Collectible Equities.

In my youth, I assembled a fair number of silver and bronze age comics. The items were read sparingly, packed away carefully in several Styrofoam coolers and stored in a cold, dry cellar as I journeyed forth from my parent’s home to university and beyond. I had been made aware, even as a child, that comics offered more than the joy of reading an illustrated story; there existed a tantalizing possibility of appreciation through collectability.

Some years later, after my long-suffering parents unceremoniously dumped, on my hallway floor, the aforementioned chests of comics, I attended my very first comic book convention. Boxes in tow, the several hundred issues were laid out on the tables of not one, but two separate comic book dealers. A sort of “antiques roadshow” appraisal ensued; hopes were dashed. It turned out that the favorites of my youth, apparently, were simply not in demand. I had purchased and painstakingly stored “commodity” issues; they were churned out monthly to fill racks. These comics weren’t storyboarded, they weren’t illustrated by up and coming stars, there was no attempt at providing interesting serialization of the plots and universal themes of morality were noticeably absent. Lacking these distinguishing attributes, only a handful were considered to be worth the cover price paid more than two decades beforehand. Not a single one was deemed to be worthy of a modest expenditure required for a professional grade assignment and protective plastic packaging for all eternity. The sole purpose for the initial printing of these issues was to “populate” the shelves of stores.

The lesson I learned from my initial misadventure in the world of comic collecting is that time + comic does NOT always equal a positive return. Granted, I was only out of pocket about $37 dollars, using my average cost of $.10 to $.25 per issue. That belied the entirety of the loss; I am out far more than the total expenditure as the time value of capital has been squandered over 20 years. Moreover, an opportunity was lost, had I selected some actual collectible comics for storage, I would have earned a pretty penny. My mistake was believing that ANY comic book would produce a positive return, given enough time. That proved false. It turns out that some comics are highly collectible, some moderately so (niche titles) and most are simply expenditure titles, with no merit as an investment whatsoever.

Comic book collectors and I assume, most collectors across all manner of items, are extremely discerning in their purchases. The top collectors have set criteria that they have employ so as to ensure the highest likelihood of a positive return. Every serious art collector, comic collector and rare book collector rely on a set of rigorous and tested guidelines for assembling their portfolio. Not a single collector of any repute would give the time of day to those who attest that the preferred approach to build a collection is to purchase everything in sight.

Those that have amassed wealth in the art, rare book, wine, comic world, etc; they all accrued wealth with thoughtful, deliberate and discriminating selection. Interviews with the most notable in the collectible fields all indicate striking similarities in approach. They have learned, via trial and error or formal policy, that most categories offer only a minority of highly desirable items with a larger selection of moderately desirable items and the bulk of any category being wholly meretricious. This represents the meritocracy of collectibles; the most sought after items have unique and compelling attributes and produce scads of return; the rest are dross and cannot be gussied up, no matter how they are promoted to novice collectors.

In contrast to the collector world and the capitalist world at large, those attempting to manage equity savings for the public advise us, time and time again, that to be discriminating and selective is a mortal sin. John Bogle, of Vanguard fame and Warren Buffett admonish that indexes simply cannot be beat over time, so why even try? Marketing advertising by most firms cement this positioning and have framed the public discussions to suggest that only three main alternatives exist in the modern era; ETFs, managed funds or discount brokerage accounts.

1. The first bolt loosed on the public is that one must abandon all notions of outperformance and to turn savings over to ETFs or passive index products. An ETF product represents abdication at its core, it holds everything in the representative category. An ETF is simply an index and an index is indiscriminate; they hold some meritless businesses plus a selection of a few truly excellent companies and are book-ended by dozens, hundreds or possibly even thousands of ordinary investments. At the margins, an ETF will even hold a handful of spectacular failures in the making and a soupcon of companies legitimately lurching towards insolvency.

One cannot outperform with ETFs, because an ETF is not designed to win; an ETF is the investment equivalent of a peloton in a bicycle race. I would suggest that never, ever, in the history of athletics, has anyone placed money on a peloton winning the Tour De France. Yet, here we sit in 2020, with tens of trillions of investment dollars currently warehoused in ETFs globally.

2. The second option advertised to the public is that one should find themselves one, or several, active investment fund managers and turn their savings on to them. “Active” funds are somewhat more discerning in the selection process and endeavor to buy winners, hold them for a bit, sell them when they feel the time is right and deploy that capital to find new winners. In theory and sometimes in practice, this represents a sensible approach. There are numerous issues with the approach of selecting active funds. Investors chase hot returns; invariably they put money into funds at market tops, sell out at market bottoms and that utterly defeats the notion of long term investing. Investment managers themselves have the unenviable task of fighting with these influxes of money, and requests for redemptions. During periods of strong markets, they must invest capital influxes. During periods of underperformance, these managers are forced, by redemption orders, to sell shares at bottoms, which again defeat the notion of long term investing. Some managers endeavor to get around the hot money issues through “capping” or “closing” funds to new investors, but they still permit additional investment from existing clients; it is amazing how much additional inflows accrue from clients that had supposedly already invested everything they had. In good times and bad, investment managers must also act as expectation managers and on occasional as psychiatrists; that takes managers well beyond the scope of the job description. In active funds, long term outperformance is difficult to achieve when individual investors won’t stick around for the long term.

3. The third option presented in the modern era is that you can “trade” your way to incalculable wealth through discount brokers. The premise is false; time and time again, study after study concludes that discount traders perform far worse over time than even ETF returns when trying to manage their own equity accounts. There are a variety of reasons for it, but at the top of the heap is the obstacle that I learned when trying to make a fortune in comic collecting; I did not learn the ropes beforehand. Studies confirming the failure of the individual investor are beyond dispute, but a 120 page cautionary report, compiled by Nobel prize winners, lacks the panache of that glitzy 30 second discount brokerage advertisement taken out on Super Bowl Sunday. ETFs were created, not because they outperform indexes; they came into being because ETFs do less damage to an investors savings over time than individual investors do to themselves with a transaction oriented approach.

Traders are replete with tales of wins, but what they typically lack is enormous wealth earned over time on a world class and highly sought after portfolio. In the art world, multibillionaires inventory Picassos or Warhols on their estate walls. Traders, in contrast, inventory tales about how they “bought a Warhol once in the 1970’s for $100, held it for a couple months, and then flipped it for $1,000”. Nobody, in the entire history of the Mona Lisa, has likely ever bragged about their SALE of the painting, because it was always a mistake, from the perspective of maximizing long term capital return, to have placed that sell order.

Why is it considered a win to have owned and flipped (sold immediately for a profit) some shares of Google on the IPO? That’s not a win, that’s a profit limiting horse-kick to the head. The trader that bought Action comics #1 (first issue of Superman) at the $.05 issue price and sold it for $10 a few years later made a good return on their time invested, absolutely. But about the $3.2 million that they missed out in potential profit, had they just held it to today? What most traders call a win, are more dispassionately viewed as cautionary tales. Traders work really, really hard and endure enormous stress, for very little return. I prefer to work as little as possible and limit my stress, for a great deal of money.

Getting back to my initial comic foray, in hindsight, I got part of the equation right. I set them aside for the right duration before offering them up for appraisal. I even was correct on storage. What I got wrong was the selection process and that’s entirely on me. It isn’t “buy anything and everything” in the art and book world. It isn’t “anything and everything” in real estate, location matters. It isn’t “anything and everything” in farmland, climate, soil composition, access to water and proximity to crop depots is important. In fact, it is NEVER anything and everything in the capitalist world, so why would an anything and everything approach prove to be the right tactic when it comes to equity investing? The answer is that anything and everything is likely NOT the right approach for those seeking outperformance in equities, if an indiscriminate application of capital has been deemed unsuitable in all other areas of capitalism, why WOULD it be the right choice for equities?

After my first failure in comics, I decided to focus on looming trends for the next go. The current Marvel and DC comic superheroes were mostly created in the 1950s and 1960s. They became cinematic franchises and created demand for certain comics. This present round of superhero movie franchises is coming to a close. The movie industry, when it resumes, will embark upon the rollout of several new series, based upon different characters. About 20 years ago, I purchased graded issues of “New Gods”, “Forever People”, “The Eternals” and some other series. I was selective; no more commodity type publications and no niche market purchases. In the equity world, a niche business is called a “vertical” whereas a company that can sell its wares to a very large base is deemed a “horizontal”. No verticals for me in the comic world will do, I sought horizontals that will be enjoyed by as many people as possible.

Can lessons drawn from the world of collectibles be applied to the world of equity investments for individuals? My supposition is, “absolutely”. As with comics or art, any equity that one owns needs to be excellent and scarce. The business supporting that equity price must be in demand and that demand should be foreseen as growing for many years to come. An investment must be, for all intents and purposes, irreplaceable. A company needs to be on-trend, slightly ahead of trend seems fine, but too far behind trend and the odds of a business catching up with competitors diminish.

The equity market, as a whole, in my view, is quite similar to that of any other collectible market. As with art and other collectibles, a small minority of equities produce the vast majority of returns in a market, some equities earn a moderate return, many equities return squat (after investment price inflation is taken into account), some equities eventually lose everything on the purchase price. This return segmentation suggests our mindset should be that of a collector, not of an investor. Great collectors acquire, they seldom dispose. Great collectors possess enormous patience; they measure holding periods in decades, not years. Great collectors are exceedingly selective; they refuse to make commodity or meretricious purchases; a truly world class collector desires, above all else, to hold only the best. And, great collectors never, ever, ever, buy damaged goods. We, in the investment world, would be better served, if we were to apply these simple, immutable practices to the the building of our portfolios. Our long term goals might be far better met if we adhere to a collectors timeframe of decades, vs the traders timeframes of days, weeks or months. FOBI (fear of being invested) and FOMO (fear of missing out) drives people to make purchases and sales that just don’t occur in the world of the collector.

A strong majority of equities in the world today lack collectible, investment-worthy, attributes. Most freely competitive industries are populated with businesses that must expend more to maintain market share than they expend for growth based initiatives. How does that serve the interest of the long term investor? Wouldn’t it be far better, from an capital perspective, to own companies that don’t need to spend anything on defense and that can focus 100% of their capital profits for growth based activities? More than 100,000 publicly traded equities trade on the planet today. Most were listed in order to raise funds for selling shareholders (an exit strategy), to raise funds to pay off debts or to make acquisitions. Once listing occurs, they lack a legitimate reason for public existence and primarily exist solely to populate indexes or reward executives; similar to commodity comics, these companies are not special, they are not unique and that means that in the long term, they will likely not be sought after. Some businesses are truly damaged goods and will cost more to repair than they might return over time as a collectible. In the comic world, a damaged issue that has been professionally repaired or restored is denoted as such in the grading, even when fixed to the naked eye, the restored comic will NEVER be as valuable as an undamaged issue. If individual equity investors took the “once damaged, always discounted” warning affixed to graded collectibles and applied an equivalent warning towards for potential equity purchases, there would be far fewer disappointments in a portfolio; many, many businesses would fail the initial cut for inclusion.

Only a small minority of businesses in the public equity space are highly desirable and deserving of collection. We in the investment world should more carefully note the obvious similarities between the collectible world and the equity markets. If we did, perhaps we would spend less time obsessing on FOBI and FOMO and devote more time and capital towards building a collection of unique, scarce and highly desirable businesses, to be held for decades.

Buy the extraordinary, hold the irreplaceable; do not agonize over the transaction.

Posted in Open Blog

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