Investing For Dummies - Eric Tyson

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sometimes enjoys multi-year periods with generous returns; over the long term, it has produced returns just comparable to the rate of inflation. Gold isn’t a place to put your money for long-term growth, as you can attain in stocks and real estate, but it does seem to do a decent job with protecting the purchasing power of your money over the long haul.

       Just like gold, Bitcoin is scarce, highly divisible, can’t be counterfeit, and is very portable. Bitcoin is one of thousands of made-up cryptocurrencies. There is nothing scarce nor unique about all of them as a group.

       Bitcoin has real utility, unlike gold. Bitcoin proponents derisively argue that gold is maybe good for jewelry and some electronics. Gold has real commercial uses and people also enjoy its durability and beauty in jewelry. Bitcoin offers none of those benefits and uses as it is a made-up thing that exists online only.

       Bitcoin enables you to move value all around the world instantaneously and is basically free. This is the most preposterous and demonstrably false statement of all. It takes time and effort to transfer Bitcoin, and it’s far from widely accepted. Furthermore, there are significant transaction costs associated with its use given the spread between the buy and sell price at any given moment.

       Over time, Bitcoin will become more stable than gold and grow at a much higher rate than gold. While the extraordinary volatility that Bitcoin prices have had should lessen over time, it’s highly unlikely it will ever be as stable in price as the price of gold is. There’s also no legitimate reason to expect Bitcoin, or the thousands of other online made-up cryptocurrencies, to grow in value faster than the price of gold or to grow in value at all. (Interestingly, during the COVID-19 crisis in early 2020, the stock market, Bitcoin and other cryptocurrencies dropped in value, while gold rose.)

       Bitcoin is a unique cryptocurrency as it enjoys a strong brand name, amazing community, and is finite in supply. There are thousands of cryptocurrencies, and Bitcoin is far from unique. It does have relatively strong name-brand recognition and certainly devoted followers and believers (who are, of course, talking up something they have put their own money into). While it is supposed to have an upper limit placed on its eventual supply, there’s no forever guarantee of that being honored. Also, there are thousands of other cryptocurrencies that are close substitutes.

      The term collectibles is a catchall category for antiques, art, autographs, baseball cards, clocks, coins, comic books, dolls, gems, photographs, rare books, rugs, stamps, vintage wine, writing utensils, and a whole host of other items.

      I’m not trying to diminish contributions that artists and others make to the world’s culture. And I know that some people place a high value on some of these collectibles. But true investments that can make your money grow, such as stocks, real estate, or a small business, are assets that can produce income and profits. Collectibles have little intrinsic value and are thus fully exposed to the whims and speculations of buyers and sellers. (Of course, as history has shown and as I discuss elsewhere in this book, the prices of particular stocks, real estate, and businesses can be subject to the whims and speculations of buyers and sellers, especially in the short term. Over the longer term, however, market prices return to reality and sensible valuations.)

      

Here are some other major problems with collectibles:

       Markups are huge. The spread between the price that a dealer pays for an object and the price he then sells the same object for is often around 100 percent. Sometimes the difference is even greater, particularly if a dealer is the second or third middleman in the chain of purchase. So at a minimum, your purchase must typically double in value just to get you back to even. And a value may not double for 10 to 20 years or more!

       Lots of other costs add up. If the markups aren’t bad enough, some collectibles incur all sorts of other costs. If you buy more-expensive pieces, for example, you may need to have them appraised. You may have to pay storage and insurance costs as well. And unlike the markup, you pay some of these fees year after year of ownership.

       You can get stuck with a pig in a poke. Sometimes you may overpay even more for a collectible because you don’t realize some imperfection or inferiority of an item. Worse, you may buy a forgery. Even reputable dealers have been duped by forgeries.

       Your pride and joy can deteriorate over time. Damage from sunlight, humidity, temperatures that are too high or too low, and a whole host of vagaries can ruin the quality of your collectible. Insurance doesn’t cover this type of damage or negligence on your part.

       The returns stink. Even if you ignore the substantial costs of buying, holding, and selling, the average returns that investors earn from collectibles rarely keep ahead of inflation, and they’re generally inferior to stock market, real estate, and small-business investing. Objective collectible return data are hard to come by. Never, ever trust “data” that dealers or the many collectible trade publications provide.

      The best returns that collectible investors reap come from the ability to identify, years in advance, items that will become popular. Do you think you can do that? You may be the smartest person in the world, but you should know that most dealers can’t tell what’s going to rocket to popularity in the coming decades. Dealers make their profits the same way other retailers do: from the spread or markup on the merchandise that they sell. The public and collectors have fickle, quirky tastes that no one can predict. Did you know that Beanie Babies, Furbies, Pet Rocks, or Cabbage Patch Kids were going to be such hits (for however long they lasted)?

      

You can find out enough about a specific type of collectible to become a better investor than the average person, but you’re going to have to be among the best — perhaps among the top 10 percent of such collectors — to have a shot at earning decent returns. To get to this level of expertise, you need to invest hundreds if not thousands of hours reading, researching, and educating yourself about your specific type of collectible.

      Nothing is wrong with spending money on collectibles. Just don’t fool yourself into thinking that they’re investments. You can sink lots of your money into these non-income-producing, poor-return “investments.” At their best as investments, collectibles give the wealthy a way to buy quality stuff that doesn’t depreciate.

      

If you buy collectibles, here are some tips to keep in mind:

       Collect for your love of the collectible, your desire to enjoy it, or your interest in finding out about or mastering a subject. In other words, don’t collect these items because you expect high investment returns, because you probably won’t get them.

       Keep quality items that you and your family have purchased and hope will be worth something someday. Keeping these quality items is the simplest way to break into the collectible business. The complete sets of baseball cards I gathered as a youngster are now (30-plus years later) worth hundreds of dollars to, in one case, $1,000!

       Buy from the source and cut out the middlemen whenever possible. In some cases, you may be able to buy directly from the artist. My brother, for example, purchases pottery directly from artists.

       Check

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