For those of a certain age, the gut-wrenching scene is burned into the back of the brain: A stunning, red, vintage convertible 1961 Ferrari 250 GT California in the famous movie Ferris Bueller’s Day Off crashing through the glass of Cameron’s Dad’s pristine garage and landing in the ravine below, a smoldering wreck.
The cause of the crash? Ferris’ failed attempt to reverse hundreds of miles driven about town on their iconic day off by jacking the back of the car up and putting a book on the gas pedal – and Cameron’s kicking the car’s shiny chrome bumper in frustration when it doesn’t work. (For those feeling a little nostalgia, click here to watch the scene again, courtesy of YouTube.)
It is a classic illustration to launch discussion of a recent academic research paper we stumbled across on collectibles as alternative investments.
The paper (click here to download from SSRN), written by Péter Erdos at the Budapest University of Technology and Economics Ph.D. School in Business and Management, takes a lengthy, detailed and surprisingly mathematically analytic look at how collectibles are priced, valued, grouped and traded, as well as how their performance in valuation over time can be measured against one another and against other types of benchmarks.
The unusual topic and detailed analysis of exactly how collectibles can and should be quantified as alternatives grabbed our attention – things like applying variance ratio tests to measure the size of the random walk component in U.S. art auction prices since 1935 and looking at fine wines from an investment theory point of view using London International Vintners Exchange (“Liv-ex”) indexes. The table below illustrates the performance of the Liv-Ex 100, the Liv-Ex Claret Chip and Liv-Ex investables indexes.
The research paper doesn’t get into the intricacies of sports cars like the 1962 Ferrari GT California (by the way, there were only 55 made and, to our shock, the one in Ferris Bueller’s Day Off was actually a replica). But it does take a very in-depth look at collectibles, defining things like paintings and prints, stamps, coins, ceramics, photography, furniture, books and wines as a sub-segment of alternative assets on the collectibles market.
To be sure, the author notes all of the pitfalls that collectibles as investments carry: illiquidity, valuation and pricing disparities, general consumer trends and preferences that affect supply and demand and even different markets that affect levels of how the items are priced and traded. “Collectibles also have both primary and secondary markets which work differently from an efficient point of view similarly to the IPO and the secondary stock markets,” remarks the author.
For instance, the paper notes that there are parallels between collectibles and IPOs. When a company debuts on the stock exchange, for instance, there is much uncertainty about its future profitability. In the same vein, when paintings or vintage wines are put to market, their future success depends heavily on collectors’ future taste, which is obviously not predictable. (See chart below illustrating historical U.S. art market prices dating back to 1875.)
“If the works of a given artist are to fall out of fashion, investments in these pieces can easily become worthless and these pieces disappear from the market,” as noted in the paper. “This is also true for old wines; wines from bad vintages disappear from the market faster than from good vintages.”
The 114-page paper goes at length to focus on esoteric concepts such as the random walk theory and the weak-form efficiency of U.S. art auction prices, with numerous theories from academics and authors on gauging hard to value trade assets and even survivorship bias techniques.
In the end, the paper offers separate but similar conclusions for art and wine collectibles as alternative investments. On the art front, the conclusion is that auction houses have actually prompted upward price bias estimates on collectible works of art, which has skewed notional returns on such pieces. On the wine front, it is that fine wines actually provide a “safe haven” for investors during times of market duress.
What neither does is correlate with stock market returns, which according to the paper quantifies them as bona fide alpha-generating alternative investments. We are also mindful of the fact that, as the look on Cameron’s face after his Dad’s car crashes can attest, a collectible isn’t worth anything once it’s been damaged, broken or skidded full-throttle through a plate-glass window.
The only caveat we can think of is that if it’s a fine wine, one can drink it if the world financial market collapses.