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Why Numismatic Investments are Always Horrible Mistakes, Part 2
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(April 24, 2001) Remember coin collecting? We look at the 20-year and 10-year track records for U.S. rare coins, remind ourselves of the miracle of compound interest, and learn how your $410,000 investment in rare coins could prevent you from becoming a millionaire twenty years later.

Two weeks ago, we went on a rant about the rare coin investment scam, and the fact that it continues to claim new and unsuspecting victims. The truth is, most rare coin investors don’t understand what they’re buying, they don’t know the hidden costs involved, and they don’t know that there are ‘liquidity issues.’

This week, we’ll focus on how rare coins actually have performed as investments in recent history. The news isn’t good. Fundamentally, coin collectors are an aging group, and younger affluent collectors of old money are more likely to collect paper currency rather than coins.

Simply put, to the younger generations, paper currency is money. Coins, to them, are tokens that you put in vending and game machines. Only the old-timers think of coins as money. Demographically, it’s no wonder that the hobby of coin collecting peaked out in the 1970’s. And it’s been pretty much downhill ever since.

For this exercise in price comparisons, we’re going to ignore all costs, commissions, markups and fees. We’ll compare wholesale ask prices in 1981 and 2001 for a broad range of investment-quality U.S. numismatic coins.

In order to quantify the numismatic track record, we’ve come up with six areas where we can compare U.S. rare coin prices in 1981 prices versus 2001 prices. We focus on the accepted investment grades of Mint State-65 and Proof-65, totaling some 160+ different classic U.S. coins and coin types that comprise a large percentage of all copper, nickel, silver, and gold regular-issue and commemorative coins from the 1800-1942 era.

1981 prices are the wholesale ‘ask’ prices from a tabulation of the December 25, 1981 edition of the Coin Dealer Newsletter, the authoritative weekly publication in the rare coin field, bylined as ‘A Monday morning report on the Coin Market." 2001 ‘ask’ prices are from the April 6th, 2001 edition of the same publication. (Published by CDN, Inc., 18807 Crenshaw Place, Torrance, CA, 90510)

These comparisons aren’t perfect. For one, grading standards have changed dramatically since 1981, and many rare coins that were sold as MS-65 quality (65 points on a 70-point grading scale) back then won’t meet today’s strict standards for that grade. Also, we have ignored, for the most part, the more common coins ($500 and less) which have performed poorly, and the high-price rarities ($100,000 and over) that sell too infrequently to establish reliable trading prices. We have concentrated on true quality coins that are obtainable, but not museum-quality pieces that lack reliable pricing information.

We are comparing here the performance of quality, investment grade coins – the ideal choices for investors. Unfortunately, what is sold is not usually genuinely rare, high-grade coins. Coin sales firms and brokers thrive by selling common, off-the-shelf stuff and ‘story’ coins that are hardly top-drawer numismatic material. We are ignoring the ‘sludge’ that many unknowledgeable coin investors are often sold – modern coins in high grade, obscure ‘mint errors’ and minor varieties, treasure and ‘hoard coins,’ rolls and bags of common coins, and the whole gamut of second-tier material that often gets foisted off on the unwary.

We have tried to give rare coins a chance by focussing on quality type and commemorative coins in the whole range of U.S. coinage – gold, silver, copper, and nickel. Here are the price comparisons 1981-2001 for the ‘blue chips’ of numismatics.

UNCIRCULATED U.S. TYPE COINS { Copper, nickel, and silver}

From the Uncirculated Type Coins section of the December 25, 1981Coin Dealer Newsletter, we totaled wholesale "ask" prices in Mint State-65 grade of the 55 different coins, going back to about the year 1800.

The 1981 prices add up to

$186,085 *

The year 2001prices 

$226,985

*Investing that sum of $186,085 at 1% for 20 years, produces the same result as this holding:=  $226,998

 

UNCIRCULATED U.S. TYPE COINS, GOLD

Page one of the CDNL has always featured the popular gold U.S. type coins from the late 1800s and early 1900s. The eleven coins with a listed MS65 wholesale ‘ask’ price in 1981 totaled 

$39,500 *

By 2001 a slight loss had been incurred, and they were worth 

$37,525

* Or invest $39,500 at 5% over 20 years, and today you would have $104,805 -or- $67,280 improvement over the return on this holding.

 

PROOF U.S. TYPE COINS, Copper, nickel, and silver

We find 33 coins on page 4 listed under Proof Type Coins that show MS65 ask prices in 1981. At that time, the total wholesale asking price was 

$108,145

2001 prices on the same coins total 

$125,233

 This holding produced for a miserly annual yield of  less than 1% (3/4 of 1%}

 

CLASSIC ERA 20TH CENTURY PROOF SETS, 1936 – 1942

Some would say these are the most attractive U.S. coins of the 20th Century, featuring high-quality, mirror surface presentation versions of classic coins such as the Buffalo nickel, Walking Liberty half dollar, and Winged Liberty ("Mercury") dime. In 1981 the seven sets cost wholesale 

$13,375

By 2001 the list price had gone down to 

$ 9,750

This modest investment cost you $186 a year for the joy of ownership.

 

SILVER COMMEMORATIVE COINS

The 50-piece type set of the different commemorative designs from 1892-1954, in MS65 condition, were available in 1981 for a total of

$35,000

In 2001 those coins total

$48,272 *

* This holding produced  a 1.62% annual yield.

 

GOLD COMMEMORATIVE COINS

The complete commemorative set of gold dollars and $2 ½ coins, issued from 1903 to 1926, total 11 pieces, and the MS65 wholesale ‘ask’ price in 1981 was 

$28,500

By 2001, this series would cost you 

$86,275 *

* This is a spectacular performance among rare coins in the past 20 years! - Works out to a whopping 5.69% annual return!

 

ALL SIX ABOVE GROUPS TAKEN TOGETHER

Had you decided to buy all of the above-mentioned coins in 1981, you would have a very impressive collection of rare investment-grade U.S. numismatic coins. The wholesale asking prices back then was 

$410,605

Today they list for 

$534,040

To own this coin collection as your pride and joy would of course set you back the original out-of-pocket 1981 expense of $410,605. 

But imagine that you had not taken up this costly hobby, and had invested the money at 5% annually instead. Twenty years later, you would have $1,089,457 -or- $555,417 more  than produced by this holding.

Which means this numismatic indulgence translates into over half a million dollars in lost opportunity costs.

 

LET’S DO THE UGLY NUMBERS

Initial investment amount in 1981

$410,605

What you could have earned at 5% interest 1981-2001

$678,852

Giving you a total holding value in 2001 of

$1,089,457

Value of the coin collection in 2001

$534,040

Lost opportunity cost at 5% in owning these coins for 20 years 

$554,417

Or at 8% you could have turned your money into

$1,913,788

That’s one expensive hobby, isn’t it?

 

Well, maybe 1981-2001 is a statistical fluke. How about the more recent price history of rare coins, such as during the booming 1990s? The most widely used price guide for the certified coin market, the Certified Coin Dealer Newsletter (also published by CDN Inc., 18807 Crenshaw Place, Torrance, CA 90510) tracks thousands of coin prices in various series from a January, 1990 price baseline. Some recent results:

CCDN Market Index 1990 baseline = 1000 

March 30, 2001 = 724.79

CCDN Buffalo Nickel Index 1990 baseline = 1000 

March 30, 2001 = 906.48

CCDN Proof Singles Index 1990 baseline = 1000 

March 30, 2001  = 626.77

CCDN Silver Commemorative Index 1990 baseline = 1000 

March 16, 2001  = 502.45

CCDN Gold Commemorative Index 1990 baseline = 1000 

March 16, 2001  = 517.72

CCDN Mint Gold Type Index 1990 baseline = 1000 

March 9, 2001 = 469.47

Mark Twain once referred to "Lies, damned lies, and statistics." And we are sure some will quibble with our analyses of rare coin price performance. Although we compared prices on a broad spectrum of U.S. coins in top grades, other choices will yield different results. Looking back with perfect hindsight, you can always select specific issues to bolster your case for or against investing in rare coins.

Our intent is not to knock coin collecting – we indulge in it ourselves, and enjoy it. But when you invest your money safely at 5%, over 20 years every $1,000 turns into $2650. If you can make 8%, then $1,000 becomes $4660 in 20 years. That’s the miracle of compound annual interest. Financially, it would be foolish to ignore the cost of lost opportunity when considering the purchase of coins as an investment.

You can call it investing when you buy these shiny little bits of history, but coin collecting, like many enjoyable pastimes in life, is actually going to cost you money. So why do people think that buying rare coins is a form of investing?

Because for years, that’s what they’ve been told.

The 1970’s saw the beginning of the aggressive marketing of rare coins as investments. At that time, the track record of U.S. numismatic coins was very good. Rare coin prices had stagnated during the Depression and the early 1940s, but started to rise soon after World War II. The booming 1950’s and 1960’s brought higher prices for rare coins as disposable income increased and millions of people took up the hobby of coin collecting. When the last silver coins were struck for circulation in 1964, everyday people became aware of their pocket change, giving the surge in coin collecting yet another boost.

By the 1970’s, all these factors had combined to give rare coin prices an unprecedented 30-year long bull market. Much was made of the prices increases in numismatic coins, and the coin investing boom that began in the 1960’s became institutionalized. Of course, the seeds for the end of coin collecting as a viable hobby for most people had already been sown. Demographically, the hobby faced the problem of an aging group of participants. Popular coin collecting was rapidly fading in popularity.

In stock market terms, numismatic coins were undergoing a period of ‘distribution.’

The stage was set for investors to come along and take collector coins out of the hands of an aging collector population. Investing in rare coins became all the rage among those who were not numismatists, history buffs, or even coin collectors at all, but just wanted to participate in the boom in rare coin prices. Telemarketers took to coin sales like a duck to water. Coin dealers started to hold themselves out as investment advisors, and many formed alliances with financial planners, to market U.S. collector coins to the non-collecting investment public.

Investment interest in coins was further stimulated during the 1970’s and 1980’s by the annual publication of Salomon Brother’s list of best-performing assets. This list covered stocks, bonds, art, gold, Chinese porcelains, stamps, coins, and other fields. The results consistently showed rare coins as a top performer among all these assets. This study was extensively quoted by marketers of rare coin to their clients, even though the coins in the Salomon Brothers study were expensive and rare coins that most victims of the coin investing fad would never own the likes of.

No, what was marketed to the public was mostly the more common or ‘generic’ coins that were available in sufficient quantity to keep teams of salespeople busy selling to unwary ‘investors.’ Large coin firms had to be able to offer hundreds or thousands of virtually identical portfolios for their sales teams. That’s only possible if the material being sold is actually so common that calling them ‘rare coins’ is misleading.

Was that type of marketing consumer fraud or securities fraud? Neither, and that’s one of the peculiar thing about numismatic coins. Although many marketers sell coins as investments, coins are not regulated securities such as stocks, options, or bonds. Because of the lack of regulations protecting the coin investor, pretty much anyone can call themselves a numismatic expert and sell to the public.

And as to consumer fraud, there is no law against charging high prices for your merchandise. If the coins are described accurately, and delivered in a timely manner, then consumer protection laws are of no avail. For the unknowledgeable consumer, then, rare coins represent the worst of both worlds.

But for the marketers of rare coins as an investment, life was good. They were selling an unregulated product, backed by the performance study of a prestigious financial institution, to buyers who had no way of knowing what the true market was on what they were buying.

For the buyers of rare coins as an investment, life was, well, good. They had been assured that their coins were a fantastic investment. Better still, they were buying items that, unlike stocks or commodities, didn’t have their values printed in the newspaper every day. Since they couldn’t check on the prices, they didn’t worry about them. The broker or salesman who sold them the coins was very reassuring ("The market is strong. You’ve made money already on your last purchase!") over the phone, and often he had a special deal on even more numismatic coins for their portfolios.

Sales techniques in rare coin marketing today are ever more sophisticated, but the principle is the same: convince the customer he’s getting the inside track from an expert to whom special opportunities are available. The customer gets a great story, something pretty to look at, and he doesn’t know he’s underwater unless he tries to sell.

Numismatic coins are like any merchandise: you seldom make money buying at retail and selling at wholesale. And the markups on collectibles, whether coins, art, stamps, jewelry, or baseball cards, is so high that it generally takes decades before the ‘investor’ breaks even. Meanwhile, money in the bank draws a sure, steady, insured rate of interest.

Everyone agrees that you can make a small fortune in the rare coin field. But the fact is that it’ll cost you a large fortune.


 

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