by Elmads

Introduction

Lego, a piece of plastic toy that touched and have been a part of millions of children’s lives since its inception in 1932 Denmark. Most people in this world know about Lego, a toy that sparks creativity and happiness to the person or kid who have built and played with one. Even its name implies enjoyment, “LEGO” which is an abbreviation of the two Danish words “leg godt” meaning “Play well”.

The Lego company has been successful for decades, they’ve shown resilience in times of their setbacks and economic downturns. In fact, they have always been in the top 5 toy companies worldwide in terms of profitability.

They’ve been true to their mission and vision of making young builders and helping them to learn things through play. Their brilliance of letting children understand the relationship of time and effort through LEGO bricks.

Children get to make a connection with the Lego sets they have built via the effort they have invested in creating one. Just like with us adults, we tend to appreciate more the things that we have built, created and exerted a lot of our own effort with. This is how Lego set the bar high for playing with toys, it is indeed a well deserved success in their part. Just look at their Brand Framework below.

Due to LEGO’s decades of toy making experience and continuous innovation, they have been able to build set of fans, followers and loyalists of their brand. What’s funny is, it’s not just the children of today who enjoy Lego sets, but also the kids of the previous generations who are now adults themselves.

The more people get to appreciate Lego sets, the more it’ll have demand for its products and services. This completely reflects in The LEGO Group’s business financials, as they have maintained good sales, profits and margins year-on-year. They had a Revenue of 5.87 Billion Euros with 1.33 Billion Euros in Net Income in 2020. An indeed spectacular 2020 for the company despite the pandemic.

With their well established brand and product portfolio, the demand for their products has been seeing continuous growth by still capturing new customers, while maintaining their loyal ones. Because of this, the secondary markets for the Lego products have been formed, where different people buy and sell Lego sets through physical trade and also online markets, such as Amazon, eBay, and BrickLink to name a few.

The Heart & Brain of Lego

We must understand that, if we want to invest in Lego, then we should automatically trust the company who makes the toys and the law of supply and demand in its secondary market.

• The Brain – The Lego Company:

We trust that the company will continue to grow their business, make more Lego sets, expand their product portfolio (eg. Star Wars, Classics, Ninjago and etc) and strengthen their brand. The success of the company is the success of its secondary market as well.

• The Heart – Supply and Demand:

The secondary market for Lego sets is the heart of this investment. This is where enthusiasts, fans, supporters and other more come to trade the piece of engineering and art that the Lego company has built and made.

As long as there are people who buy and sell their products, and the company who continuously produces Lego bricks. Then, this market will continue to thrive.

The Lego Product Portfolio

To most people, the Lego company just makes toy bricks that’s it. But, not everyone knows that they have different product lines in their arsenal of Lego sets, it’s known as “Lego Themes”. What do I mean by this? Just look at the photographs below.

Source: https://en.wikipedia.org/wiki/List_of_Lego_themes

These are the Lego Themes that the company currently makes as of this writing in 2022. Toys and merchandises are more in favour when it rides the popularity of movies, series, significant events, artists, and others more.

This is why the toy industry thrives, as anything that has brand following, supporters and loyalists means there is a demand for it. This is what the Lego group has done well, by getting licenses to make Lego toys under the popular independent brands such as Star Wars, Marvel, Stranger Things, Super Mario and many more.

Nevertheless, not all are licensed from other brands because Lego also created their wholly owned theme, like Ninjago.

Take note, these are the current Lego Themes. There should actually be a lot more themes in their arsenal of products, but the group discontinued some of it already in the past. Those themes either did not work well in terms of their revenue and income, or had issues with licensing and relicensing, while others were not specified why it was completely discontinued.

Finding Your Lego Theme Niche

Anything that is related to investing must always be accompanied by our understanding of our investment. We must not just look into its possible investment returns, but also the risks it impose.

As you have seen from the Lego company’s 2022 product line portfolio, which is a lot. You must first find the Theme that you are willing to understand in a deeper level.

The Lego company has its own supporters, while each and every licensed brands they have, the themes, have also their own specific group of fans.

For instance, Star Wars, people who like this specific theme either started to love Star Wars first, then appreciated Lego afterwards. Or, a Lego supporter first who subsequently fell in love with Star Wars, or just naturally loves both.

I am a testament to this. I’ve been a Star Wars fan since I first watched Episode 1 The Phantom Menace when I was young. Whereas, I just recently appreciated Lego, because of Star Wars. This gave me an insight on the fan base level of Star Wars, I understand its culture, its characters and the world that George Lucas has created.

The whole Star Wars brand has built an empire which stands tall today, currently sitting at a $68.7 Billion worth in the media franchise industry. And guess what, 60% of that $68 Billion is thanks to its merchandise sales (novels, comic books, toys, figurines, clothing, poster, Super 8mm clips, albums, costumes).

So, do I think that Lego and Star Wars will continue to be in demand in the future? I don’t know, but what I do understand is that both Star Wars as a brand and Lego Group, the company, are having continuous independent brand growth in their respective industries and even cross industries. Both are capturing the future generation of potential fans, while maintaining their current and oldest ones.

All in all, Find your niche that you will deeply understand and gain confidence about. Have the skin on the game, understand the ins and outs, the culture, its heritage and the strengths & weaknesses of Lego and its themes that you are looking into.

NOTE: finding a niche doesn't mean sticking into one Lego Theme, we could certainly invest in one or more themes, or even all of its themes as long as we understand each one of it. Every Lego theme has its own unique qualities that others don't have.

To sum it up

We must understand that when we purchase a Lego set for investment purposes, there is no cash being paid to us in holding one, unlike Properties (Rental Income), Equities (Dividends) and Bonds (Coupon).

This is the reason why we cannot specifically value Lego (knowing how much the price could possibly appreciate in the future, and whether if it is cheap, fairly valued or overpriced), but what we can do is to only price it base from its Suggested Retail Price (SRP), which is being dictated by the Lego company.

This is the reason why I specifically emphasize that when we invest in Lego, we must understand the Company, the specific Lego Theme set (its brand following), and its Supply & Demand.

So, to finally answer my blog title “Is Lego an Investment?”, yes, somehow, as there are logical factors that pushes its price upwards.

Conversely, I will also play the devil’s advocate. Lego is a SPECULATIVE INVESTMENT, I bet you didn’t expect that coming from me. Here’s the reason why, there is no certainty that a specific Lego set will appreciate in price over time. There is no specific gauge to know its value, but it can be definitely priced through the law of Supply & Demand.

Unlike with cash flow generating assets (Equities, Bonds & Real Estate), where the value can be estimated and calculated by doing a “Discounted Cash Flow Model”. It’s through calculating the present value of an asset’s future cash flow.

This is why PRICE must be differentiated with VALUE, the both is and will never be the same. Henceforth, making Lego as a speculative investment play where it can only be PRICED and not VALUED. It’s just like any other alternative collectible investments.

As like what Professor Aswath Damodaran said to one of his classes, “A Pablo Picasso painting cannot be valued, it can only be priced”. Pertaining to all the Non-Cash Flow generating assets like Collectibles and Cryptocurrencies.

Always understand what you invest in.

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.