What makes a collectible worth collecting? To answer that question one must first contemplate why they are collecting something.
Is it a monetary investment?
Is it a hobby?
Is it to satisfy an emotional need?
For our purposes we are only going to consider monetary investments. If you are collecting as a hobby, or to satisfy an emotional need (such as recalling your childhood), price is not much of an issue. Whether a collectible increases or decreases in value is not your concern.
Usually, when the subject comes about whether an item should be collected, money is involved. The bottom line is simple: will investing in the collectible create a positive return on the investment? More particularly, will the return on the collectible exceed the return that could have been obtained with another type of investment?
For example. If you invest one thousand dollars in collectibles and can sell them for fifteen hundreds dollars in ten years, you have a five hundred dollar profit. Over ten years that is fifty dollars per year. Based on a one thousand dollar initial investment, the return each year is five percent.
Five percent is probably better than putting your money in the bank and seeing what interest the bank pays. Five percent is also probably less than what an investment in the stock market is expected to return.
On the other hand, you know what return you will receive via interest because it is a set value.
With a collectible the future is unknown. You do not know your investments will increase by a certain amount. The collectibles could lose value. They could also significantly appreciate.
To reduce this uncertainty you can look at historical prices to evaluate what is happening with a collectible and realistically expect that to continue in the future.
Factors Affecting Price Changes
Factors which influence whether the value of a collectible increases or decreases over time include:
- The original price of each item
- How many different items are available to collect?
- How rare or common each item is. (Production run)
- How many other people seek to acquire the same items?
- Is the item trendy?
- Are the items easy to counterfeit?
Each of these factors are important. But I view actual price and sales information as the bottom line which accounts for these factors, plus any other factors you have not considered.
In other words, the market determines value and the market is never wrong.
Comparing Initial Retail/Buy Back Spreads Versus Long-Term Value
Another important issue often overlooked by novice collectible investors is the difference in value after the first sale and the change in value over time.
Let me explain.
Assume a new collectible sells for retail at one hundred dollars. On the after market, such as on eBay, it can be sold for eighty dollars. That is a common profit spread for retailers. It is like buying a new car and then turning around and selling it. Once you drive the car off the lot there is often an immediate loss in value.
Short-sided investors only consider the new price versus the immediate buy-back price.
But consider this: if you buy the collectible on the after market for eighty dollars that is often your price floor. Unless the market for a collectible evaporates, as may happen for trendy items, or products with too much quantity, you do not expect value to keep decreasing each year.
Rather, once a production run has ended and rarity established, every year should see a steady erosion in how many of the item are available because some are lost, destroyed, or hoarded. There is also a steady erosion in quality as some excellent quality items become used and their quality lessens. Thus, supply steadily decreases over time.
The flip side is, usually, demand increases over time because with population growth there are simply more collectors.
My suggestion when evaluating a collectible is, if possible, to get a price history. The market creates prices.
If prices decrease over time the item is probably not a wise investment.
If prices increase over time then you can evaluate how much they are increasing and whether it is worth your investment.
While that is easily stated, in practice the issue is much more difficult because reliable price histories of sales over time are so difficult to obtain. In many cases, it may be impossible.
Fortunately, the Internet has made that task easier, and so have after markets such as eBay where you can continually monitor prices to see which way they are moving.
If you want to make money from collectibles, make sure you arm yourself with as much data as possible so you can make a wise decision.