Defining Affordability

[jwither 10]

The purpose of this post is to provide my opinion on the profile of the collector which makes a particular coin affordable or unaffordable to them. These comments apply less to "investors" but the collector is far more important because without them, there IS NO "investment" market for coins at all. For purposes of illustration only, I will use a coin that costs $10,000 USD, which is about the recent sales price for both the 1946 NGC MS-63 1/ and 1939 NGC MS-65 2/6.

 

The first point that needs to be made is that if a prospective buyer only has $10,000 in liquid assets or some small multiple of it, they cannot afford such a coin. Yes, they can buy it but they are a "weak hand", this term meaning that their financial position provides them little cushion under advese personal circumstances thereby turning them into a forced seller. In actuality, there are probably many "weak hands" today who have a lot more liquid assets than this.

 

To determine when affordability exists, I will answer two questions.

 

Question #1: What is a likely representative value of the collection?

 

My answer is, AT LEAST $200,000. Do I actually know this? No, not really but what I can tell everyone here is that someone who has a collection worth substantially less than this would not typically own a coin like this one, even as the centerpiece or "capstone" of their collection. Collections worth $50,000, $100,000 or even more typically have either few of these coins and sometimes not even one. Maybe most have none. Sure, someone with a "collection" worth $50,000 could own five coins worth $10,000 each but I do not see any real collector doing that, only an "investor". The reason for this is that $10,000 coins do not really "fit" properly into a real collection below this ($200,000) value. By point of comparison, my remaining collection I value at somewhat under $50,000 now and I have only paid over $1,000 for a single coin twice, though there have been maybe as many as two dozen coins I own or once owned where I paid between $500 and $1000. Most other coins (yes, including those I profiled here in the past) cost me much less.

 

Question #2: Based upon this hypothetical collection valued at $200,000, what proportion of someone's net liquid assets is reasonable to reduce the likelihood of becoming a "weak hand"?

 

My answer is, AT MOST 20%. So doing the math, to comfortably own a $10,000 coin in a well rounded collection will require liquid assets of AT LEAST $1,000,000. The fact of the matter is that $1MM USD is not what it used to be, not even close. It isn't even close to being "rich" in the Unted States and I doubt it will make you "rich" in South Africa either. Personally, I would not even consider this amount "rich" in Bolivia anymore, though it buys a lot more than in any developed country.

 

The most logical conclusion from this (subjective) example is that most people have too many other personal obligations which are competing for their money to make a coin like this either affordable or a priority to them, unless they have a substantial multiple in liquid wealth to the value of the candidate coin. Yes, obviously there are many people today who have a lot more, but then these people have other "investments" competing for their money also, whether in coins or elsewhere.

 

I am also aware that there are other factors which make a coin of this value more or less affordable to a particular prospective buyer. I have excluded them due to space considerations but can address them in a subsequent reply if necessary. That is, assuming anyone else even has any comments on this subject.

Edited October 11, 2012 by jwither

[jcriller 11]

This is a quite an interesting formula that you have put together, applying it to myself i must say that i agree with most of the post, i doubt i will ever want to move to Bolivia though.thank you for an interesting post

[Pierre_Henri 14]

The purpose of this post is to provide my opinion on the profile of the collector which makes a particular coin affordable or unaffordable to them. These comments apply less to "investors" but the collector is far more important because without them, there IS NO "investment" market for coins at all. For purposes of illustration only, I will use a coin that costs $10,000 USD, which is about the recent sales price for both the 1946 NGC MS-63 1/ and 1939 NGC MS-65 2/6.

 

The first point that needs to be made is that if a prospective buyer only has $10,000 in liquid assets or some small multiple of it, they cannot afford such a coin. Yes, they can buy it but they are a "weak hand", this term meaning that their financial position provides them little cushion under advese personal circumstances thereby turning them into a forced seller. In actuality, there are probably many "weak hands" today who have a lot more liquid assets than this.

 

To determine when affordability exists, I will answer two questions.

 

Question #1: What is a likely representative value of the collection?

 

My answer is, AT LEAST $200,000. Do I actually know this? No, not really but what I can tell everyone here is that someone who has a collection worth substantially less than this would not typically own a coin like this one, even as the centerpiece or "capstone" of their collection. Collections worth $50,000, $100,000 or even more typically have either few of these coins and sometimes not even one. Maybe most have none. Sure, someone with a "collection" worth $50,000 could own five coins worth $10,000 each but I do not see any real collector doing that, only an "investor". The reason for this is that $10,000 coins do not really "fit" properly into a real collection below this ($200,000) value. By point of comparison, my remaining collection I value at somewhat under $50,000 now and I have only paid over $1,000 for a single coin twice, though there have been maybe as many as two dozen coins I own or once owned where I paid between $500 and $1000. Most other coins (yes, including those I profiled here in the past) cost me much less.

 

Question #2: Based upon this hypothetical collection valued at $200,000, what proportion of someone's net liquid assets is reasonable to reduce the likelihood of becoming a "weak hand"?

 

My answer is, AT MOST 20%. So doing the math, to comfortably own a $10,000 coin in a well rounded collection will require liquid assets of AT LEAST $1,000,000. The fact of the matter is that $1MM USD is not what it used to be, not even close. It isn't even close to being "rich" in the Unted States and I doubt it will make you "rich" in South Africa either. Personally, I would not even consider this amount "rich" in Bolivia anymore, though it buys a lot more than in any developed country.

 

The most logical conclusion from this (subjective) example is that most people have too many other personal obligations which are competing for their money to make a coin like this either affordable or a priority to them, unless they have a substantial multiple in liquid wealth to the value of the candidate coin. Yes, obviously there are many people today who have a lot more, but then these people have other "investments" competing for their money also, whether in coins or elsewhere.

 

I am also aware that there are other factors which make a coin of this value more or less affordable to a particular prospective buyer. I have excluded them due to space considerations but can address them in a subsequent reply if necessary. That is, assuming anyone else even has any comments on this subject.

 

Where did this post come from? Looks like my internet pops in and out of its own mind ...

 

Hope to respond soon after reading.

 

Pierre

[Pierre_Henri 14]

Where did this post come from? Looks like my internet pops in and out of its own mind ...

 

Hope to respond soon after reading.

 

Pierre

 

I reread your article and it makes for very interesting but maybe controversial reading.

In general I agree with your formulas but I think you are too conservative. Someone who is in the market for buying coins worth $10 000 probably has a collection of much more than $200 000.00 – I would really think at least double that. Top coins, even SA coins, can sell for well over $100 000, 00 so a $200 000 coin collection is not really that “big” if one collects top of range coins. And to be able to do that $1m in liquid assets would be a too low estimate.

We obviously do not really know and there is always the exceptions:- there are obsessive collectors who might take out a second bond on their house to buy an expensive coin (we all know what happened at the King Farouk auction) whilst others with really big bucks might have a limit of $1000 per coin.

But on AVERAGE, I would think that the big spenders who can afford a $10 000 coin must really be well off. You don’t just buy a coin like that as a once off and stop collecting – you buy many of those to complete (!) your collection. And to be able to do that you must a really big bank balance. A million dollars today just does not cut it anymore, even if one is already middle aged.

[jwither 10]

The example I gave was for ILLUSTRATION purposes only. And I agree that $200,000 USD is NOT a big collection but it is a far more than what most either do have or ever will have.

 

The primary point I was trying to make is that when a number for a coin is thrown around, that unless the purchase is a nominal amount, it takes a substantial multiple of that amount in both wealth and liquidity to "reasonably" support the purchase. How much that may be is subjective and open to debate but I do not believe that most have either thought about it either when buying their own coins or what it means from a practical standpoint for what coins can or "should" sell for.

 

In the example that you gave, you are referring to John Pittman who was a middle manager at Eastman Kodak in 1954 when he bought his coins from that auction. I would never recommend taking that path but the distinction between then and now is that:

 

1) The expensive coins he bought and others like them were "dirt cheap". Obviously, there was no guarantee that he would get the result he did by turning his (total) $100,000 outlay into $30 million, but no one can reasonably claim that comporable coins or even many that cost much less represent the same value. Thanks to the credit mania, the inflation adjusted prices have skyrocketed.

 

And if anyone tries to claim that this is not true, then let me make it obvious by this example. According to the PCGS "Million Dollar Club", the most valuable US coin is the unique 1849 proof double eagle at an estimated $20 million. By way of comparison, Sotheby's sold the Forbes collection of Faberge Russian Imperial easter eggs some years ago in a private sale. (They cancelled the planned public auction.) The presale estimates ranged from about $5 million to $24 million for each item. I do not recall the exact date and do not know what these would sell for now, but there is no justification whatsoever for ANY coin to sell for about the same (much less more) than most Faberge Eggs because there is no comparison between the two from both an artistic and significance perspective. Yet, this is exactly what would happen with quite a few coins were Pittman's results remotely duplicated. Most likely, this 1849 $20 is worth more than many of these Faberge Eggs today if this $20 million is a real price. That is just plain crazy.

 

2) Pittman lived in another era when both the world and the financial system were a lot more stable. I would agree that the ratios I used could be somewhat more aggressive if someone had a "good job" that also has a lot of stability, but this does not apply to MOST people.

 

The other reason I wrote this post is that I suspect that more than a few collectors of SA coinage are doing exactly what I am warning against in this topic, regardless of the money involved.

 

From what I can see, there is little to practically no market depth for most SA coins. It is a lot more for ZAR than Union but much less than for the majority of US series which are (in actuality) quite illiquid themselves. The way we can know this is by the wide selling prices which frequently exist from one sale to the next in both directions. We can also know this from the absurd price spreads between higher and lower grades (both within MS and between MS and AU) as I have pointed out repeatedly here.

 

In practice, what this means is that for many of the prices we see at auction, there are only two buyers anywhere near it. For many others, only a few more somewhat below it. This is true for some US coins but taking a series like the Morgan Dollar, there are probably multiple potential buyers for any particular coin at any reasonable discount to the most recent or prevailing price and hundreds or even thousands for many others. For SA coins, individual preferences are one explanation for the wide price swings but a second and equally valid one is the likely weak financial capacity of a substantial (if not majority) number of buyers in today's market.

 

On your last paragraph, I also agree with it IF we are talking about an actual collector. But I suspect that more than a few "investors" who are far less affluent than financial profile you described would do exactly that. And in SA, I concurrently suspect that there are more such "investors" who are doing this by using coins as substitutes for other forms of SPECULATION such as the stock market and real estate and that the proportion of assets "invested" in coins either exceeds or far exceeds the "optimal" allocation maximum I provided..

 

Sometimes though, there are collectors (real ones) who buy a coin in the $10,000 range as a "capstone" to their collection. It just depends upon what the collection includes. For a "type set" of US coins, certainly. In SA collecting, generally a 1946 NGC MS-63 1/ or 1939 NGC MS-65 2/6 would not be such a coin because there is nothing particular about either that makes them stand out. I do not know how many top quality Union collections exist, but the last time I checked, neither of these coins were included in the NGC Registry.

Edited October 15, 2012 by jwither

[jwither 10]

This is a quite an interesting formula that you have put together, applying it to myself i must say that i agree with most of the post, i doubt i will ever want to move to Bolivia though.thank you for an interesting post

 

The example I gave in this initial post was exactly that. And I would say that it could be adjusted from somewhat to "a lot" in both directions depending upon any particular individual's personal and financial circumstances and to a lesser extent, for prevailing market conditions.

[jwither 10]

The link below from the NGC Message Boards includes a series of posts on a related topic. As a guess only, I would estimate that the typical poster on NGC has a household income of between two and four times the US national median or about $100,000 to $200,000.

 

Budget - Collectors Society Message Boards

Edited November 4, 2012 by jwither

[jwither 10]

Revisiting this topic, the data below came from an article (which I have not read), in a blog post from another site I visit. I can add the link if anyone wants to see it.

 

According to this source, here is how the "rich" in the United States are distributed:

 

Approximately 8.6 million households with net investable assets of $1MM or more. Subtracting 1.1 million from 8.6 million leaves about 7.5 million households with net investable assets between $1MM and $5MM;

 

Approximately 1.1 million households with net investable assets of $5MM or more. Subtracting 107,000 from 1.1 million leaves about one million households with net investable assets between $5MM and $25MM; and

 

Approximately 107,000 households with net investable assets of $25MM or more.

 

Supposedly, net investable assets (my recollection of the term used) excludes the equity or value of the primary residence. I presume that this data includes all marketable assets, whether financial instruments (such as shares and debt) and also presumably any ownership of private business interests (whether in stock form or otherwise) and "investment" real estate. I do not know whether it includes the value of other tangible assets such as collectibles or precious metals, though in my opinion its inclusion or exclusion would be statistically insignificant to these numbers. It would only be significant for specific individuals.

 

Also, the total number of households at the time these results were published was 115MM.

 

So, how does this fit into this subject of affordability? Well, it should be obvious from these numbers (assuming they are reasonably accurate) that there are a substantial number of people who have the financial ability to pay high prices for coins, though it does not say whether they are willing to do so. This despite the fact that much of these balances are not necessarily in liquid form, since a disproportional number of the affluent in the US have an above average balance of their assets in private businesses.

 

My opinion is that the propensity to collect among these groups must be fairly high. I do not know whether it is higher or lower than in other countries but I suspect that it either is or not much below it. By other countries, I am primarily referring to those with a history of established collecting such as the other Anglo-Saxon nations (mainly the UK, Canada and Australia) or western Europe. I am not referring to a country such as Bolivia which I have mentioned a few times in my prior posts where collecting is essentially non-existant.

 

So, how does this relate to South Africa? I do not know exactly except that it should be obvious that given population, income and asset levels, that there are obviously far fewer households that have this type of financial profile. If anyone reading this post has ever seen this type of data, I would be interested to know.

 

My guess (and that is all that it is), is that the number of households is probably in the vicinity of 15 to 20 million (I am guessing the population is about 60 million now not having checked). And of this number, those with net investable assets of $1MM or more is probably fewer than 100,000.

 

The other consideration is the demographic composition along with the propensity of each group to collect or "invest" in coins. My opinion for South Africa is that the non-majority groups (mainly but not exclusively European) are represented disportionately in the groups profiled here and also in the collecting population.

 

In absolute terms, the prices of most South African coins are low compared to those in the US. There is no economic obstacle to the members of this group becoming collectors and "investors" in your country and (theoretically) pushing the prices of the bettter coins higher or much higher, despite the existing distorted price structure which would be even more distorted should this happen. However, i also equally suspect that the lack of a collecting history which resulted in the scarcity of these coins (more so Union than ZAR) in the first place is also an impedement to future higher prices.

 

It is an impedement because of the lack of a collecting culture. I presume that there are more today than in the past, but from my observations, a disproportionate number of these people are (far) more interested in the financial aspects. In the United States, I read many anecdotal reports of collectors and yes "investors" who started in their youth when they had no money who spend "big money" now that they are older and wealthier. The recent buyer of the 1794 PCGS SP-66 dollar for $10MM is one of them to my knowledge.

 

I am not aware that this happens much in South Africa, at least proportionately. Most of the personal accounts I have read here indicate that the vast majority of both collectors and "investors", at least among those who buy the more expensive coins, only recently did so, and this is one of the main reasons why I believe the financial aspects are far more important to them. Most likely, they mostly became "investors" because of the trend in rising prices. I believe that a disproportionate number of these people are less commited to collecting versus someone such as myself who has been a collector (on and off) for 37 years.

 

If this is correct, that would partly explain why so many coins have lost as much value as they have recently. Yes, the "times are tough" argument is part of it, but not all of it unless the number of affluent buyers is practically non-existent in your country. This is an entirely logical conclusion given that the prices of most South African coins are trivial in absolute terms for anyone with the wealth described here.

Edited February 26, 2013 by jwither