Investment Grade Antiques Have Always Been Expensive, Even When New

Investment Grade Antiques Have Always Been Expensive, Even When New

A common misconception surrounding antiques is that items that were originally cheap or commonplace decades ago can somehow age into choice, investment grade art today.  In this fantasy, junk collectibles gradually improve with age – not unlike a fine wine – until, if you hold them long enough, they finally become incredibly valuable.  Occasionally there are stories in the media that reinforce this idea.  For example, a million dollar treasure trove of old, rare baseball cards – including Ty Cobb, Cy Young and Honus Wagner cards – was found in the attic of an old farmhouse in Defiance, Ohio in 2012.

With sensational stories like this it is no wonder that many people believe their grandparent’s knick-knacks and junk could be worth a fortune.  After all, vintage baseball cards were free, throw-away prizes for buying candy or tobacco products in the early 20th century.  They were made from cheap cardboard, one of the most fragile and least durable materials on earth.  Doesn’t this definitively prove that an antique can go from zero to hero – in terms of desirability and monetary value – if stashed in an attic long enough?

Disappointingly for many people, the answer is an emphatic “No!”  That particular story of old, valuable baseball cards is very much the exception and not the rule in investment grade antiques.  Instead, the theme that we see repeated again and again is that today’s investment grade antiques were almost always extremely expensive when they were new.  And if you stop to think about it, this makes a great deal of sense.

Two of the attributes that are highly valued in fine antiques are durability and quality materials.  These two characteristics are inexorably intertwined.  When an item is crafted from high quality materials it is almost always durable.  The inverse is also true.  When an item is durable, it is almost always constructed from high quality materials.  However, only very skilled craftsmen or artists tend to work with these substances.  For one thing, good materials are very expensive.  They also require great proficiency to mold properly with minimal wastage.  Additionally, no true artist wishes to bequeath the world a poorly executed or shoddy work of art composed of fine materials.

A consequence of this is that good quality items – the sorts of things that later become investment grade antiques – were naturally very expensive.  Ancient and medieval coinage is a perfect illustration of this.  Gold coins have always traditionally been made with the greatest of care while bronze coins were hastily and crudely struck.  This was nearly universally true in pre-modern times, regardless of culture or era.  Civilizations as diverse as ancient Rome, medieval Germany and 17th century Mughal India all followed this unwritten rule of coinage.  Gold coins always had face-values significantly higher than their bronze counterparts and were thus substantially more expensive – both straight from the mint and among collectors today.  It is only with the advent of modern minting technology in the 19th century that all coins have been struck to similarly high standards, regardless of their metal composition.

Antique Japanese lacquerware offers another good example of this phenomenon.  In the 19th century Edo and Meiji periods, only the wealthy could afford finely adorned lacquerware dishes and boxes.  Today, these very same high-end pieces, resplendent with maki-e (gold) and raden (mother of pearl inlay) decoration, are the best of the best of investment grade antique Japanese lacquerware.  Very plain lacquerware, in contrast, was much cheaper to make and destined for those who were lower on the socio-economic totem pole.  In the current age, this undecorated Japanese lacquerware isn’t nearly as desirable.

This pattern repeats endlessly, regardless of whether we look at Tiffany jewelry, Gorham silver flatware, Patek Philippe pocket watches or medieval French illuminated manuscripts.  Items that are desirable, investment grade antiques today tended to be expensive – oftentimes very expensive – items when they were new.  So keep this little bit of wisdom in mind next time you’re convinced you will strike it rich by digging through your relatives’ old junk heap.

Superb Japanese Edo Era Signed Samurai Tsuba

Superb Japanese Edo Era Signed Samurai Tsuba
Photo Credit: matsu-kaze-japan

Superb Japanese Edo Era Signed Samurai Tsuba

Buy It Now Price: $550 (price as of 2016; item no longer available)

Pros:

-This is a stunningly executed example of a Japanese tsuba, or samurai sword guard.  It is from the Edo period, before 1868, when the Tokugawa shogunate, dominated by the samurai class, still ruled Japan.

-The piece is substantial, measuring 68 mm (2.68 inches) long by 60.5 mm (2.38 inches) wide by 7.5 mm (0.30 inches) thick.

-The tsuba, featuring an exquisitely crafted scene of a wild goose in nature, is made of brass, shakudo and silver.  Shakudo is a uniquely Japanese alloy, typically composed of 93% to 97% copper and 3% to 7% gold.  It results in a metal that has an alluring, satiny black finish.

-This Edo era tsuba is prominently signed by the artist, “Jiseitei Sadatsune”.  The traditional craftsmen who produced these works of art did not hesitate to sign particularly fine examples of their craft.  A signed tsuba is an indicator of quality, and will command a higher price than a similar, but unsigned, tsuba.

-This breathtaking tsuba is in excellent condition, especially considering it might be over 200 years old.

-The item is sold by an experienced Japanese antiques dealer, and ship straight from Tokyo, Japan.

-The quality of this tsuba is simply breathtaking.  The level of naturalistic detail coupled with the skillful use of multi-colored alloys is consistent with the finest Japanese tsuba work from this period.  Honestly, the asking price of only $550 seems a bit low to me.

 

Cons:

-Earlier in Japanese history, during the Warring States period, tsuba were fully functional battle gear.  However, after the consolidation of all political power by the Tokugawa shogunate in 1603, peace reigned.  Therefore, tsuba became strictly ceremonial items.  Daimyo (lords) and samurai then commissioned lavishly decorated tsuba to advertise their high social status.  So this tsuba specimen would almost certainly not have been involved in any battles or duels.

-There is really very little negative to say about this antique samurai tsuba.  The price is attractive, the design is magnificently executed and it is signed.  I suppose you could argue that it wasn’t crafted by a renowned tsuba artist, but that is a fairly weak criticism.

A Theoretical Approach to Valuing Antiques and Fine Art

A Theoretical Approach to Valuing Antiques and Fine Art

One of the enduring enigmas of investing in art is valuation.  Unlike traditional financial assets that are largely priced according to expected future cash flows, fine art has no future cash flows except for the ultimate sale proceeds.  In this regard art is similar to a zero coupon bond.  Of course, the future selling price of any piece of art is unknowable in the present.  This presents any would be financial analyst of the art world with a conundrum.  A fair valuation – and by extension a reasonable performance estimate – cannot be made without knowing the future sale price of a work.  Using expected future cash flows as a valuation method for art and antiques is therefore a doomed exercise in circular reasoning.

For a long time, this problem bedeviled me.  Relative valuation, in comparison, is a much more approachable riddle in the world of antiques; items of higher quality and condition are generally worth more than those of lower quality and condition.  But absolute valuations stumped me.  How do I know that the antique I’m considering is priced fairly compared to stocks, bonds or other traditional financial assets?

But then it hit me.  Maybe I was approaching this issue from the wrong angle.  Rather than trying to determine valuation from unknowable future cash flows, maybe I should be looking at the amount of money available in an economy to buy art.  In other words, I should look at the inputs (available money) rather than outputs (future sale prices).  According to my hunch, inputs in this instance would be nominal (non-inflation adjusted) GDP (gross domestic product) – the value of all goods and services produced in an economy during a year.

So I started gathering data.  Now historical price information for art and antiques is somewhere between difficult and impossible to find.  However, after significant effort, I managed to put together a miniature index of U.S. type coins with price data back to 1950.

This index consists of three equally weighted constituents:

1) 1842 Liberty Seated silver dollar in XF condition (mintage: 184,618)

2) 1857 Flying Eagle cent in XF condition (mintage: 17,450,000)

3) 1908-D no motto $10 Indian Head gold eagle (mintage: 210,000)

These coins were very specifically chosen.  They are all classic pieces that have been popular among U.S. coin connoisseurs for many decades.  Although not plentiful, none of the pieces is a rare or key date.  Only one coin is gold, limiting the impact of gold spot price fluctuations on the overall index.  And because they are all U.S. coins, we can surmise that nearly all collector demand for them originates in the United States.  This allows us to exclusively look at U.S. economic data in an attempt to find a meaningful correlation.  In addition, our U.S. type coin index, possessing all the desirable attributes of investment grade antiques, should be an excellent proxy for the broader art and antiques market.  So any relationship with economic data we find here will most likely carry over to that larger market.

US Type Coin Index vs US Nominal GDP vs US Inflation Rate

This first chart shows our proprietary U.S. type coin index graphed from 1950 to 2015 against both nominal U.S. GDP and the U.S. inflation rate (CPI).  You’ll notice the very close relationship between the coin index and nominal GDP.  The correlation coefficient between these two data sets is 0.943, a very high number indicating almost perfect correlation.  To put this value in perspective, a correlation coefficient of -1 means two data sets are perfectly inversely correlated.  A coefficient of 0 means two data sets are completely non-correlated, moving randomly in relation to each other.  And a coefficient of 1 equals a perfect correlation.  Inflation, useful as a reference baseline, lags far behind. The coin index and nominal GDP moving in almost perfect sync seems to confirm my theory that nominal GDP is the primary driver of collector demand.  This makes a lot of sense, as art aficionados and antique collectors are constrained by their available resources and nominal GDP is a reasonable measure of those resources.

US Type Coin Index to US GDP Ratio

But we can take this data one step further.  We can plot a ratio of our coin index versus nominal GDP to reveal periods of overvaluation and undervaluation.  This is what our second graph shows.  In this case, the long term average has been indexed to 1.  So any number around 1 implies fair value while those significantly above signal overvaluation and those substantially below show undervaluation.

The results of our graph are intriguing.  We can see that most of the period from the 1960s through the 1980s shows persistent overvaluation in the coin index.  This period also broadly coincides with an elevated rate of inflation.  So the story seems fairly straightforward.  People who fear inflation flee underperforming stocks and bonds for the relative safety of tangible assets, including bullion, art and antiques.  This phenomenon eventually pushes these tangible asset classes into overvalued territory.  Our proprietary coin index almost reached double its fair value in 1975.

The period on our chart from 1995 to 2015 is equally illuminating.  Once inflation receded and traditional financial assets began performing well again, people tended to abandon tangible asset en masse.  This drove valuations well below fair value for the last 20 years.  Although the coin index – and investment grade antiques in general – bounced off its year 2000 low of 0.57, tangibles are still substantially undervalued today.  The latest 2015 data point for the coin index is 0.64, meaning a rally of more than 50% would be needed to return to our long term average valuation.

But how can we be sure our coin index data isn’t a fluke, or perhaps just coin specific?  Well, I also managed to get some historical data on the Antique Collector’s Club Antique Furniture Price Index.  This is an index started in 1968 by John Andrews that tracks the performance of 1400 types of commonly seen antique British furniture.  It is divided into seven categories: oak, walnut, early mahogany, late mahogany, Regency, Victorian and country.  Antique furniture is a radically different kind of market than coins.  So if we find the same relationship to nominal GDP here that we found in the coin index we can be assured that it is meaningful.  However, one caveat about antique furniture is that it is not, in my opinion, technically investment grade.  This is due solely to the fact that furniture is not portable, a requirement for investability by my definition.  But we work with the data we have, not the data we want.

ACC Antique Furniture Price Index vs UK Nominal GDP vs UK Inflation Rate

The next chart shows the ACC Antique Furniture Price Index from 1968 to 2015 versus U.K. nominal GDP and the U.K. inflation rate (RPI).  You can immediately see the tight relationship between the furniture index and U.K. nominal GDP from 1968 to 2002.  At that point the relationship seems to break down.  Looking at correlation coefficients confirms this analysis.  From 1968 to the index’s peak in 2002, the correlation coefficient is a near perfect 0.974, but if we look at it over the entire period, the correlation coefficient drops to 0.710.  This is still a fairly good correlation, but not nearly as close as it had been until 2002.

What happened?  Well, the antique furniture market has been undergoing a tumultuous period for the last 15 years or so.  Specifically, living arrangements have been changing.  Smaller houses, condos and apartments are now the norm.  So a lot of massive antique furniture from bygone eras simply doesn’t fit in the average home anymore.  Also, many people are overly indebted.  They struggle to make the monthly payments on their massive mortgages, car loans and credit cards.  Paying top dollar for antique furniture isn’t a top priority when you’re barely making ends meet.

ACC Antique Furniture Price Index to UK GDP Ratio

This leads us to our last graph.  It shows the ratio of the ACC Antique Furniture Price Index to U.K. nominal GDP.  And it shows a remarkably similar story to our coin index chart.  A period of overvaluation in the 1970s through the early 1990s turns into extreme undervaluation for the most recent 10 years.  As of 2015, the furniture index to GDP ratio rests at 0.40, indicating a 150% increase would be necessary to reach fair value.

Now I would take this indication of extreme undervaluation in the antique furniture market today with a grain of salt.  While I do feel that antique furniture is undoubtedly selling too cheaply, lifestyles have changed in the last couple of decades – perhaps permanently.  Fair value may be lower today than the (still evolving) long term data says it should be.

In any case, I think there are a few important points we can garner from this data.  First, we can successfully measure the absolute value of art and antiques.  Second, art and antiques as an asset class tend to appreciate at the same rate as nominal GDP growth over the long term.  Third, inflation and the accompanying underperformance of paper assets lead to periods of overvaluation in antiques while booming stock markets and low inflation rates give birth to secular undervaluation.  Fourth, all indicators show that tangible asset classes like art and antiques are somewhere between moderately undervalued and egregiously undervalued today.  It is clear that there has rarely been a better time to become a connoisseur of fine art.

The Future Is Handmade

The Future Is Handmade

As we boldly move into the 21st century, it is becoming apparent that mass manufactured goods will continue to become cheaper and more plentiful.  The rise of computer AI, robotics and globalization is all converging to create an environment where most items can be produced quickly and in large volume.  The future will feature ever less expensive consumer electronics, appliances and clothing.  It will also feature many fewer human workers.  So how will people make money and what will they do for work?

Since the beginning of the 19th century people have been trained for the industrial economy, a dystopia of gigantic factories and high speed machinery.  Workers stood on long assembly lines dutifully cramming the same widget into the same appliance again and again.  Then, in the mid 20th century, came the rise of the office economy.  This system relied on vast cube farms populated by armies of college-educated workers mindlessly entering data into spreadsheets.  Now we are rapidly transitioning into the information age, where individuals are often self-employed or contract workers.  A typical workspace for these intrepid pioneers may consist of sitting in a Starbucks with a MacBook Pro and an espresso.

But many of us will still long to use our hands just as much as our minds in the information age.  For those people, the obvious solution is handcrafting one-of-a-kind goods for direct sale to the public.  We can already see how this new style of production is spreading quickly.  Online distribution platforms like Etsy, eBay and even Amazon are providing today’s entrepreneurial craftsmen with powerful retail outlets that have a truly global reach.  It is now possible to sell your unique creations almost anywhere, to almost anyone.

And as the global marketplace inevitably becomes flooded with commoditized manufactured goods, handmade alternatives will become increasingly desirable.  No mass-produced cell phone or coffee mug can possibly compare to the warm, personalized touch of a handcrafted sterling silver keychain or a handmade monogrammed leather wallet.  The care, expertise and skill that goes into the creation of handcrafted goods is immediately and viscerally apparent to even the casual observer.  Handmade will eventually become a byword for luxury and refinement in a world awash in mass produced clutter.

In the end, the profound changes the world is currently experiencing will resolve positively.  People cannot be truly happy in life unless they feel they are doing something meaningful.  Working on an assembly line or in an office cubical might have put food on the table in decades past, but I think few people found it fulfilling.  Today we stand on the precipice of perhaps the most radical change since the industrial revolution – a world where many traditional white collar and blue collar workers retool to produce handcrafted luxury goods.