“Collectible ‘emotional assets’ – sometimes also called ‘investments of passion’ – form an important part of the portfolios of investors around the globe. According to a Barclays (2012) survey, the average high-net-worth individual has almost 10% of his wealth invested in artworks, antiques, jewellery, fine wines and other luxuries in limited supply.”
So begins Investing in emotional assets, a recent academic paper, written by Elroy Dimson of the London Business School and Christophe Spaenjers of HEC Paris, which reviews the performance of three categories of emotional asset – stamps, art and musical instruments – and compares their long-term returns with those generated by gold, treasury bills, government bonds and equities.
The authors note the increasing professionalisation of the collectible investments industry over the last 10 years or so and particularly the media’s focus on “the adventures of well-known financial investors in emotional asset markets – think of the art purchases by [hedge fund manager] Steven Cohen or the high returns reportedly realised by [Pimco’s] Bill Gross on his stamp collection”.
So should The Value Perspective be spending more time poring over Sotheby’s catalogues than company accounts? Well, according to the paper, the long-term returns on stamps, art and musical instruments have all beaten the total returns from gold, treasury bills and government bonds – or at least they do before transaction costs and other expenses are taken into account.
As an example, point out Dimson and Spaenjers, “auction houses typically charge a ‘premium’ to the buyer and a ‘commission’ to the seller; taken together, these transaction costs – which should both be considered as a tax on the seller – can easily amount to more than 25%’. Further considerations for would-be emotional asset holders include illiquidity, fraud and changes in taste and wealth patterns.
All of which leads the authors to conclude “an investment in collectibles should not be considered lightly” although they go on to acknowledge “even if collectible emotional assets are dominated by financial assets in their risk-return properties, they can still be rational purchases for individuals who actually derive pleasure from owning them”.
As we read through the paper, The Value Perspective was struck by the fact that we do not know how to value emotional assets such as stamps, art and musical instruments because we are unable to work out their intrinsic value – and the reason we are unable to do that is because none of them has a cashflow.
And, all the time, we kept being reminded of the line from Benjamin Graham’s 1934 value classic Securities analysis that: “An investment operation is one that promises safety of principal and an adequate return and anything other should be labelled as speculative.” Here on The Value Perspective, we believe emotional assets fall firmly into the ‘speculative’ camp.
That is why we will be avoiding them and sticking to equities, which are what we know and what we can value and, to our eyes, the right ones remain the ultimate “rational purchase”. Furthermore, as the sharper-eyed among you may have worked out, equities were found by Dimson and Spaenjers to be better long-term performers than stamps, art and musical instruments – let alone gold, treasury bills and government bonds. That is just one reason why we also derive great pleasure from owning them.