A, B, C, D and G

#tangibleassets #commodity #investment

August 2020

Throughout my career, the most frequently asked question has been “Is (fill in the blank) an investment?” To be honest this is not a question about investments, but a question about consumption.  My clients and their associates have come to me with the same question so much and so often that in 2014-2015 I finally sat down and wrote an FAQ.  I made a chart to summarise my thoughts.  Recently I dug out this collection of loose sheets with the goal of giving it a more modern and positive spin.

Originally the project was designed to answer the question brought to me by clients whose children or other family members suggested investing in what I call top-end consumption goods.  Sports cars, wine, jewellery and art (in that order) were the coveted items most frequently recommended by these young and impressionable investors.  Can’t say I don’t admire the enduring marketing success of some industries! Since I didn’t work at an auction house, I had to find a tactful way to explain this mentality.  So having a ready FAQ meant it wasn’t personal.  After all I cherish my good relationship with clients and don’t mind preserving their sometimes fragile family dynamics.  Not my goal to crush any egos.  

I grouped these into broad categories Art, Boy Toy (mostly sports cars and occasionally watches; I only addressed sports cars here), Cult Wine and Diamonds.  The original project summarised why they didn’t make solid investments and what exceptional conditions would protect them from the elements.  A recent client inquiry prompted me to add gold bars to the collection and refresh the dated FAQ with a new approach, “What does it take to invest in ...”

Art 

Art has many enemies: dirt, grease, humidity, direct sunlight and sometimes even overexposure to interior lighting; it is also subject to theft and cleaning accidents.  Investors in this asset class should consider that museum basements (should their works of art be loaned to museum exhibitions) ironically do not necessarily offer optimal storage conditions and the home is where art is exposed to an even wider range of harmful elements.  Tipsy dinner guests, clumsy cleaners and unruly children immediately come to mind.   

Collecting art is all about building connoisseurship and expertise as well as sharing the passion with like-minded people.  Building a meaningful collection establishes the collector as an expert which in turn gives the pieces a credible provenance and increases the value of the overall collection.  This particular asset class appreciates in the hands of those who are willing to put in time and effort to examine, to read, to write, to reflect.  The work done by the collector (and the professionals engaged to care for the collection) adds value and increases the value of the collection.  By definition, a collection should be worth more than the sum of its parts.  Strictly speaking it is an investment of time and energy to create cultural capital out of financial capital with the added benefit of attracting social capital in the process and reaping financial capital at the exit. Enthusiastic collectors can rightly say the more you enjoy it the more it appreciates. 

What does it take to invest in art? It is best suited to investors who leave the proper care of their art collection to professional conservators and provide a proper home to the collection.  The best solution is to establish a gallery or negotiate a room or wing of a museum / gallery to house their collection.  That brings in a side benefit of potentially letting more people visit the collection, making it accessible for research and enjoyment; also building the reputation of the collection.  (Adequate) Insurance is mandatory though you will be surprised how uncommon it is sometimes, among old-money seasoned collectors. 

Intellectual curiosity is what it takes to start and build an art collection; research focus and discipline shape the collection and give it proper direction; academic rigour gives the entire collection real meaning and is the soul of provenance. Most art collections were lovingly amassed over decades, some collecting plans are more fluid while some are more fixed.  And it is indeed such a personal and emotional pastime that collections are essentially organic and will morph over time to reflect the personality, philosophy and personal growth of the owner.  

One work of art in isolation, however rare and well executed, does not a collection make. And it would be in the awkward purgatory of having neither the life and soul of a collection nor the saleability of a commodity. 

Boy toy 

Of all the different categories, cars are subject to the most wear and tear and are the most vulnerable to damage.  The more you enjoy it the more it depreciates.  The expected depreciation factor is mileage and the unexpected factor is accident on the road.  You can control your car but you have no control over other drivers and other cars.  Once you take the baby out of the garage you are literally putting it in God’s (or the Devil’s) hands. 

What does it take to invest in these super cars?  You can arrange for storage in the dealer’s facilities (no showing off when you go about town) and fly in technicians from Italy to service your car / fleet, save the cars only for the race track and avoid putting them on Main Street. Race tracks are not immune from accidents but you filter out the masses leaving only the focussed near-professionals with you.  Insurance is mandatory and transport options for the super cars (sending them to an overseas race track) are costly.  And no, one car does not make a collection.  A car collection can qualify as an investment.  But a one-off is a splurge rather than an investment as you won’t be able to cash out on your car except at a steep discount.  

And if you never intend to part with your precious gem? You are not investing.

Cult wine

Once you drink it, it’s gone. And it is also subject to accidents.  

To make it a real investment, one needs to arrange for storage at one of the wine dealers or established wine consultants in London or in France.  The cases of wine can then be shipped with pristine record of provenance to the next buyer.  Substandard cellar facilities with unstable temperature and humidity conditions will ruin the wine and will adversely affect the selling price when you exit.

Recently, a friend mentions in passing that her hubby insists on not opening cases of wine because unopened cases are worth more than the sum of the bottles. In principle I don't disagree. And I am adding this short paragraph here post-Covid as this brings us back to the root of the question - is this an investment or is this wine for pleasure? An investment wine would benefit from provenance (refer to last paragraph). Wine we enjoy is best aged naturally and therefore needs to be let out of their wood cases. And it is better to ship wines to their destinations to age in place rather than storing them in prestigious London cellars to ship to the owner as mature ready-to-drink wine. Wines are like people, they get jet-lagged and need to settle down before they can put on a spectacular show. So the drinking wine is best separated from the investment wine. 

Diamond 

I have a (male) client who advocates collecting diamonds not as an investment but as an international currency in case one needs to flee a war zone.  His idea is one should keep only one-carat, flawless, D-colour, brilliant-cut diamonds for this purpose.  One can travel with a string of diamonds without being stopped at the airport - it is not illegal for men to wear jewellery.  One-carat stones are very easy to sell and you can offload them in any major city.  Very large stones with bigger tickets are much harder to sell.  My savvy client says the large stones have well referenced prices but he might not be able to find the buyers willing to shell out.  Transparent pricing doesn’t guarantee you will find a ready buyer. So he avoids the low-liquidity big-ticket items like the plague. 

Diamonds is relatively lower maintenance than the rest of the items mentioned here.  Diamonds don’t deal well with cleaning agents and sharp surfaces.  So they have to be separated from their neighbours (other stones) or set professionally.  Certificates need to be updated regularly in case stones get scratched.  Service and maintenance is generally manageable even for laymen.  Finished jewellery is not in scope in this discussion as they are out on the town and exposed to all the elements and all sorts of unpleasant accidents.  

Gold (bars)

This comes up every now and then but I didn’t include it in the previous FAQ as it is indeed an investment instrument.  The million dollar question then, is “how” and “for whom”.  Let’s define gold bars. First there are the international investment and trading instruments of institutions, notably gold reserves of central banks. They come in standard sizes and shapes and require recorded provenance. Then there are the tiny pinkie-sized bars reportedly carried by Vietnamese refugees when they swam to Hong Kong to flee the change of regime in the 1970s.  This is the tale told by the older generations and is responsible for the misconception that gold bars are the currency of refugees.

As a commodity, gold bars are supposed to be traded close to publicly quoted value. Therefore those that qualify as investment realistically need to be recognisable and tradable.  We could also expect to trade them relatively easily and quickly. 

So what does it take to invest in gold bullion the way Bank of England does? You will have to buy the standard size bars (roughly 12Kg each), store them in recognised vaults (for the recorded provenance) and pay for the associated storage and transport fees.  For the vanity of having your gold bars sit in the same vault as those of Central Banks in London (state-of-the-art high-security underground vaults converted from wartime shelter facilities), you will pay through the nose.  If and when you wish to exit, you will need to prove to the next buyer that the bars are in the same (untempered) condition as other gold bars.  Without properly recorded provenance, gold bars could have been melted and recast. Institutional investors (or any savvy investors really) will avoid substandard conditions and practices and gold bars kept at unrecognised facilities will eventually have to be sold to a goldsmith or other less-strict outfits.

There are many smaller sized ingots manufactured by reputable companies but one needs to check if one can only sell the gold back to the same company or if they are accepted elsewhere.   Many have the impression that gold is a universal currency but how you plan to travel with it poses a logistical challenge.  One of my clients pointed out that if you wanted to flee the country with gold bars in your suitcase you have a great deal of explaining to do at security checks at the airport.  Those elite swimmers contemplating illegal immigration to another country should note that glittering gold can hardly ward off sharks.

What makes an investment?

The short answer is the exit.  We need to consider the logistics of making an exit on the investments and the saleability of individual investments.  A viable investment opportunity must present the investors with a sure way of walking out, preferably whenever they wish, if not, then at least at pre-agreed redemption window(s).  Even if prices keep going up indefinitely, an unsaleable item can only be considered an expense.

The client who plans to flee with a string of diamonds only invests in round brilliant cut diamonds.  His sister once explained to me that all other cuts, however aesthetically pleasing, are worthless when you want to trade for cash.  Any buyer will legitimately inform you that (s)he does not like those specific proportions of your pear-shaped or heart-shaped diamonds.  The closer you get to having a standard commodity the easier you can sell out.  Uniqueness appeals to us because we want our pretty possessions to reflect our personality.  Uniqueness therefore does not suit everyone.  Uniqueness does not a good investment make.  

If all the investors are only willing to buy tangible assets brand new, then there is no real secondary market for anyone to sell their goods.  Owners or potential buyers of tangible assets who plan to / need to cash out of their investment will have to guarantee a certain quality maintained while goods are in their possession.  This gave rise to the provenance of “proper” storage facilities and maintenance services.  The cost of these services should be taken into consideration when making a purchase. 

Another consideration is the intention to exit.  Do my clients’ children intend to purchase their dream Ferraris so they can make a profitable sale? Or do they want to get the dream cars before prices go up again?  Or do they plan to race on the track? Or perhaps to race (illegally) in town at the crack of dawn? This is perhaps very harsh, but IMHO most use “investment” to justify an expense they cannot afford.   

Another broad category of investments brought to my attention are what I call inadvertent profit. My little cousin went to a newly set up international school as a youngster.  As the school’s reputation and demand soared, so did the price of its debentures. By the time my cousin was about to leave her school and getting ready for Princeton, the school’s debentures were trading close to USD 1 million.  Her father would tell friends that the USD 6,500 debenture he bought at the school’s infancy turned out to be his best investment.  Another friend who worked at a Southeast Asian sovereign wealth fund also joked that he would take this Hong Kong school debenture idea to his investment committee!  Is school debenture an investment? It was not designed, and indeed never marketed, as a financial instrument.  The purpose of issuing school debentures (or capital notes) is to allow parents to contribute to the running of a school while their children go there. Parents buy them with the intention of securing an interview and hopefully a place at the school for their kids. If some made significant gains from holding the debenture(s), we can only call it an inadvertent profit.  

Covid has given us a lot more time to spend at home this year;  and spring cleaning has yielded a lot of pre-loved items in need of a new home.  The most profitable spring clean reported to me features film camera equipment and vinyl records.  A specific record of singer Teresa Teng fetched around USD 400.  The other records and cameras equipment altogether made more than USD 12,000.  Does that make cameras and vinyl records investments? Not in the financial sense.  Therefore it is very similar to what art and sports cars bring to the owners-enjoyment and then possibility of sale if in good condition and if a buyer can be found.