The Emotional Asset Investment

"Emotional investing and knee jerk reactions to short term events can be hazardous to your wealth." - Diego

Emotional investing and emotional assets are two separate things.  The first, as the quote says above, can be very hazardous to your wealth.  Investing based on fear or greed, the two main emotions intertwined in investing can make rational investors act irrationally and cost them a fortune.  This occurs every day, has occurred for centuries and will occur as long as humans invest.  The birth of computerized trading strategies is an attempt to take this irrational thought out of the equation and to a large extent it does just that, but even so there is still some emotion in that the program being written is done by humans based on human responses to market movements and the price movements of the assets in which it trades are based on human emotions.

Emotional assets are different in that this asset class is akin to collecting.  My son has hundreds of emotional investments in collecting sets of toys and other "valuable" items.  He cannot wait to show his friends at school and trade for items that he does not have.  I used to do the exact same thing in my day and generations before me have done the same thing.  As we get older we shun these "investments" for the more tried and tested forms of stocks and bonds but the wealthy spend a fairly large portion of their wealth on collecting rare assets from art to wine to stamps to violins to coins and diamonds just to name a few.  It turns out that the kid in us still likes to collect and show off our collections to our friends but with the low interest rate environment and the fragility of the economic recovery many more people are looking at these investments as a possible solution to their poor returns and as a way to protect their wealth against another drop in housing or stock prices.  So does this investment class provide these benefits or is it a myth?

As you would expect, over the long term the value of the assets has increased however it is relatively hard to quantify the increase in the investment value for the simple reason that no real market exists for these assets.  True you can buy art, stamps, diamonds, wine, violins and coins relatively easily but tracking the increase in price of your particular asset is very difficult.  A while back I took a stab at investing in diamonds and coins with limited success.  I held the assets for three years during which time the value of gold, silver and platinum appreciated significantly.  My investments were in all of those assets so when I decided to liquidate I assumed that my coins would have increased in value tremendously but I was wrong.  My silver and platinum coins had appreciated in line with the price of the metal as they were newly minted and were purchased at the spot metal price.  The gold coins had actually lost value!  Apparently the coins I had purchased (early 1900 American Eagles) were now not in high demand by investors and so the premium I had paid for these coins had fallen more than the price of gold had increased hence I lost money.  My diamond trade was similar to the gold coins but one thing that was interesting was that I had a number of jewelers value the piece and the price difference was huge, in the magnitude of 50%!

Now had I inherited a Ming Dynasty vase that would have stood me in good stead and I am sure that all of the coins I previously owned would by now (10 years later) have appreciated but I was too impatient to wait it out.  So one thing I did learn is that this asset class relies on a long period of time to appreciate.  As an example I have a piece of art that I purchased as a student more than 25 years ago.  The artist was an up and coming South African artist who, it turns out now, has international acclaim.  At the time I purchased it because I loved the painting but it now turns out that I own a fairly valuable piece of art.  Based on the purchase price and the quoted sale price (no I did not sell I just looked up painting values of his listed on the Internet for this blog) it has appreciated at a rate of 22% compounded annually.  Not bad I have to say but at the time it was not purchased as an investment but rather as something to hang on the wall and I gave it enough time to appreciate.  Furthermore I was lucky that the artist I chose became famous, many don't.

So while the press reports the massive prices paid for works of art and other collectibles to be at all time highs (and no doubt those pieces are), there is no guarantee that YOUR assets will have appreciated.  The risks therefore are large as everything from changes in human tastes (just think of that 70s tile in your fixer upper house), to changes in wealth patterns to fads and bubbles can derail the value of your precious cargo.  Furthermore there is the risk of theft and forgery and the spread between one buyer and the next can be large making it hard to find someone to trust to handle the transaction.  So while this investment has appeal, particularly after the TV shows about people finding treasure in abandoned warehouses and storage units, unless you are very wealthy or an expert in the trade this is an investment class that should be left alone unless you are buying it for the pure pleasure of owning it to enjoy and share with your friends!