Cashing in on the collectibles craze

In April, a comic books investor paid a record $3.25 million for a high-grade copy of “Action Comics No. 1,” the 1938 issue that introduced Superman to the world.

The seller had bought the comic book for just over $2 million in 2018 and thus saw a handsome profit, according to the broker that oversaw both sales.

That profit is clearly of a scope that few collectibles investors will ever realize — but it is a symptom of a market that watchers say has reached an epic level of momentum, fueled by numerous factors during the pandemic.

Collectibles, including comic books, trading cards, sports memorabilia, cars and wine, can successfully be used as a small part of an investor’s overall portfolio and a potential diversifier, advisers say. But it’s not a type of asset to pursue unprepared, as values are often volatile, and collectibles investing benefits from a strong knowledge of niche or esoteric topics.

Something that all good collectibles investors must have is passion, those in the industry say.

[Read more: 10 most valuable sports trading cards]

Adviser Christopher Haigh, CEO of Iconoclastic Capital Management, is an avid collector of Pokémon cards and is building out a collectibles guidance service at his firm.

“I just really enjoy it. That’s always been a part of our practice,” said Haigh, who with his brother began collecting a variety of different types of cards as a kid. “It’s a fun outlet for us, but we realized we were pretty good at the investment side of it as well.”

HIDDEN IN DUSTY BOXES

It’s common for clients to have potential collectibles that have been stored in their parents’ basements or attics for decades. Thanks to his father, Haigh years ago didn’t sell or get rid of numerous Pokémon or baseball cards — he and his brother now have a collection of the former that could fetch at least $40,000, he said.

Bart Brewer, an adviser at Global Financial Advisory Services, began collecting cards when he was 6 years old and said he was at the first National Sports Collectors Convention in 1980. About 30 years ago, his love for collecting was reignited when McDonald’s ran a baseball card promotion in Canada.

“I got back into it because it just reminded me of the fun time I had in my youth. It was nothing but pleasant memories,” he said. Brewer is now a part-time cards dealer and advises other advisers on how to help clients with their collections.

“You really need to have a passion for the space you’re going to be in,” he said, tempering that statement with a warning about becoming a collector rather than an investor. “If you’re really in this to make money, you can’t fall in love with the stuff you have.”

In the sports memorabilia world, being a buy-and-hold investor, for at least two years, is all but necessary, especially given that the values attached to cards for newer players “can turn on a dime,” Brewer noted.

THE COVID BUMP

One possible reason for the heightened interest in collectibles is that people had more time on their hands and rifled through attics, finding items from their — or their parents’ — childhoods.

With interest rates low, people have looked to cards and other collectibles, Brewer said.

“They’re looking for things to do. I call it ‘nouveau riche people.’ They’ve got money, and they’re looking for things to invest in,” he said. “That has fueled an awful lot of this run-up.”

However, the past several months saw a pullback in demand, Brewer said. “All the new money is in, and people are trying to sell their stuff.”

Pop culture also factors in heavily. After “The Last Dance,” a documentary about Michael Jordan’s final season with the Chicago Bulls, aired in 2020, demand spiked for rare versions of his basketball cards, Haigh noted.

Just a month after that film became available, Sotheby’s auctioned Air Jordans worn by Jordan for a record $560,000, according to a recent report by consultancy Knight Frank.

There was significant growth last year in the value of luxury investment items in general, with collectible handbags up 17%, wine up 13%, classic cars up 6% and watches 5% higher, the Knight Frank data show.

Another asset, rare whiskey, saw values decline slightly, by 4%, although that category has appreciated by 478% over the past 10 years — more than twice the growth seen in other types of assets the group tracks.

Art, however, was down by 11% as a result of a variety of factors, including auction limitations due to Covid-19, according to Knight Frank.

WHAT’S IT WORTH?

Hobbyists often have some idea about the value of their collections, but they don’t necessarily think about it as a part of their financial plan.

A recent prospect claimed to have a collection of baseball cards worth roughly $2 million, Kashif Ahmed, president of American Private Wealth, said in an email.

“His collection was pure passion and hobby. Financial considerations never crossed his mind,” Ahmed said. “Until we brought it up, he never thought of them as an asset … He never thought it could play a part in his overall retirement planning.”

Ahmed told the potential client to consider storage, insurance and estate planning for the items, he said.

“I have a former client [who] had extensive precious metals collections like coins and antiques. He would refuse to place [them] in a safe, get insurance or even inventory them to find out how much they were worth,” he said. “We fire clients who do not take our advice.”

[Gallery: The most valuable U.S. coins]

Getting enthusiasts to think about their collections as assets and accept the idea of eventually parting with them can be a challenge.

Dennis Nolte, vice president at Seacoast Investment Services, has numerous clients who have worked for Disney World, he said in an email.

“These clients buy pins, dolls, cells from cartoons drawn decades ago with after-tax funds, but [they] rarely value the collection, let alone think of it as an asset,” Nolte said. One such client “who has a room that is floor-to-ceiling first-edition, boxed dolls from the Mouse … [is] deeply in debt to where they are selling the house.”

The idea of cashing in on that collection could be revisited, he said.

Because parting with cherished items can be an emotional decision for collectors, it’s not a type of investing that’s encouraged, Seth Mullikin, founder of Lattice Financial, wrote in an email.

The drawbacks of illiquidity, high transaction costs, storage and insurance needs are also reasons why Mullikin said he encourages clients to treat collections as hobbies rather than investments.

“Collectibles do not receive long-term capital gains treatment, meaning gains can be taxed at a maximum of 28%,” he noted.

They can also present difficulties for heirs, Mullikin said. “They might not be able to agree on who receives which item. Heirs who are unfamiliar with the items might not be able to obtain full value in a sale.”

EASIER ACCESS

While owning a flashy Italian car like a Ferrari Testarossa is almost exclusively a luxury for the extremely affluent, the common person can now own a small piece of one. They don’t get to drive it, though.

Thanks to a provision in the Obama-era JOBS Act, small companies don’t need to be included in a major stock exchange to sell shares to the public. That has allowed firms like Rally to securitize everything from a broadside of the Declaration of Independence to a triceratops skull, turning those items into “companies” that investors can buy a small slice of.

“Given what we as a species have gone through in the last year … collectibles is sort of an anchor. It’s emotional comfort food,” CEO George Leimer said. But “this is not really new behavior. We are collectors. People have collected things forever.”

Rally, which started off with classic cars, has moved on to include other collectibles, such as a sealed original copy of Super Mario Bros., a pair of shoes that LeBron James wore in high school and an inscribed first edition of “The Great Gatsby.” The company is likely to expand into other categories, including non-fungible tokens, intellectual property and high-value real estate, Leimer said. Rally is also exploring ways to package collectibles ownership in a different financial vehicle, he said.

“The assets themselves are immutable in ways that other assets you invest in are not,” he said. “Collectibles deserve to occupy some percentage of everyone’s portfolio.”

The advent of fractionalizing exotic collectibles is making such investments more popular, Haigh said.

Collectibles “aggregators” like Rally are indeed catching on, although investors have to make peace with the fact that they don’t get to have physical possession of assets, Brewer said.

“People feel better if it’s at their house,” he said. “You’ve got to hope that the dinosaur bones or the sports cards or whatever it is doesn’t get damaged. You’ve got to hope that the insurance is adequate and no one is going to steal it.”

Rally is seeking owners of rare and valuable items, presenting an alternative to auction houses. Asset owners “can fractionalize only a portion of the item” and keep it in their possession, Leimer noted.

Rally has about 300,000 users, a figure that doubled since the beginning of the pandemic, he said. The firm has secure storage sites around the country and an exhibition space for some items in Manhattan. Investors don’t pay fees for storage and maintenance, Leimer said.

“That triceratops skull … is 7 feet tall,” he said. “That won’t fit in my apartment.”

Related Topics: Global Financial Advisory Services, Iconoclastic Capital Management