Kicking around ideas about Investment in coins

Hey all,

First...I love coins. I have toned coins not worth as much as the change in my ashtray that I'd never part with. I have some practically worthless foreign stuff I'd never part with. Got it? I'm not just an "investor".

But lately I've definitely been thinking about investment in coins and doing some analysis. I'd like some of your input on some of my stray questions. I'll start with an easy one.

I have a price guide from today (2010) and one from 1995. I've been comparing them back and forth and I've figured out a few things.

Selected Liberty Nickels increased in value by about a factor of 2
Selected Buffalo Nickels increased in value by about a factor of 4
Selected Jefferson Nickels increased in value by about a factor of 3

There are demographic changes and changes in collector tastes at play here, but for the next 15 years, does it make sense to go with a winner (Buffalos), or do I bank on a sleeper (Libertys) under the assumption that they'll "catch up", or go with Jefferson's for an altogether different reason. Note that this assumes that I should even bother with nickels.


Nextly, I noticed, that in general over the last 15 years, for many series, the highest percentage returns came from either semi-key coins in low grade (like Good), or MS-65 specimens. Midgrade stuff didn't do too well. Why is that? And what does that mean for the future?

Lastly, going back to the nickel thing...since everyone is so concerned with bullion coins, does it make sense to snap up bargains in nickels, or am I missing an obvious opportunity in gold and silver coins?

I don't think there are right answers for these questions, but I'd sure like to hear your opinions.

Steve

 

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Steve, that is similar to fortune telling. All of us wish we knew, but then we would just drive up the prices of that issue in a self profiling event. It will always be a supply/demand situation. One might gather a group of scarce coins, only to find that no one wants them. My suggestion is to find coin series you like and learn every possible thing about them: keys/semikeys, varieties, how to grade them specifically the higher grades. Value will be enhanced for these areas IMO when you go to sell. A hundred EF 1937D buffalos will never be worth a single EF 1937D 3 Leg variety, but recognizing a raw MS-65 at a MS-63 price can give a nice return.

Jim

 

As I always respond when the "i" word comes up:

Some collectors do well financially. They tend to have the following traits. They tend to have a natural talent for grading which they hone with experience and training. They tend to have excellent relationships with dealers and/or other collectors so as to get access to decent coins at decent prices. They tend to have a love of the hobby, and spend endless hours on their hobby. The bottom line is that those that do well financially have an edge, superior grading skill, above average access to coins, market knowledge. Spend time developing those because all of those can be improved upon by putting in time.

There is a far larger group that does poorly financially. They too tend to share some traits. They buy mostly for investment. Many don't know how to grade, many have no interest in the considerable time investment required to learn the finer points of grading. Many buy from a single source and some pay significantly above fair retail (think HSN or telemarketing coin firms) for their coins.

The standard disclaimer is that past performance is not indicative of future results. While looking at what has done well the past 15 or 20 years may be instructive, it tends to have little predictive value going forward.

The traits of those collectors that do well financially, will always tend to be true, with an occasionally lucky collector mixed in. What series or grades become hot, or popular or promoted will tend to change.

 

Could have sworn this question was on final jeopardy the other night.....

Great advice from Jim.

 

Ditto!!

 

OK, I'll be devil's advocate for a moment.

As far as the knowledge base is concerned...you're right...you need the knowledge. But knowledge can be obtained. To a certain extent, whatever you invest in...coins, real estate, stocks....you should have some knowledge about what you are doing. And yes, slabbed coins are a heck of an aid, as is the star designation. Not sure what "CAC" means, but I think you're referring to the star?

Nextly, the buy/ask spread. There is a way around that. First of all, I'm assuming that a buyer is educated enough to do a little research. Say they were going to buy something on e-bay...hopefully they would check past auctions. There are also techniques for buying on-line that can garner you a profit. (As an aside, I was thinking of holding a contest here where you try to turn $50 into $100 using only e-bay and accounting for fees postage and everything...if you're interested let me know).

Anyway, one way to thin the buy ask spread is to buy at auction and only buy hotly contested items. For example, suppose you try to win an auction for an MS66 Morgan Dollar in the $400 range. One way to do this is to buy in a competitive auction. Suppose the auction has over 25 bids before it closes, and you win the coin for $365. In theory, there was someone there willing to pay $364 for the same coin. Heck, on a different day, you might be able to sell it back for just as much as you bought it for (less fees). Better pictures, a well selected ending time, etc., could get you over this hump. ***IF you think about it...this is exactly what the big players do...folks buying the King of Siam set or the 1913 Liberty Nickel are buying in a hotly contested auction, with a ready buyer willing to pay perhaps 99% of what they pay.

Yes, there are cycles. You can overcome the cycle issue with a reasonable amount of study, and a long-term outlook. I'm not talking about flipping here, but if you have a 20 year time horizon and you buy something that ordinarily is popular but is now out of favor, you'll probably do all right.

TPG policy changes. I agree, this is tough, but the winning formula that has always worked was to buy the best coins for the stated grade. Back when coins were either MS70, MS65, or MS60, if you were carefully selecting the "MS70" coins, you were probably actually buying what we consider to be MS67 coins today, but despite the change in standards, you still kicked some butt historically when looking at price returns.

Storage: Yep, no doubt. One problem, and it can wipe out your collection. So ideally, your investments need to be stored somewhere where they are insured. Or you have to buy insurance and it better be a small fraction of the cost of the coins. But then again, actually having physical possession of your investment is more comforting, though more expensive, then having something like owning gold in an exchange traded fund, because if you have to flee or something, you really can take it with you.

Overconfidence: Yep...there I agree. Investing takes a certain degree of detachment. That's always been true. When you invest in real estate, don't fall in love with the property. When you buy a stock, you have to be ready to cut your losses instead of getting attached to it and just hoping it will bounce back. With coins, you have to exercise the same level of detachment. You probably have to buy slabbed coins too. Now...all that being said, just call me Icarus...I am guilty of buying some raw coins here and there, but in fairness, I do have the level of education and the books I need to help me spot the fakes.

Steve

 

OK, here's my e-bay contest referenced above if anyone wants to give it a shot:

http://www.cointalk.com/t99024/

 

I have always said - that as long as you keep coin collecting as a hobby then coins provide a high return on investment. Most endeavors which are persued for entertainment purposes cost money and other than fond memories leave nothing of monetary value. So when comparing coin collecting to activities such as golf, hunting, fishing and the likes then the ROI is very high but when compared to traditional investment and savings vehicles there are many better alternatives.

 

I don't disagree with that. Thats probably why my wife doesn't complain too much when I buy a nice coin or when I eat unhealthy food. Heck, I've thought about working a deal that for every day I pack a lunch at work, I get to take that $$$ to buy more coins. But right now, I still like Applebees too much. But yeah, coins do not have the highest ROI, and shouldn't be more than 10% or 15% of a portfolio even if you do know what you're doing. But the ROI can be respectible if you follow the steps I outlined (or so I believe).

Steve

 

None taken. But to get 20 years of experience, I'd have to lose 15

Edit: Though seriously, why would you need 20 years of experience to follow the advice I outlined? I have investor friends that have zero experience in coins, but it seems like if they understood the general concept, that they could implement my proposed strategy. All you have to do is buy certain kinds of coins in high grade encapsulated by reputable firms in hotly contested auctions using past auctions as a guide. Do you really need 20 years for that?

Here's one: http://cgi.ebay.com/1880-S-MORGAN-D...mQQptZCoins_US_Individual?hash=item20aff7b0a4

Please illustrate for me the errors in my thinking. I'm prepared to reverse my opinion if you can provide a reasonable case. Can you honestly say this wouldn't work almost as well as the selections from a 20 year veteran? Or do you not believe in the concept of investing in coins at all?

Steve

 

Personally, from where I sit, the advice given by SteveReecy is likely a poor investment strategy. Hotly contested means high demand today. In ten years or more, it is highly likely that other items will be the high demand items and the stuff bought won't be high demand any more.

The linked coin is a MS67 Morgan toner. That is close to the worst place a novice coin investor could put their money in. Toners often retail for big premiums, but wholesale for a lot less.

Try and sell that toner bought at retail auction, wholesale to a dealer and the cash offer will likely be 50% of the retail auction price. Try to sell the same coin retail on Ebay without great photography (a skill that perhaps only 2% of collectors have), plus pristine high volume feedback (again something maybe only 2% of average collectors have) and it will likely yield results 25% lower. Take out fees and postage and the buyer is out 35% if the market for the coin hasn't moved. Take out one novice bidder and the demand might be significantly lower as well. That may be fun, and relatively inexpensive as a relaxing hobby, but it is not investing.

Experienced photographers, and online sellers often take for granted the set up needed to realize retail prices for coins on Ebay. To an objective observer, from a financial return standpoint, almost all novices would be better off buying junk 90% silver or new silver eagles at the best price available. High grade certified coins, toners, are at the opposite end of the spectrum and a good way for novices to lose money, and lots of it.

Again, those that do well in collector coins tend to have an edge. That edge may be in grading expertise and/or access to coins and/or market knowledge. Without an edge, the novice is likely to be the patsy in the coin poker game and mostly add money to the pot for those that do have an edge. I hammer home this point over and over, and I hope it saves some novices reading along from becoming those patsies.

 

Lets agree to disagree then.

I googled the CAC designation to learn what I was. I'm getting back into buying slabbed stuff after a long stretch of buying raw. The CAC designation seems like something easily faked and I wouldn't place any value on it. I don't know how easy it is to scrape those stickers off or make a fake one, but I wouldn't spend extra money on something like that personally. I can tell you that I can set two MS66 slabbed coins side by side and my 8 year old can tell which coin is better.

Buy 90% silver? I know this wasn't your comment but according to economic theory, the "real" value of commodities go down in value over time. I did a study on it where I discounted silver and gold over time with the inflation rate and it was a fairly flat line. Buying silver or gold is pure speculation in the short term value changes.

Regarding E-bay, I did qualify my statement by saying to first look up prices realized first. Re-read it. I think to have a dialogue about this, we should assume that an investor, even one uneducated about coins, should have some common sense about looking up comparables before writing a check. And for God's sake, when I talked about the underbidder stopping $1 short of my buy price, I wasn't literally talking about selling the coin to that same person. Do you really think people here are that dumb?

If someone was to do that on the auction I linked, they'd have a fair shot at a coin that will increase in value nicely. Am I wrong? Can I guarantee that? No. Can you guarantee it won't? No. Can you guarantee that a stock purchase or a real estate investment will pan out over a set timeline? No...that is the nature of investing.

By your own math, we have a Bull market every 15 years or so. You're saying that we were in a bear market for 15 years before the last bull, and now we're in a bear again. The protracted bear was an anomaly brought on by the grading services and making the purchase of coins sight unseen possible. The over-arching boom and bust cycle was unprecedented and is not a good example of how the coin market moves. Nobody can be sure of it, but it appears that on a larger scale, it appears that we are only now settling into what could be considered a "normal" market over the last decade or so, and even then, prices may not have fully bottomed, but underwent a "relief rally". All that being said, you can't definitively say coins are a bad investment, any more than I can definitively say they are a good one. If either of us could, we'd definitely both be rich. But fortune does belong to the prepared, and given that I've been discussing a 20 year investment and bull markets pop up once every 15 years or so by your own definition, any reasonably intelligent investor could make use of that. But again, you almost have to throw out everything that happened between the birth of the grading services and for a 10 to 15 year period thereafter, it was a one-time anomaly in the value increase in coins, and this is something that I have to assume you know. You can't use an unprecedented boom and bust cycle brought on by new technology to draw conclusions about future potential of the hobby any more than I can.

Oh, and if we are in a bear market and bull markets come along every 15 years or so, then use dollar cost averaging. It can be a big help. I want to purchase in a bear market...I have a longer time horizon.

Lastly, you don't know me, or know what I know, so why do you keep trying to estimate my skill level? So quit slamming me and then saying "no disrespect". It looked disrespectful to me. I don't even see how you could draw the conclusion that I'm a noob, other than the fact that I disagree with you. I did ask which nickel series looks good right now. I did ask a question about copper coins because I don't collect them and saw an odd thing attributed to ANA grading standards that doesn't jibe with what I've seen on slabs. You don't know what I've collected, nor do you know how much formal education I have in investing, economics, etc. FYI, my focus has been on mint state Morgans (crack out games), BU type, and BU nickels. I dabbled for a while in ancients and foreign. I tend to buy the book and then the coin, and I have a masters in business but I'm an engineer by profession. I've also collected other things and I enjoy comparing and contrasting the differences in different collectibles. I'm very interested in the general theory associated with collectibles.

Steve

 

So to be clear, rather than advocating the purchase of high grade morgan dollars when the market is "slightly" weak but in a general upward trend, you're advocating that they buy bullion which is near a 25 year high?

http://www.pcgs.com/coinindex/indexallgraph.chtml

http://www.kitco.com/scripts/hist_charts/yearly_graphs.plx
(link broken...click on historical silver, from the period 1985 to now)

Might be better off selling the bullion and buying coins.

And yes, I too think the dollar will weaken but maybe not...it could go up on a flight to quality...If I knew, I'd be crazy rich.

Steve

 

I'll guess at something. Collector grade coins of China and India. Coin collecting is more of a middle class - upper class hobby. Over the longterm these two countries have the greatest potential for growth in these social classes.

 

Yes, for the novice, they'll be far better off buying 90% silver than certified MS67 Morgan toners at Ebay auction, just on spreads alone. A low end MS67 coin is typically worth 1/3 to 1/2 the price of superb examples. Does a novice have a good chance at determining which are the superb examples? The novice is doing well if they can determine MS65 from MS67 with any consistency, much less the finer points of what constitutes a nice MS67 from a low end example.

If the novice shops for MS67 Morgans on Ebay mostly on price, as it seems like you are advocating, guess what the novice ends up with? The novice will often end up with coins in a high grade holder that high end retail dealers want no part of, and that many experienced collectors actually wince at when they see.

To be clear, I'll repeat that my opinion is that this strategy with that particular kind of coin linked (MS67 Morgan toner), is close to the worst way for a novice coin investor to proceed. I am not making any comment on the specific coin, or the specific ebay parties involved. That is separate. I am talking about process, and about investing, not hobby stuff.

Again, let me explain more about certified coins for the many novice readers. Not all MS65 coins are created equal. At true auction, with mostly veteran collectors and experienced dealers bidding, the low end coins will typically sell for half of what the nicer examples sell for. And that's not taking into account toning, or different grading companies. I'm talking the same date/mintmark, same company's holder. Go up to MS67 and the price ranges get even wider than at MS65. Shop at true auction mostly based on price, and for the most part the novice will be buying the low end coins.

Again I'll repeat, that typically it will take a year or more of involvement at the hobby level, for a novice collector to understand the basics of grading. Typically five years or more to understand the finer points of high grade mint state grading. Yes, there are a few exceptionally talented novices that learn faster, but there are far more folks that will take longer than average.

 

I think that sums it up better than anything. What more proof do you need that the idea has been tried by millions before and maybe a dozen have succeeded in making something out of coins as an investment? Coins are not stocks...they're not even close, much like Cheetos aren't fish. Anybody with a buck can make money in the stock market with little to no knowledge in what they are doing. Show me where the same has happened with coin. It hasn't happened.
Guy~

 

If you consider a hobby as an investment.. then coin's are the way to go, easily.

However, I don't think the process described here is a sound investment strategy. Ebay if ripe with shill bidding sellers and groups of sellers. I could name a couple of power selling, highly marketed sellers on the bay that appear to always have 15+ bidders on each of thier coins, and my experience with these sellers is that thier product is sub-par and highly overpriced... they have either found an infinite source of novice heavily monied collectors, or they are passing these coins back and forth within a significantly large dealer group and hoping a few novice collectors jump in and buy a few coins during each auction at heavily inflated (shilled) prices. Point being, you can't always trust the ebay auction results... in general they are sound, but I'd use the lower 60% average rather than the entire population to find my expected sell price (unless you plan on selling with shill bids also).
Also, MS67 morgan's is not the right place for novices.... nor is it the right place for intermediate's either... if you game is investment, then leave the high end stuff alone...
If you a novice and want to play on the bay to make some money, than a good way to learn is to buy a bag of 5000 cents for a fair price on the bay (I think around 220'ish or so).. divide em' up, search em' for key dates and varieties, practice grading them,,, and then sell the divided lots back to the 'bay (and learn the in's and out's of selling). You should limit any losses and maybe make a bit while pocketing a few nice keepers and learning the lincoln cent in greater detail.
You are simply NOT going to jump into the high end coin game on the 'bay and do anything that can be considered investing... maybe collecting (ie - enjoying the coin at a fiscal loss).
To your original question: I'd go with the Buffalo's ; )... any grade certified key date's only if "investing".. high grade common's if collecting.