Coin portfolio challenges common sense

Ross Farmer's Alternative Investment Portfolio 2009 purchase date

*According to Ross Farmer's own analysis

Chris Dillow, Investors Chronicle's economist, says:

This portfolio is a challenge to common sense. Common sense says you don't get paid for having fun. If you enjoy collecting antiques, you shouldn't expect a high financial return. So how can you be right and common sense wrong?

One possibility is that just as few people are skilful enough to earn a living from music or sport, so you are skilful enough to get good returns from your hobby. But, of course, this can't be true for everyone.

Similarly, the fact that the antiques market is informationally inefficient can't help everyone. For everyone buying an item worth £500 for £180, someone else is selling.

What's more, anecdotal evidence that antiques prices have risen over time is not to be trusted. There's a self-serving bias here; people talk about their successes more than their failures. There's also a selection bias. If an item fails to meet the seller's reservation price, he often simply takes it off the market. The prices we see, therefore, can be an upwardly biased sample of all prices - because they are those of items in good demand.

Luckily, we do have robust evidence on the long-term price performance of some collectibles. Elroy Dimson of the London Business School has found that prices of stamps have risen over time, but by less than the share prices. Yale University's Will Goetzmann has found a similar thing true for fine art. We don't have such a long history for wine, but data since the mid-90s suggests they have done better than equities. These findings are for collectibles in relatively 'thick' markets, where good price data are available. But it's reasonable to suppose they are a guide to what sort of returns to expect on the more recherchè items you collect.

There are two possible reasons for such good returns. One is that they are a reward for taking on liquidity risk - the danger that you'll not be able to sell quickly at a good price if you need to. The other is that collectibles have benefited from social and demographic change. The sort of people who enjoy wine, art, stamps and antiques have increased in number and wealth in recent years. Professor Goetzmann points out that prices of fine art have for years varied with movements in top incomes.

However, collectibles are not a one-way bet. Liv-ex estimates that wine prices have fallen by a quarter in the last two years. Prices of antique furniture have fallen for 10 years. And just as there is idiosyncratic risk in share prices - some stocks can fall a lot even in good times generally - so there is risk in the price of individual collectibles.

But this combination of modest return and high-ish risk does not make collectibles a poor investment. One consistent finding of research into them is that they have low - though positive - correlations with equity returns, which means they are a decent way of diversifying some types of equity risk. (I say some because the sort of general financial crisis that makes people desperate to raise cash might also cause them to sell some collectibles; wine prices, for example, fell in 2008-09.)

On balance, though, there is a financial case for investing in collectibles, as long as you don't expect huge returns. You can be paid for having fun.

Richard Gladdle, coin adviser at Stanley Gibbons, says:

The 'numismatic' section of your portfolio falls into two categories, bullion gold coins and collectable rare coins.

The first is essentially investing in bullion gold, and as it is in the form of a 'coin' it commands an extra few pounds premium. The value of these hangs entirely on the present market value of gold and also to a small extent the value of the pound against the dollar. As the world value of gold is measured in dollars, any change in the sterling-dollar ratio will be reflected in the sterling value of gold held in Britain.

In the last few years, gold has seen an unprecedented rise in value - so your holding of gold coins has seen a very good increase in value. In fact, at the time of writing (22/09/12) with gold at $1,775 an ounce (£1,090), your valuations are out of date. For instance, you value your five sovereigns at £1,200 - ie £240 each - but I would gladly pay £255 apiece and make a few pounds profit.

This illustrates the volatility of investing in gold - for next week they could be worth a few pounds less if gold drops or the dollar weakens against the pound. However, in view of the general forecast of no immediate upturn in the world economy and the continuing malaise of the euro, I think it is unlikely that your investment in gold will prove to be anything less than good. Incidentally, there is no capital gains tax on the sale of gold sovereigns minted after 1837.

You hold one rare coin - the Cromwell shilling of 1658. Judging on your valuation and accepting the assertion that you are an experienced numismatist, your valuation of £800 suggests that it is not in the best condition. Cromwell shillings are quite rare and, at the moment, in almost uncirculated condition they fetch around the £2,000 to £3,000 mark in auction. They are more common in good condition than worn condition because they were never officially circulated and were only made shortly before Cromwell's death as an 'intended coinage' and then restruck after his death as curiosities.

The value of a coin depends on many things - rarity, condition, popularity of the area, provenance and historic interest, and if one is not aware of these aspects or experienced in the field of numismatics, it is all too easy to come unstuck and buy a 'pup'.

Having said that, if one gets it right, there are, or certainly have been, enormous gains to be made in investing in rare coins. The issuers of the Standard Catalogue of British coins 'Spinks' have identified a general 16.5 per cent a year growth of the value of coins, and for certain rare and good condition pieces the yearly increase in value is more than 21 per cent over the past five or six years. This rise is not simply a 'mark up of catalogue values', but is borne out by auction results, that is, what someone has actually been prepared to pay. Very large increases of value are now being achieved in the sale rooms - for example, auction house DNW sold a Mary gold Ryal for £190,000 last September - it fetched £400 when it was sold in 1950.

There is a growing confidence in the market and as there are only a finite number of good condition rare coins, collectors are willing to spend more money to acquire that piece. Coupled with this confidence is the development of the internet, for this has not only increased the market from 'national' to 'world', but has also served to facilitate and generate an interest in the hobby and thus increase the collecting base.