The Alternative Assets
by elamds
Introduction
The essence of investing is to grow our present capital into a larger amount in the future. Most investors achieve this by investing in assets that have safety, security and value to people, such as Stocks, Bonds, Real Estate and Commodities. These assets have proven their worth and made fortunes to its investors for decades.
Assets that have been an integral part of the financial world. No wonder why some assets have been further improved through securitization (bundling of financial assets to create a new security, which is then divided and sold to investors). This is for the betterment of liquidity in the market, and also to cater the different risk appetite of investors.
Nevertheless, there is still a dilemma with both the traditional and securitized assets, they are directly influenced by supply and demand, economic changes and even politics, which contribute to further price fluctuations (volatility) of its prices.
This is the reason why some people are not comfortable investing their money in the capital markets, and some just doesn’t want to dabble and learn the bits and pieces about it. The question then is, where then could individuals invest their money in order for it to grow? other than the traditional and securitized assets?
This is where the alternative asset class comes into the picture.
What are Alternative Assets?
Alternative assets consist of different kinds of investments that are outside the traditional investment assets (stocks, bonds and cash) and also the securitized assets.
They tend to be more illiquid compared to their traditional asset cousins, this is because they have fewer regulations from the government. Traditional asset classes on the other hand are recognized by the government, companies and institutions as a legitimate and well regulated investment vehicle used to raise capital, which also helps circulate the money within the financial system.
The Alternative Assets
1.) Private Equity – this consists of institutions and investors that partnered together with the purpose to invest their accumulated capital on private companies. This is to help fund different private companies for growth expansion, to strengthen their balance sheet, new technologies and/or acquire new companies. It is like the stock market, but in here we invest in private companies, which impose more risk as for our capital it is not regulated by Securities Exchange Commission (SEC). Private companies lack transparency with their business as they are not required to release reports regularly to their investors.
2.) Hedge Funds – This is an investment firm, just like mutual funds where they pool capital from various investors. They employ different investing strategies such as call and put options, volatility arbitrage and many more. Their purpose is to gain larger capital returns by doing these strategies and to lessen the price fluctuations gains/losses in the portfolio. This is mostly available to high net-worth individuals only, pension funds and endowments.
3.) Private debt – These are debt that finances companies who needs it. Private debt, as the name implies, are debts that are not financed by banks but by private institutions. Companies who operates this kind of business model are called private debt funds.
4. & 5.) Real Property and Hard Commodity – both of them are considered alternative assets because they have a physical representation of value, they are also called tangible assets. Most of them are illiquid and cannot be sold easily unlike stocks and bonds.
Overtime, these two has been securitized by institutions (meaning bundled up to make a new investment vehicle) and offered to investors. One of the most popular securitized asset is the Mortgage Backed Securities, where the Mortgages taken by people who bought properties are broken down to pieces and bundled up to make the said (MBS).
What happens with this is, the mortgage payments by individuals who borrowed money via mortgage loans, will be funnelled out and be distributed to the investors who owns the Mortgage Backed Securities (MBS) As an asset. The problem arises, if a home owner who has the the mortgage debt, is not able to pay anymore, in short he/she defaulted on his/her mortgage loan.
Just imagine if there is a large number of default in mortgage repayments? can you just imagine the damage it could bring upon the financial system of a country? This was what happened during the 2008 US housing crisis, which further caused a global domino effect and that was the Global financial crisis of 2008.
6.) Collectibles – these are what most investors immediately think when they talk about alternative assets. Art, Classic Cars, Luxury Watches, Wine, Jewelleries, Rare Whiskeys, Furniture, Coloured Diamonds, coins and Luxury Handbags are the top 10 alternative collectible assets worldwide based in the 2020 data.
Collectibles as an Investment
Most people who dabble in “Collectibles as an investment” wouldn’t usually choose Private Equity, Hegde Fund, and Private Debt for their alternative asset class investment. Why? because some of these alternative investments, excluding most collectibles, are also heavily exposed to the traditional assets like stocks, bonds and cash. Henceforth, their performance tend to move the same with the traditional assets, but not most of the time.
Additionally, one of the reasons is the complexity of understanding these alternative investments. Not everyone will have the enthusiasm and passion of understanding businesses, corporate finance, capital allocation, chart readings, and a bit of economics, not to mention that some of the alternative investment class employs complex investment strategies.
This is where, collectible as an investment has the upper hand, because when you say collectibles it consists of vast items in the world that holds value to a specific group of people. It usually is connected to our own likes, passions and personality, which makes it easier for us to understand and grasp its value.
Also, what strongly transform collectibles as a good alternative asset investment is through their uncorrelated price performance to their traditional asset class counterpart.
Collectibles, such as art and sculpture have proven its worth time and time again. Its Value held during the worst economic downturns and even wars, unlike traditional investments where prices naturally drops when such events occur.
It is an enticing alternative investment to some investors due the personal relationship it creates for them, the natural love and passions for it. An investment that evolved over time as its demand has continued to grow and has not even abated, just look at Luxury Watches.
Individuals who become deeply entrenched to collectibles, to the extent that they have learned not just the item itself, but also its industry, its creation, engineering, the raw materials used, to manufacturing and its market’s supply and demand.
In short, a group of people who understand its underlying beauty, and its unit economics, hence value.
Collectibles Investment Returns
The investment returns of collectibles vary depending on the category. Some will have higher number of collectors and investors than other, which is dependent on the geographical location. For instance, based form 2020 data, luxury watches were the most popular collectible investment in the Asian region, while art dominated in North America. This could mean that having a luxury watch investment collection in Asia could yield good investment returns, as the popularity in the said region was high during that time period.
A certain geographical location where there are a lot of individual collectors, traders and investors transacting for luxury watches would mean a good market for both buyers and sellers, where liquidity, supply and demand are on the table. That being said, does popularity immediately translate to higher investment returns?
Based form the survey done by Knight Frank with over 600 bankers, wealth advisors and family offices studied regarding the 10 years growth in asset value of luxury goods from 2011 to 2020. Rare Whiskey came in with the highest growth of 478% over a span of 10 years, whereas luxury furniture only had an increase of 22% in the same time period (This is an awful 10 years return on investment, as this only translates to 2% annual growth rate). See the complete table below.
Even though art had been the most popular collectible investment during the previous decade, 2011-2020, Rare whiskey on the other hand, dominated the collectible market in terms of the total capital appreciation over the same period. This could signal that, popularity of collectibles doesn’t immediately translate to higher investment rates of return.
Just like with other investment classes and vehicles, no one in this world will ever be able to predict consecutively and with 100% certainty, which one will produce the highest investment return in the future. But, what we can do is to understand the market itself, the supply and demand, participants of the market, things that substantially affect its price and value, and most importantly finding what works for you.
Understanding and loving a collectible for investment purposes is important, it gives you the edge to know how prices will increase, decrease and how demand will keep up with supply and vice verse.
In the NBA trading card world, people who understand the players, their strengths, weaknesses, their training, the fan base, the popularity, and the possible growth of the player based from their previous to current gaming data, and a lot more to consider, have a larger impact on their respective NBA cards.
One example is the Lebron James’ 2003 Cleveland Cavaliers Rookie Trading Card, which was sold at auction at a price of $5.2 million. Another one is the 1980 Topps Bird/Erving/Johnson #16 PSA 10 cards which was traded at the $780,000 price range, as of November of 2021. These two were the top hottest NBA cards during November of 2021.
NBA cards could be just a piece of junk for some people, but we cannot disregard the fact that these cards have truly held its monetary value and some of it even superseded inflation, for the large community of its patrons.
Cards that has been driven by supply and demand, the supporters’ love of the NBA and its players, its significance it has to their lives, and most especially nostalgia which has played a substantial role in its success.
Nostalgia is a strong competitive advantage for those who understand its nature and leverage its power. It strongly hooks people’s emotions to an item, character and certain event in time. You can reintroduce and remake these things, and still, people will be willing to purchase one. The more an item, character or certain even in time had an impact to their lives before, the more likely they will be willing to pay a premium for it. Just look at Disney and Nintendo with their Intellectual Properties, their remake movies, remake merchandise, their different characters but generally almost the same stories to name a few.
1980 Topps Bird/Erving/Johnson #16 PSA 10
2003 UD Exquisite Collection #78
https://vintagecardprices.com/hot/free-basketball-card-prices?time_range=month – Check this link If you want to see the current price guides of sports cards.
To sum it up
In the collectible space, there are people who are willing to splurge money on it, while others see it as an immense waste of time, effort and money to put into. Two sides of the coin with different understanding and point of view, but who are we to judge one’s interest and collectible investments.
It’ll be supply and demand, its market and participants who will always dictate if a person made a good investment decision, and not the personal opinions and perspective of a person or group of individuals who are not even into the game.
A collectible investor’s job is to understand the market and the item itself, as this will give them a competitive advantage in the collectible alternative asset investment space. This actually sounds familiar, because all types of investment requires us to understand what we invest in for us to be able to become successful in this endeavour. It’s our willingness to learn that give us the edge in whatever type of investment asset or vehicle we use.
On the other hand, we must also be specific with our goal on a collectible. Is it really for investment purposes, or for our own indulgence and enjoyment? This is because supply and demand changes, there might come a time where the popular collectible of today, could be just a piece of invaluable item in the future. Just look at the Beanie Babies.
My point here is, we must differentiate if a collectible item is an investment or not, because if it is, then we should always be ready to sell an asset once the need for it arises. Like what you asked? like when we achieved the initial reason why we’ve been investing our money in the first place (Is it for retirement? child’s education? for your further education? buying a home? buying a car? etc.), or if there is a substantial change on the supply and demand of an asset, if it declines just like the Beanie babies.
But, if we see it as a collectible for our own enjoyment, then we should not look into it as an item to make money out off, but as an item for our own pleasure.
Just follow the TIP given by Investopedia: While collectibles are sometimes referred to as a class of investments, many never rise in price or even maintain their original value. That's why experts advise people to collect what they enjoy—and if it becomes valuable, consider that a bonus.
Invest on what you understand, this has always been one of the fundamental rules of investing. Remember, your money is your own responsibility, always make an informed decision.
Knowledge is my Sword and Patience is my Shield,
elmads
This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.
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