18
RISKS AND DUE DILIGENCE
Obviously, as with any investment,
an investment into rare stamps
and coins is not without risk.
LIMITATIONS TO INDICES
AND ANALYSIS
There are though a number of flaws
with anything that attempts to measure
the performance of collectible assets.
The data used to construct collectibles
indices can sometimes be highly selective,
which makes comparisons to traditional
investments such as stocks, bonds
or commodities rather meaningless.
Collectibles are often illiquid, unique
or priced according to demand and
condition – there is no continuity.
Indices often only include a
selection of data from the market.
The market isn’t transparent and
therefore only selected data may be released
and used for compiling indices. This creates
the risk that only successful sales or top
performers are included in the index – which
means it may only represent a small section
of the overall market and performance.
Stanley Gibbons have taken numerous
steps to provide clarity and openness to
their indices, by sharing the underlying
data through their website and Bloomberg
listing, justification of the chosen rare
stamps and coins that are included and
by aiming to provide a good cross section
of the market (with the inclusion of 250
rare stamps on GB250 and 200 coins on
GB200). Data and prices are based on
annual catalogues which in turn are based
on achieved auction prices and third party
sales. For rare stamps and coins that do not
change hands particularly often, catalogue
prices may be based on best estimates and
therefore can never be 100% accurate.
As Veld discusses in his paper “Portfolio
Diversification Benefits of Investing in
Stamps”
7
, it is extremely difficult to come
up with a reliable index of rare stamp
prices. With millions of different stamps
in issue, ranging from pennies to millions
of pounds, it is a challenge to select and
include a good sample of stamps in an index
which will provide an accurate picture on
the performance of the market. Due to this,
indices often only cover selected markets,
and stamps worth between specified values.
Added to this the complexities in valuing
stamps and it can be very hard for investors
to accurately keep track of the worth of their
portfolio and compare the performance
to other, more mainstream, assets.
RISKS THAT CAN BE MITIGATED
One of the key risks is simply buying the
right stamps or coins. Because each stamp
or coin is unique and because so few meet
all of the criteria to make them investment
grade, a large amount of technical knowledge
is required to assess their value and identify
investible opportunities. Collectors may
build this knowledge up over a period of
years (although that may not necessarily
be the case – remember that they are
interested in completing their collections,
not earning investment returns). But for
first time investors, this means they are
very exposed to overpaying or simply
purchasing the wrong assets - stamps
or coins that may never rise in value.
Ordinary retail investors lack buying power
and are only likely to be making small
purchases, often buying single items. They do
not necessarily have the purchasing power
to buy large collections when they come onto
the market (which often offers the best value
way of purchasing rarities). Ordinary retail
investors will be unable to negotiate discounts
and would typically pay higher transaction
costs (as a percentage of the purchase).
Closely linked to buying power, individual
buyers do not have access to deep markets.
Stamps and coins are traded at auctions
and in specialist shops around the globe
and a large network of contacts and a
lot of specialist knowledge is needed to
access genuine buyers and sellers.
These risks can be summarised as
information asymmetry – some market
participants have more knowledge than
others. Buyers believe they know something
the sellers don’t and vice-versa. It can
be a competitive environment and quite
intimidating. However, investors can easily
mitigate these risks by working with a trusted
agent or broker who has the required
technical knowledge. This evens up the
information asymmetry, tilting it in the
investor’s favour and harnesses the broker’s
buying power to minimise transaction costs
and get the best value for the investor.
Internationally there are large variations
in the classification and grading of rare
stamps, which can render a stamp desirable
to collectors from one country rather
undesirable to collectors from another.
Investment grade stamps should be in
superior condition and match the prime
examples included in stamp catalogues.
The prices listed in these catalogues are the
prices dealers expect to achieve (including
their mark-up) for only the best examples.
Investors need to be mindful when
purchasing stamps that they are not “over
graded” – i.e. they must be in the condition
that they are being advertised or sold in. This
can require expert knowledge and is another
strong reason for only buying through
reputable dealers or with the assistance of
a specialist. Some rare stamps may have a
certificate of authenticity which can aid resale.
RISKS THAT CANNOT
BE MITIGATED
Like any market, buyers need to be matched
with sellers. As stated, at the moment
there are plenty of buyers willing to pay
high prices for rare stamps and coins. But
investors must take a view on how long
those buyers will be around and for how
long they will be willing to pay those kind
of prices. If, for some reason, buyers were
to withdraw from the market investors
would be faced with losses on their assets.
There is no real way to mitigate against
this. Diversification (not over allocating
to stamps and coins) helps to protect
the overall portfolio – but apart from
this practical step investors must come
to their own assessment of the strength
of buyers in the market and what the
future buying trends are likely to be.
With no income streams, business plans or
liquid public exchanges it is very difficult
to establish just what fair value is for a
rarity, so having a positive view on the
likelihood of future buyers being willing
to pay for your assets is essential.
