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moneysense.ca, 25/06/07
Exotic Investments
Today’s Financial Post featured a front-page story on exotic investments, which typically hold esoteric asset classes and are sold to investors for their “diversification benefits”:
Diamonds – Diamond Circle Capital plc, a closed-end fund that plans to list on the London Stock Exchange will invest in a portfolio of polished diamonds, with a minimum investment of $1 million per stone. The fund plans to raise $400 million in its IPO.
Fine Violins Fund – A London-based dealer is planning to start a $50 million fund to invest in old violins.
Wine Investment Fund – Another London-based fund that aims “to generate capital growth through the buying, holding and selling of investment grade wines”.
The Fine Art Fund – A hedge fund that plans to make money by buying and selling paintings by Monet, Renoir, Picasso and other artists.
Football Players Fund Management – A hedge fund that has $15 million invested in the transfer rights of soccer players in Europe.
Apart from the fact that most of these funds seem to be based in London, I don’t know why anyone would want to invest in mostly speculative instruments. Like pure commodity plays like gold, silver and oil, these assets have an expected real rate of return of zero.
moneysense.ca, 25/06/07
I wouldn’t touch any of these choices with a 10′ pole.
Although with that said, a friend of mine has a very impressive personal collection of guitars. A couple of autographed guitars, a few limited edition series and some vintage guitars along with some more pedestrian ones which he just happened to get an amazing deal on… But with respect to his guitar collection, he’s definitely a buy & hold investor – it’s been a very rare event when he actually sells one. And I never get a chance to play any of them because he completely babies them, I guess for good reason. His basement is like a museum.
So, in my opinion, you should only be a collector of things that you’re passionate about (coins, stamps, art, comic books, whatever). But you shouldn’t look at them as investments but rather something precious which should be cherished.
Phil: You’re right that collecting is not investing. Making money on them isn’t the point but indulging your passion for whatever interests you is.
I can’t imagine buying diamonds as an investment. Just to break even you’re gambling that deBeers will be able to maintain the artificially inflated price despite losing their monopoly on production. I’ve heard that when production ramps up on manufactured diamonds, the bulk price could be as low as $5 a carat, and the stones are by definition flawless. They’ve done a good job historically at selling something with little intrinsic value, but I don’t see any way for the price to go up, or even keep pace with inflation.
For 15 years, I was an investment professional on Wall Street. On Day 2 of my first job, my boss told me that margin exists to increase the commissions on Wall Street because it’s certainly not good for the average investor. I never forgot that.
Twenty years later, I am seeing the same thing. That same thing is products being created with the sale in mind first. The functionality and the overall sense of the investment is down the list in terms of importance.
Looking at these new products, it doesn’t surprise me. In the end, we all have a sense of greed and that greed is fed by products that are new. These products create the dream and keep the dream alive which is what most investors want.
In addition, we have a need to find something new; the next big thing or the next good story. We’ve all heard the story that if you want to be successful, do what successful people do. I can assure all readers that The Wizard of Omaha is not buying any old violins. Well, I take that back, if they’re priced right. When you’re buying an allotment of old violins packaged in a fund, you’re paying for marketing, insurance, management fees etc. You can buy those violins cheaper on Ebay.
The violin one is funny. At least commodities are liquid, what happens if the bottom falls out of the fine violin market?
Mike
Don’t knock the violins so much. They are a scarce resource increasingly valued by a name-seeking music industry and Stradivari and Guarneri prices, as well as fine-quality piano prices, have skyrocketed. I personally would not bet on it, since it seems a bit bubble-like, but I’d place it as less risky than the diamond one, for instance. Correlation for other asset classes? – haven’t a clue.
Mike: I guess violin investors can fiddle while the market burns.
I found the fine art fund funny because pretty much the entire website is password protected. I guess they didn’t want the riff raff trudging through the place.
Haha, good one.
Well, I for one was learning to play the violin a few years ago. I would still be taking lessons if work wasn’t getting in the way of that. Anyways, never mind “fine” violins, the “regular” violins cost quite a pretty penny! In my experience, most kids today would rather play more conventional instruments such as guitars and drums. On the one hand, violin playing will slowly become a lost art which will put downward pressure on the market, but on the other hand, I think violin makers will also become a lost art and put upward pressure on the market. Which will win over? Who knows, but I’m still not making the investment!
Funny post- this remains me of earlier this decade when the street started packaging things like the royalties to David Bowie’s CD collection as a product you could invest in. They ran out of product and started selling strange things. Perhaps a sign the market is well past its peak?
[...] can add stamps and photographs to the list of exotic investments that now includes diamonds, fine art, wine, violins and soccer players. An interesting nugget in [...]
Moderation in all things is the key. Art prices have risen considerably over the years. Various indexes show these type of investments do work. I think people will be seeking out these type of investments even more due to the fallout from the sub-prime loan debacle. Many alternative investments don’t follow the stock market trends, so they are used as a hedge. I wouldn’t be the farm on these type of investments, but I would at least swap a cow or two for a picture of a cow by certain people.
[...] are embellished simply to justify a pricey hobby to the significant other. In an earlier post (See Exotic Invesments), I wrote about investment opportunities in diamonds, fine violins, wine, fine art and soccer [...]
I would be interested in investing in Wine. If the bottom falls out of the wine market you could always drink your problems away..