The Business of Collectables

TR – Hello, I’m Tom Record and I’m here with Tom Morris. Welcome to Global Infusions, an investment podcast from the Liontrust Global Fundamental team that takes a long term view of today's stories.

Last episode we chatted about the business of alcohol from giant multinationals hiding their ownership to make brands seem small and authentic to the impact of repealing ancient gin laws. This episode we’re tackling collections – from philatelists to Pokémon cards. If your taste buds are tickled or you have any questions for our next episode, please do collect them up and send them in via your client contact or through the contact us link on the Liontrust website.

So sit back, grab a cup of tea, and remember that when we talk about individual companies we are not making a recommendation to buy or sell shares and that some of these companies may not be held across Liontrust’s global fund range.

TR – So Tom, it’s estimated that 40% of US households engage in some sort of collecting behaviour.  What makes it so popular?

TM – Well, there are lots of suggestions of what’s behind it from materialism to neurobiology, marketing and game design.  But the truth is, beyond a few very extreme cases linked to particular brain conditions, nobody knows. 

TR – Collecting can give people a sense of purpose and control, as well as playing on less positive emotions, like a fear of missing out if you don’t buy something, and frothy speculation if people become convinced prices are only going up.

TM – And that’s why it can be a very lucrative, but also potentially quite dangerous business.

TR – Yes, just look back on Tulip mania, a speculative bubble in the 1630s when Dutch society went mad for tulip bulbs, initially as decorative luxury items, and then as a way of getting rich, driven by the belief that someone else would always buy them off you for more.

TM – I went to the tulip museum in Amsterdam a few years ago, and I think I read that some of the most prized bulbs ended up costing as much as houses.

TR – Yes, for a brief while, until it all collapsed, as manias always do.

TM – It does sound quite a lot like what we’ve seen recently with many collectibles like Pokémon cards and NFTs.

TR – Yes, Pokémon cards have been popular since their launch in the late 90s, but in recent years values of the rarest cards shot up, and collector behaviour has become much more frantic. I think we talked in a previous episode about the issues McDonald’s had in 2021 when they offered Pokémon cards in happy meals.

TM – Oh yes, I remember that – loads of adult collectors started buying dozens of happy meals just to get the cards, and bribing staff to give them the packs before they were put into the meal boxes. It all got a bit heated.

TR – Yes, and coincidentally it looks like Pokémon card prices likely topped out later that year with that sale to a youtuber...

TM – Yes, the peak was probably marked by the most expensive Pokémon card sale ever recorded – a pristine condition Pikachu Illustrator card sold to Logan Paul for $5.275 million in July 2021.

TR – $5 million! I knew it was a lot but $5 million!?!?

TM – Yep. It was one of only 41 ever printed, they were given away as prizes in Pokémon design contests held in the late 1990s.

TR – That kind of story is like cat nip for collectors.

TM – Yes, and I think in this case it was also about self-branding by Paul. He wanted to pay the most ever, so that he could say he had the world’s most valuable card. The high price was in some ways the thing he was collecting, rather than Pikachu.

TR – So while we’re on cards, we should also mention Magic: The Gathering, a collectible card game made by Hasbro which has also seen a boom in values in recent years.

TM – Yes similar to Pokemon, the prices paid for the rarest MTG cards ballooned – in fact the value of the most sought after card, The Black Lotus, tripled between 2019 and 2021, with a mint example selling for over half a million dollars.

TR – So a tenth of an overpriced Pikachu then?

TM – Well yes, but still quite a lot for a printed rectangle.

TR – We should also talk about watches.

TM – Another big pandemic winner.

TR – So obviously watches have been collectible for a very long time – there have always been people who get deeply into learning about the complications, brand histories and special decorations you can find on fancy pieces.

TM – Yes – I used to think it was all a bit silly, but then I went along to a Patek Philippe touring exhibition when I was in Singapore a few years ago, and it really opened my eyes to the incredible skill and artistry that goes into some top-end watches. Unbelievable feats of mechanical engineering for watches that can do things like accurately plot the movement of planets, or tell you when Easter is going to fall.

TR – An Easter calendar!

TM – Yep – can you imagine doing that just with cogs? They also had examples of the artistic techniques that are used for the faces, like micro marquetry, and miniature paintings and all kinds of amazing things.

TR – So something happened in the last few years that pushed watch collecting out of its niche and into the mainstream. For instance, it used to be possible to walk into a Rolex retailer and buy a watch on the spot.

TM – Ha! Yes just try doing that today. Now almost all models have waiting lists, often a year long. In many cases you aren’t even allowed to join a waiting list for a popular steel model until you’ve spent enough money on less popular, more expensive precious metal models.

TR – So a bit like Hermes only allowing their best customers to buy a Birkin bag.

TM – Yes exactly. It means that secondary market prices have risen in part because they’re the only way of actually getting the model you want today.

TR – And expectations of price rises create more speculative demand. People join retail waiting lists just so they can flip the watch on the secondary market for a 100% mark-up as soon as it’s delivered.

TM – They’ve kind of become an asset class rather than a functional item or a piece of jewelry.

TR – And that’s a bit dangerous, because that pace of price appreciation and speculation is often the sign of a bubble that can reverse at some stage.

TM – Indeed.

TR – Trainers seem to have gone through a similar transition over the last few years.

TM – Yes things like rare old Air Jordans have always been popular with some collectors, but Nike and Adidas have really leaned into the idea of limited editions and artificial scarcity.

TR – You mean with designer collaborations, that sort of thing?

TM – Yes exactly, and collections that are released, or dropped, at specific times in specific stores, in an attempt to create buzz, and queues.

TR – And the queueing and socialising and online communities centred around trainer collecting can be fun in their own right. It becomes a shared hobby, something which Leonardo Bursztyn of the University of Chicago refers to as ‘joint consumption’.

TM – I can definitely understand that – the internet has helped people with niche interests to find each other, share knowledge, and in this case probably also photos of their latest purchases and tips on where to find things. It can be fun.

TR – It’s also created an industry of people who you can pay to help you get the rarest trainers, either by queueing for you, or using software to try to get trainers in online drops. Some people have made a lot of money buying and flipping sought after collectible trainers.

TM – Yes when prices were rising, everybody seemed to be piling in, buying trainers wrapped in clingfilm and never wearing them. It’s funny because these are mass produced items – for the most part they’re only desirable because they’re scarce, and they’re only scarce because Nike and Adidas have chosen to undersupply them. There’s no physical constraint on production.

TR – It’s entirely artificial, but it’s worked brilliantly for the trainer companies.

TM – But there are risks, as Adidas has learned with the fall from grace of Kanye West, and the effect that has had on its Yeezy collaboration with him.

TR – Indeed… So wine is another product that at the high end has gone from being something people drink, to something people just collect and speculate on.

TM – Yes the most popular fine wines have increased in value very significantly over the last 20 years, in part as a result of growing demand from China.

TR – Very similar to what’s happened to Scotch whiskies.

TM – Yes and unlike trainers, both fine wines and whiskies have genuine supply constraints – there’s only so much land that is suitable for producing specific types of wine, and EU regulations also limit production in many cases to small designated areas.

TR – Like the champagne and cognac regions that we spoke about last episode.

TM – Yes and within those regions, land is classified into better and worse areas, which are normally labelled on bottles. So of the 318 villages in champagne, only 17 are rated as grand cru, the highest classification, and wine made from 100% grand cru grapes tends to fetch much higher prices.

TR – And it’s similar in Bordeaux and Burgundy with their classification systems. Demand increased, but supply couldn’t keep up, so prices rose.

TM – And as we keep returning to this week, rising prices often attract more collectors and speculators, adding more demand, which causes prices to rise even further.

TR – So we end up in a somewhat bizarre situation where a lot of top wines are now almost exclusively bought by collectors for long-term storage and investment. The wine merchants Berry Brothers and Rudd have over a billion pounds of wine in storage for clients.

TM – Yes I’ve often thought this must be a weird situation for some wine producers, where they are making a product that is supposed to be consumed, but almost nobody ever drinks it. It just gets left in bonded warehouses, being traded back and forth between investors. If I were them I’d find it a bit depressing.

TR – It’s like an artist painting something that never gets seen, just covered in a blanket and sold.

TM – Exactly – the producers get rich, but is the job really as satisfying?

TR – Ok, so Tom, we really can’t talk about collecting without touching on Stamps. So there are two ways in which your stamps can be valuable. The first is collecting old stamps, and the second is buying a load of first class stamps and holding them until you need them.

TM – So what sort of return would you have made if you just bought and held first class stamps?

TR – Well you’d have had to swap them for the new QR coded ones, but you would have made 64% over the last 5 years.

TM – Wow! That’s over 10% a year for something that’s close to risk free and that is exempt from capital gains tax.

TR – So used and old stamps have been collected since the they were first printed in 1840. There are colourful and memorial stamps, and I remember as a child enjoying being given foreign stamps by my grandfather. Now, like most collections, the most valuable stamps are the rarest. Now sometimes that’s because they were a limited edition, but the rarest and most valuable stamps are often those that have defects or strange origin stories.

TM – Ah yes, like that British Guyana 1c Magenta that sold for almost $10m in 2014 at Sothebys.

TR – That one has a great story. The postmaster ran out of stamps and was unlikely to receive any more soon so he got the local gazette to print some emergency stamps on low quality paper. And the rest is history.

TM – Very expensive history!

TR – Yes and defects like the Sicilian Error of Colour, when a stamp was printed in the wrong colour were also immensely valuable.

TM – Sometimes getting it wrong pays!

TR – True! Of course, collections don’t have to just be physical items. People can also collect experiences and one of the oldest and best known of these is birdwatching.

TM – Ah yes, I know birdwatchers tend to build up their lifelong list of birds that they have spotted and they can get pretty long.

TR – Yes, it’s about experiences – not if there’s a bird in a tree, but if you actually saw it and so can add it to your list.

TM – Exactly. I was chatting to our colleague, Tom Hosking, who is a casual twitcher, and he was explaining how technology is making birding more enjoyable and easier.

TR – I assume it’s because there’s an app for that?

TM – Indeed, well there are actually two apps! Both are from Cornell University and the first allows you to record your sightings, so you always have your list to hand. It also feeds sightings back to a main server to help monitor bird populations to improve conservation.

TR – Very useful, and another great example of how mobile phones fulfil more and more functions.  So what’s the second app?

TM – Now this one is a bit cooler. It’s called Merlin and it uses AI to help identify birds – either from pictures or from their song.

TR – Ah yes, I read about this…  it builds a spectrogram, so converts the sound to an image which is then identified by the AI.

TM – Who would have thought that Birding would end up at the convergence of AI, photography and the internet?

TR – Awesome. OK Tom, quiz question for this episode.  Which book has had the most editions printed in the history of mankind… after the bible.

TM – That’s a tough one…

TR – Well, the answer is apparently Cervantes’ novel, Don Quixote – there have been over 3,000 editions in various languages. And the reason I asked is that I know someone who has collected literally hundreds of these different editions.

TM – Very cool!

TR – Some of these editions have stunning illustrations by artists from Picasso to Doré to Robert Smirke.  Others allow you to follow how the book travelled by the mistakes in translation that were replicated and translated into another language. It adds a layer of fun to the collection.

TM – Very interesting. So the final collectible mania I wanted to briefly mention was the craze for Beanie Babies, those small cuddly toys that became popular in the last 1990s.

TR – I vaguely remember those

TM – Well my wife Leila collected them as a child, and recently we were talking about how ridiculous the secondary market prices of some of the supposedly rare beanies had become. So she did a bit of research, got her collection down from the loft, and made a spreadsheet.

TR – OK well I always love a spreadsheet.

TM – As do I! And looking on Amazon, ebay and Etsy, she added up the highest currently offered prices for each beanie, the lowest currently offered prices, and the achieved sale prices in the last year. The results were, shocking, to say the least.

TR – OK I’m fascinated now.

TM – So using the highest offered price for each toy, her collection is supposedly worth, and I’m putting that in air quotations, 300 thousand pounds!

TR – What!

TM – You heard me. But it’s clearly nonsense, because using the lowest prices currently offered for the exact same toys gives a grand total of …. £59.81!

TR – Ha! So a 5000x difference. That’s clearly madness. Those high prices must just be wishful thinking.

TM – Indeed. So Leila then looked at what prices the beanies had actually sold for – not just what people were asking for them. And even those prices varied a lot, but sadly were nowhere close to £300,000. Her collection would have sold for somewhere between £42 and about £3000. In one instance the same bear had previously sold for 99p and £822.

TR – So what’s going on?

TM – Well it’s hard to tell, but my theory is that most of the prices are fake, possibly a result of people just fishing for ridiculous offers, or even selling toys between themselves in order to create a false impression of higher prices. So the true value of her collection is probably about £40 or less, but it was fun looking into it!

TR – Ha! It’s an illustration that with very illiquid markets, you need to be extremely careful about not getting ripped off by unscrupulous dealers. So before we finish on collectibles, it’s worth considering why so many of them seem to have risen and then fallen value in synchrony over the last few years.

TM – Well the answer is surely a combination of monetary and fiscal policy. All that money printing, coupled with ultra-low interest rates, and huge fiscal stimulus from governments, just left a lot of people with a lot of spare cash to play with.

TR – And they went out and bought trainers, watches, wines, cards – perhaps initially for their own use and enjoyment, but then increasingly as speculative investments.

TR – Alright, let’s move on to the news. Tom, what has caught your eye?

TM – Well the first thing I wanted to talk about this week ties in with last episode’s discussion about alcohol. Tom are you a fan of chartreuse?

TR – The greeny yellow herbal liquor? It’s not one of my top drinks but I remember it being a tasty tipple to take on a mountain top.

TM – Yes exactly. It’s a fascinating drink, made by the Carthusian monks who live in near silence at the Grand Chartreuse monastery in the French alps. They sell about 1.5 million bottles a year of three variants, green chartreuse, yellow chartreuse, and the original 1764-recipe elixir, which is marketed as an indigestion medicine.

TR – And I suppose the recipe is a well-kept secret?

TM – It is indeed – in fact only two monks know the full 130 ingredient recipe. All the other people involved know only fragments.

TR – And it’s still made by the monks themselves?

TM – Yes the monks in the monastery sort the 130 herbs and plants, which are then taken to a nearby distillery owned by the order, and staffed by those two monks who know the recipe, and 5 non-monk employees. They also bottle it on site.

TR – So it’s basically a family product, of sorts.

TM – Exactly – and a pretty good one. 1.5m bottles, about $60 each, so brand sales of about $90 million, but there are only about 380 monks and nuns, so revenue per monk is plausibly over 200 grand. Obviously profits will be only a small fraction of that, but nevertheless, a material amount of money for people who live very stripped back lives.

TR – So why do you mention it?

TM – Well, the monks have just decided to limit production. They sent a letter out to all their customers a few weeks ago saying they won’t be increasing volumes, and are immediately putting all their markets on allocation, rather than free sale.

TR – Did they say why?

TM – They said they want to focus on solitude and prayer, and that they are concerned that increasing production volumes would have a negative environmental impact.

TR – That actually sounds pretty reasonable. And quite similar to the core strategy of lots of luxury brands who choose to increase pricing rather than volumes.

TM – Indeed – it means that Chartreuse is likely to become harder and harder to come by, as demand grows but supply remains fixed, and primarily directed to bars and restaurants rather than shops.

TR – So if you’re a fan, it could be worth squirreling a bottle away when you find one.

TM – Agreed.

TR – Ok so first up from me this episode is a story about love and romance.

TM – Really?

TR – Well, about dating apps – which are now the way the majority of newly married couples met.

TM – Yes – that’s been a persistent trend as our lives have moved online… so come on then, what is this love story…

TR – Ok, well it’s almost the antithesis of a love story. We’ve chatted before about how women tend to be much pickier than men on dating apps and so 10% or so of men get 90% of the female interest and the majority of men find it hard to find anyone.

TM – Yes. It’s a major problem (and also a source of revenue) for dating apps.

TR – Well, now men can sign up to an AI that does all the early leg work for you. So this is why it’s not really a love story, but the cupidbot will go onto lots of different dating apps, find people it thinks you’ll like, write to them in your style and even arrange to meet at a time that’s free in your diary.  Then you can move it into the real world.

TM – I think that’s somewhat appauling – I mean it’s complete fraud really!

TR – Yes, it is rather dystopian and somewhat scary for how the next generation will find their partners.

TM – Right the next thing from me is also on alcohol – this time the growing popularity of sake outside Japan.

TR – Ah yes I thought I’d seen that sake consumption in Japan has been declining for a long time?

TM – Yes Japanese domestic sake consumption has fallen by around three quarters since the peak in 1973, as people have moved on to western drinks like beer, wine and spirits. But more recently sales have begun to pick up overseas.

TR – So exports from Japan?

TM – Yes exports have more than doubled, from around 14 million litres in 2012 to around 36 million litres last year, but that’s still well less than 10% of Japanese production.

TR – I am seeing sake more and more often on the drinks menus of bars and restaurants, with awesomely named cocktails like the Kanpai Colada and various fruit flavoured Caipisakes…

TM – Yes I’ve seen those too – and so a recent article in the New York Times caught my attention, talking about a sake trend in the US, and also the growth of domestic US production.

TR – So people are actually brewing sake in America now?

TM – Yes, microbreweries are opening in Brooklyn, larger ones are opening in upstate locations like Hyde Park, and a giant one is being built in Arkansas, with production capacity of a million litres a year.

TR – Arkansas?

TM – Yes that was my reaction too – but it made sense when I found out that Arkansas is the biggest producer of rice in the US.

TR – Aha

TM – Indeed. Some of these projects are in partnership with big Japanese brewers, some are independent – it’s quite a dynamic market at the moment. There are even some foreigners going into Japan to produce sake there for the export market – for instance Richard Geoffroy, who used to head up the champagne house Dom Perignon.

TR – I presume he’s making something pretty luxury and rather expensive?

TM – Indeed – it’s called IWA, and it’s about $200 a bottle.

TR – So perhaps after tequila, sake is the one to watch. We’ll know it’s hit the mainstream when celebrities start making their own.

TM – Ha! Yes exactly. I’ll keep an eye out for the Osaka sisters branching out from tennis into Sake.

TR – Next up, I’m going to move from ancient drinks to a ‘modern and ancient’ food.

TM – Ok. Hit me with your paradoxical fodder!

TR – So I came across an article about a very rare meatball. A meat I’ve never come across before. Tom, would you eat a Woolly mammoth meatball?

TM – Wow! That’s unexpected. The truth is, I probably would. I mean I assume that this is lab grown meat?

TR – Exactly. They took DNA from a woolly mammoth, spliced it with elephant DNA and then used that to grow muscle from a 4,000 year extinct species. So would you eat it?

TM – Well, yes, I think it would be quite interesting to try something that is so different, and grown in a conservation-friendly way, you could even argue it might raise the profile of extinction as well as other climate change issues.

TR – So this is the first meat I’ve seen grown from an extinct species, but apparently back in 2018 another company made gummy bears with gelatin that was grown from mastodon DNA, so you could actually masticate a mastodon

TM – What a phrase!

TR – I couldn’t resist.

TM – So the last thing from me today is a tech demo that caught my eye, from Epic

TR – The developers behind Fortnite and the Unreal engine.

TM – Yes exactly. They unveiled a new piece of software to help with facial animation, something that is notoriously difficult and time consuming.

TR – I think I saw the video

TM – Yes it’s been getting a bit of attention because it’s genuinely very impressive. They basically filmed an actress using a smartphone, and within less than 5 minutes they use her movements to animate a 3D avatar.

TR – It’s like high-end motion capture, but without the dots on your face, or the proprietary and expensive camera set ups, and the days of post-processing.

TM – It could be transformative for games – faces are normally some of the weakest bit of animation, in part because we spend so much of our lives looking at real faces that we’ve become extremely sensitive to even small suspect movements.

TR – Yes it could really save a lot of time and money for developers of big games with lots of characters.

TM – Agreed, and it could also help in the longer-term with metaverse/AR avatar animation, and maybe even with things like customized ads, where human movements could be mapped onto whatever avatars companies think a given customer would relate to most.

TR – A bit troubling, but very exciting too. Thank you for listening to Global infusions - a podcast that believes that the best discussions are had over tea and cake. We hope you've enjoyed your cuppa and our thoughts on the business of collectables. Please do subscribe through Apple or Spotify and with that we wish you goodbye!

TM – Goodbye!