US national average of $152,000 and the 2011 Massachusetts average of $319,900 seems to be pretty accurate based upon my recent experiences when looking for a house to buy. You can find homes for less, but they either need work or are  likely to be a bit of a commute to get to work.So lets be generous and use the national average of $152,000 for a hypothetical scenario.

Based upon government statistics the average income for males with a Bachelors degree in 2010 was $49,800 and for females it was $40,000. Note that this doesn’t match another average household income study for the 25 to 34 cohort that shows it be around $50,000. So lets call it $45,000 as an average and assume a single person with a student loan debt of $35,000. Currently only about 20% of Generation Y is a married which will affect things, but the math is a bit easier for a single person and since it 80% of Generation Y is single, it works.

It is currently being reported that members of the Generation Y cohort are graduating from college with $35,000 worth of debt, each. Depending upon where someone goes to school, how long, and how much they work during school this number could be higher or lower, but as an average it doesn’t seem half bad. A student loan payment chart [pdf] shows that $35,000 at 6.8% interest would be around $400 a month to service the debt. Note that 6.8% is higher than the current issue rate, but then again we are looking at people who have already graduated and entered into the workforce so, again, it works for demonstration purposes.

So plugging the following into a paycheck calculator:

  • $45,000 annual income
  • 5.3% state income tax (Massachusetts)
  • $380 monthly health insurance premium (based upon $4,565 annual premium)

We arrive at a net monthly paycheck of $2,575.99. Depending upon where you live your rent can range anywhere from $650 to $1,500 which gives an average of $1,075 which in the Boston metropolitan area would be cheap. So it might be a good number to work with.

Thus, recalling that $2,575.99 monthly net salary. After we factor out rent ($1,075) and the student loan debt ($400) we are left with $1,100 to live off of. While that does seem like a lot, recall that we are not making any contribution to a 401(k) which would shrink the size of the net income and food (figure $200), car insurance (figure $100, minimum), utilities (figure at least $250, which also includes cellular service) and we are down to $550.

But what about that 401(k) contribution that we aren’t making? A 6% contribution means $163.12 less in the net while 12% gives us $326.25 less. So realistically that $550 surplus we were showing before realistically would be about $223.75 to $386.88 if we were to use the 6% to 12% 401(k) contribution rates. So at the end of the day, not that much is left over for saving for a down-payment.

Recalling the relatively modest $152,000 average cost for a home, a 20% down payment would be $30,400, plus closing costs, so call it $35,000 to buy a home. That means that if you were able to save $550 a month, then it would take you about 55 months or a 4 years 7 months to save for the down payment. Granted you could put down less, but that means a higher monthly mortgage payment. Given the absolutely horrible current rates for savings of under 1%, the interest isn’t going affect calculations that much. Plus, we are also looking at a situation where someone is not saving for retirement, doesn’t have a car payment, credit cards, and really isn’t doing much of anything with their income for that matter.

So where does this leave us? Well, to be honest, someone would be really hard pressed to convince me that members of Generation Y aren’t doing enough to try and buy a house given their incomes – you can only save so much banks aren’t exactly willing to allow NINA Loans like they were prior to the Great Recession, which is a good thing. Just because you can put less down doesn’t mean that you can actually afford to buy a home.

Something I mentioned earlier might be a good argument, namely the marriage rates. To say that Generation Y is marrying later is hard given the ages involved after all, most people don’t marry during college and it may take a couple years after college to establish yourself and get married. Realistically the only part of Generation Y that would be “marriable” in this day and age would be the 22 to early 30’s cohort so the 20% overall marriage rate is a good metric to work with but may be misleading.

The reasons for not getting married are highly variable and can be another post in and of themselves, but it goes without saying that a dual income household is going to be able to save more money than a single person can. If we had a couple hold of two incomes at $45,000 each putting 12% of their income into a 401(k) they we will likely have at least $2,000 left over after household expenses are paid. If all that is put to saving for a down payment then $30,400 could be reached in about 15 months.

But again, we are being very generous with our estimates, which means they are likely wrong. However, this is also where things tends to get interesting since the more we adjust and correct of things, the more they point to things not being Generation Y’s fault, or at least, Generation Y is subject to may circumstances than are beyond its control. Take the marriage rates, sure members of the Generation Y cohort could get married but then again, this is no guarantee that it would really affect things that much since a lot of members of Generation Y are living with their parents or room mates, thus saving more money, and still  not buying homes. Even if someone is able to save more money, $152,000 for a home is a national average and thus might be something you just can’t find where you live. It’s the classic problem of cost of living.

Originally I titled this entry “No, Generation Y is not holding back the housing recovery” and while I think that title is accurate since a lot is holding back the housing recovery and blame can’t be placed on a single generational cohort, I don’t see it as easily defend-able as when I first started writing. Generation Y is definitely putting off such “milestones” that are classically associated with adulthood such as marriage and home ownership, but fluctuations in the times associated with these milestones are nothing new1 and tend to raise questions of if the economy is holding back Generation Y or if Generation Y is holding back the economy in some way.

So at the end of the day, quit trying to blame a slow housing recovery on Generation Y and making snide comments such as those that came courtesy of Mr. Mims. I’m sure if we sit down we can find a lot of reasons to explain the slow recovery of the economy as a whole and I doubt that Generation Y has the buying power to actually affect the entire economy, yet.