- - Thursday, December 23, 2010

ANALYSIS/OPINION:

Normally I tend to discuss topics about investing, stocks, economics or something along those lines. Every once in a while, I break form to discuss something I feel is noteworthy. In this case, there are some pending changes in the estate tax law that affect an alternative form of investing — collectibles. For more on this and the collectibles market in general, I had the pleasure of interviewing Matthew Erskine, principal of the Erskine Co.

Q: Matthew, exactly what is the collectibles market? I know many think of baseball cards and some other items, but paint us a fuller picture of the collectibles market.

A: The collectibles market is as varied as the collectibles themselves. Collectibles can be very large (cars, airplanes, locomotives, etc.) or very small (coins, pins, etc.). They can be man-made or they can be natural objects (such as seashells) or natural objects manipulated by man (such as cut gems). They become collectible when there are individuals who, based on their personal interests and desires, place a premium value on the item than the value that society does otherwise.

Just as the collectible market is driven by personal desire, it can fall as personal desire wanes. Hence some fad collectibles (such as Beanie Babies) may rapidly gain value, but also rapidly lose value as people move on to the next fad. Some collectibles grow in popularity, some decline, but so long as there is someone (or preferably some two) individuals who desire the ownership of that specific item, the premium price will rise.

Q: What does the everyday investor need to consider when deciding whether to invest in collectibles? Which areas are better for the new collectible investor?

A: Just like investing in the stock market (or alternative investments like private equity or hedge funds), there are only two ways to invest in collectibles: Be willing to spend the time and effort to learn the market yourself, or hire someone to manage your investment for you. There is no shortlist of things to do for an investment in collectibles, since the premium is so driven by the individual desires of the buyers.

Also, you need to be dispassionate about the collectibles if you are going to be investing in them rather than collecting them. This is easier said than done, but if you are investing in a collectible, you are there to make money, not to have bragging rights. Just like you set certain prices at which you would sell your stock holdings, you need to set the level where you will sell your collectible. Also, you need to treat the collectible as an investment — that is, putting it on the market when you feel the price is right, working with a curator, dealer, gallery owner or auction house to market and promote the piece, and so forth.

Finally, know that you are in this for the very long term, and unless you have a creative team working for you, the costs may be quite high to keep the collectible in excellent condition. You may be able to sell a collectible, but it may take 10 or 15 years to get the right market, maturity and interest aligned to get your desired return.

Q: How does the everyday person keep informed as to the value of their collectibles? After all, it isn’t quite like tracking stocks in the stock market.

A: There are many trade publications, for instance in the numismatic market there are the so-called “greysheets,” which come out weekly and give prices for U.S. coins, bullion, etc. Also, there are shows and auctions that post their sales prices on the Web, for example www.coinarchives.com, as well as the sites for auction houses like Skinner here locally and Sothebys internationally.

However, since probably 90 percent of the business of buying and selling collectibles is done privately, these prices are very suspect. The only way you know how much something is really worth is to sell it, and sometimes even not then.

Q: I understand there are some changes in the estate and gift tax law. What’s going on, and do the changes benefit collectibles investors?

A: It is “back to the future” for the estate tax, and who knows how long that will last. The same issues dominate planning as have always dominated planning: the issue of control.

Unlike income taxes (which are incurred when you receive a benefit), estate and gift taxes are incurred when you transfer control of something from you to another. Most estate planning revolves around the issue of control, and how you can so restrict the control (hence the discounting by family limited partnerships) or split the control — split interest gifts like [grantor retained annuity trusts], [charitable remainder annuity trusts], etc. — so that when the owner makes the transfer, the value of the control passing to the beneficiary is at a much reduced, or completely eliminated, tax cost.

Here, where ownership of the item is what the collector paid a premium for in the first place, giving up control of the ownership, and the ultimate transfer of that ownership based on the collectors desires and principles, makes most of the traditional discounting and split interest entities unacceptable to the collector. This requires an entirely different approach to planning, and one that places control, access to expertise and capital, as well as financial security, at the forefront, rather than just reduction of tax costs in an estate.

Q: Where can individual investors learn more about this investing strategy, and what are some resources?

A: There are a number of books and websites, but the best way to learn about investing in collectibles is to work with someone who knows the area already, for example Jeff Rabin at Artvest Partners jrabin@artvest.com (artwork, wines); Seth Kaller at Seth Kaller Inc. seth@sethkaller.net (historical documents and ephemera); or Nancy Harrison at Emigrant Bank Fine Art Finance at www.emigrantbankfineart.com/ EBFAF_about_nh.html.

Thanks, Matthew, and to all, merry Christmas and good hunting.

Chris Versace, the Thematic Investor, is the director of research of Think 20/20, an independent equity-research and corporate access firm located in the Washington, D.C., area. He can be reached at cversace@washingtontimes.com. At the time of publication, Mr. Versace had no positions in companies mentioned. However, positions can change.

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