How to maximize the return on your collectibles investment

To my way of thinking, there are three ways to become involved in the Antiques & Collectibles business: as a dealer, a collector, or an investor. Usually, there is some overlap between the three, but efficiency dictates that there shouldn’t be. Following is a discussion of maximizing the return on your collectibles investment.

A mentor once said to me: “You can be a dealer or be a collector, but you can’t be both.” What he wanted to impart was that a dealer shouldn’t save the “best stuff” for himself, because the profit generated by those items could represent the difference between a healthy or a struggling business.

The same rule can be applied to collectibles: You can be a collector or an investor, but not both; i.e., you can hold (collect) an item for the long-term, or you can sell it when the investment return meets your criteria and then re-invest the profit in another item.

Research shows that profit generated by taking short-term gains often results in a higher return-on-investment (ROI) than holding items long-term.

Case in point: A few years ago, Terry Kovel divulged “10 Collectibles NOT Worth Collecting Anymore.” If you had collected (with few exceptions) Longaberger baskets, metal lunchboxes, Hummel figurines, or Limited-Edition Barbie Dolls and held them for twenty years, you were in for a big disappointment when you tried to “cash in” your purchases. Although these items still sell, most models bring a fraction of their original “investment.” Says Kovel: “Hummel figurines once sold for hundreds of dollars apiece ... Most used Hummels now sell for no more than $75 in shops, with prices likely to continue to fall as more Hummels reach the market.”

Despite popular advice to “only buy what you like,” buyers often rationalize purchases by stating “this will only go up in value.” In a 1999 American Economic Association publication titled “Measuring Returns on Investments in Collectibles” author Benjamin Burton points out: “A substantial proportion of collectors ... hope for financial gains. In a survey of 154 antique and popular culture memorabilia collectors ... 35 percent cited investment as their primary motive for collecting ... In a survey of a broad range of collectors, 22 percent of respondents gave financial investment as a motivation for their collecting.”

It’s not too much of a stretch, then, to say that about one-quarter of all collectibles purchases are made with the expectation of financial gain. But, to what extent is financial gain actually happening? How can collectibles investors maximize their ROI? One method is to use the same methods that Wall Street investors use. Investors Business Daily provides tips on stock investing that collectibles investors might find illuminating. Here are a few:

1. Determine your desired return on investment. When you hit that threshold, sell. Doing so requires discipline; the tendency is to hold an item as long as the price keeps going up. Be aware that other collectors may be holding the same item. As selling prices rise, these collectibles will come to market and the greater supply will flatten and/or lower prices. Keep a close watch on the supply of an item coming to market, as long as the supply is declining and demand stays steady your item will probably continue to go up in price. EBay’s completed sales search can provide a 30-day glimpse of an item’s supply, sell-through, and high and low prices achieved. The condition, rarity, and provenance of your collectible will dictate where you want to be within the item’s range of selling prices.

You’ll need to consider selling fees, shipping, and other expenses into your ROI determination; you’re looking for net profit ROI, not gross profit ROI. Find a selling venue that works for you (dealer picking, eBay, etc.) and stick with it. 

2. Learn to cut your losses. Not all your purchases will be winners; don’t hold on to an item hoping that the price will go up. If you do, you’ll eventually own an accumulation of items you are upside-down on. Wall Street advisors recommend setting a loss threshold and selling any item that hits that threshold. Investor’s Business Daily suggests selling a poorly performing stock when the loss hits at about 8 percent (or less) of your purchase price. If you bought an item for $100, and the price for similar items hits $95-$93 and is trending downward, then sell. If you “win” on two items out of three, your long-term gains could be exceptional.

3. Consider the tax implications. When you hold a collectible long-term and then sell, the profit is taxed as capital gains. But, when you churn your purchases, profits are taxed as ordinary income (even though the activity may be casual). For a more thorough exploration of this topic, see my May 2015 Behind the Gavel column “When does a hobby become a business?” If you have a question about the topic, see your tax advisor.

4. Consider opportunity costs. Wise investors hold onto their seed money. Set aside a financial reserve and enough money to start over if you need to. All remaining money should be invested in saleable collectibles. But, set limits on how much inventory you want to invest in. As many dealers will attest, the antique business can take over your life. You may be sorely tempted to open a store or a mall booth; if you do so, expect your profits to plummet (because your expenses will be greater). You can’t be a shop owner and an investor at the same time.

Being an antiques dealer is a uniquely rewarding career, and being a collector is satisfying on a personal level. Investing in collectibles is a fun and financially rewarding hobby that works best when pursued on a casual basis. In other words, don’t quit your day job to become a collectibles investor.