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Law and Coins
AN EXTENSIVE LOOK AT THE LAWS
THAT GOVERN OUR NUMISMATIC
COMMUNITY AND OTHER TOPICS
OF INTEREST
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Salomon Brothers 2001 Review Show Coins Good Investment
by David L. Ganz
Column 15 - August 23, 2001
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(CONTINUED FROM PAGE 1)
For a dozen years, the first week in June meant a hype that collectors saw in the form of a short four or six page newsletter, the Salomon Brothers report, without mentioning dates or condition of coins, reported overall what their impression was of the rare coin market during the previous 12 months.
By 1989, the results were still impressive. As the survey written by Salomon Brothers itself stated, "Conclusion offered: during the succeeding 12 month period of time, rare coins offered a return of more than 30%," ranking behind only old masters' paintings and Chinese ceramics.
By the following year, 1990, I wrote "Little wonder, then, that Wall Street is smiling on the rare coin industry, whose one year ranking in the survey showed a 14.6 percent annual return, and a ranking of fourth." Only Old Masters, Chinese Ceramics, and Stocks ranked higher.
For 1991, however, the investment-banking house bowed to intense pressure from the Federal Trade Commission and decided to withdraw rare coins from its chart of tangible assets on which gains, and losses, were measured. "When we began publishing our annual report on investment returns a dozen years ago, we expected that the assets in the survey would generally fall into two classes of investments -- financial and tangible -- and that returns from these categories would diverge", Salomon Brothers annual report stated.
Claiming that Stack's, the New York-based numismatic firm, did "too well" in selecting a model portfolio, Robert Salomon announced that rare coins would be replaced by stamps. In the process, it was hoped that the quotation from the survey's results would no longer be used by telemarketers trying to sell rare coins to the gullible.
Precisely who the rare coins are interesting to is actually the subject of an intriguing comment by Salomon Brothers in their annual survey, which now classifies three different types of assets: financial assets, tangible assets, and collectibles. Collectibles are what Salomon Brothers claims is conspicuous consumption: a desire to show others that someone had reached a particular financial plateau, or that they are capable of acquiring an item than someone else desires, but is not capable of purchasing for reason of finance. As a Salomon report put it succinctly: "They are a means of proving to others the financial capability of the buyer, i.e., conspicuous consumption".
Foreign currency, by contrast, is not consumed; it is financial in nature, and, over the past year, that investment has been less than stellar, but still very respectable. Salomon termed foreign exchange (10.5% average growth) the fifth best investment, just after coins during one period measured.
Taking the Salomon Brothers survey over a 62 year period of time (the actual survey went on for a dozen years, but it is possible to extrapolate data and reach back to the 1930's, and then go forward to the year 2000), rare coins are demonstrated to be a superior investment vehicle with a phenomenal rate of return that is not approached by any other financial or tangible asset.
No wonder, then, that Wall Street started to dabble in the rare coin market, with "funds" or limited partnerships (actually, securities, anyway you look at it) offering a "mutual fund" type approach to take away from the investor the need to have any specific numismatic knowledge -- and instead to allow the investor to rely on the purchasing manager's numismatic knowledge and the overall upward trend in the market place.
The Salomon Brothers Survey of Tangible Assets, and its inclusion of numismatic items, helped transform a hobby into a cottage industry, and later into the dynamo that it is today. Does it precisely parallel how thousands of different coins have gained, or lost, through the years? The answer, obviously, is no. Neither does the Dow Jones Industrial Average, the Standard & Poor 500 Index, or any other market-basket approach to the statistics.
The great stock crash of 1987 which saw the largest single drop in history on the Dow Jones Industrial Average, either numerically or as a percentage, will long be remembered. What is forgotten is that because Dow Jones is a market basket -- like the Salomon Brothers coin portfolio selected by Stack's -- there were a few stocks that gained substantially on the day when the Dow was supremely negative and hundreds of stocks had dropped precipitously.
So, too, is it with coins.
No one claims that the Salomon Brothers portfolio is a perfect one, but it constitutes what a serious collector might have accumulated in an era when price appreciation was generally moderate, and gains from a collection were realized over a lifetime.
In evaluating the data supplied by Salomon Brothers, and in this interpretation utilizing prices found in a variety of sources, it is essential to understand what the market-basket selected is not: it cannot, and does not, purport to measure the price gains, or losses, of every coin. Instead, it relies on a market-basket approach, much like the Dow-Jones Industrial Average.
The gains and losses recorded on the charts and graphs that accompany this will differ slightly from the actual percentages and rates of return found in the Salomon Brothers examination because the method of compiling prices for the chart differ than the raw auction data used in the compilation of the Salomon Brothers review. But, because the same basic approach was used year in, year out, for a half century, the rate of return -- the gain, and loss -- is a reasonably accurate measure of the status of the coin market.
The accompanying charts prepared by me lists the combined values of the 20 coins that are found in the Berman-Schulman list, and then shows the price for them from about 1938 until the present. (Pricing for 1938 depends on the old Wayte Raymond Standard Catalog of U.S. Coins; for the early years of collecting, the Red Book is a basis for price interpretation, mingled with some other price guides. For the past three years, Dennis Baker's NumisMedia has been the source for impartial pricing.
NumisMedia's participation has been a godsend for an entirely different reason: the fair market value appears to have been a more accurate method than relying on advertised prices in trade publications, auction prices, and printed books. It sort of utilizes all of those elements and combs them for accuracy, reliability, and usefulness in the marketplace analysis.
If the market-basket had been compiled in 1938, it would have cost about $136 to build the collection. By 1947, the amount increased to about $430. Considering that lawyers were being paid $31 a week to work on Wall Street that year, the sum was not inconsequential. By 1955, the market-basket had nearly doubled, to $781 in cost. Except for some brief inflation during the Korean War, the Consumer Price Index (CPI) had advanced only modestly in the intervening years. But rare coins increased almost 14 percent over the previous year, a trend that would continue for at least the next two decades.
At the very same time that coins were increasing by nearly 14 percent, U.S. government long-term bonds (15 years and greater terms) yielded a 2.32 percent rate of return. High grade municipal bonds, according to the Statistical Abstract of the United States and the Economic Report of the President, brought 1.98 percent returns. (The average stock in the Standard & Poor 500 Index had a dividend rate of about 6.3%).
A decade later, in 1968, the identically described coins would have had a value of just about $8,000. In 1978, the Red Book values for all of the coins on the list amounted to about $35,000. That is a 341 percent gain (or a simple rate of return of about 34 percent annually). Analysis of the components of the portfolio, and the rate of change each year, show a general overall positive trend. Not every year was a gain, but there are many more gains than there are losses. The same is not true of gold, silver, or most other assets in the survey.
A comparison between the portfolio's direction, with the consumer price index (CPI) and the price of gold is illustrative. The CPI is a steady progression upward. Over the 62 year period of time, the average annual rate of change is around 4.6%, with the highest years reserved for post World War II (1945-6), 1974, and 1980-82 when rates averaged from 10.3 to 13.5 percent. (Coins for the following year period moved dramatically ahead of inflation during that period).
In 63 years of toting these market-basket coins, only 10 of those years show a negative growth rate, and at least three of those years essentially were non-growth or loss. The rate of change for coins over the period of time averages to around 12% using the index. By contrast, high grade municipal bonds averaged about 5.7 percent annually during this year period, and U.S. government long-term bonds had an average of 6.5 percent annually. There was minimal risk with those investments for the return; the 11.47% received for coins is with more risk.
Dow Jones ups, and downs, have played havoc with preparing a chart. I picked an arbitrary day (June 25) when the Dow had just jumped upward again -- it's been very volatile this year -- and the surprise showing is that if stocks are ahead as an investment right now, it's only by a small margin. Gold, silver, and many other tangible investments have fallen by the wayside. The Dow, overall, was down about 2.65% since the last time that I made the compilation; by contrast, coins were also off, but by about half as much, 1.58%.
Market volatility is so substantial as to make comparison and analysis difficult. By contrast, rare coins almost could be described as a stable investment and a storehouse of value where there is not the substantial risk of volatility associated, now, with the stock market.
After more than 35 years of commenting on the coin market, and analyzing it, this review suggests that Salomon Brothers was on to something; rare coins, as a tangible asset, has proven over time to be a good investment. Nothing is guaranteed; last year's performance is this year's fodder. But it seems clear enough that rare coins are worth more than a quick look.
The financial details (and the several charts that accompany this article) come from the same data that has been compiled and used by me in other articles over the past two decades while commenting on it. (An original research piece appeared in the 1982 edition of the "Red Book" entitled "Planning Your Rare Coin Retirement").
Placing individual coins from the Salomon Brothers survey and comparing them against the Dow in side-by-side charts is an interesting exercise. The 1921 Walking Liberty half dollar, for example, substantially outperforms the Dow in this comparison (some but not all years), so does a 1795 draped bust dollar (the Walking liberty half dollar does better, however, in most years). In the present article we have included the 1916 standing liberty quarter for comparison.
Compared against the consumer price index (which was re-valued in 1982, requiring all numbers to be re-classified), coins have outperformed -- and make them a decent hedge against that old bug-a-boo, inflation, which deprives the dollar of some portion of its purchasing power.
Measuring some of the other precious metals in the same way, silver under-performs against the CPI, except in the mid-to-late 1970's and early 1980's -- and not a single year since 1987. Platinum and gold, by contrast, while their prices have been volatile, seem to have good company -- the two more precious metals outperform silver easily.
Though it is difficult to show and compare all of the coins in a single graph -- even when you can do it in color it tends to be over-crowded -- it is nonetheless impressive to look at a small portion of them, and the way that it has outperformed the Dow, year in year out, for quite some time -- though the task, now, is more muddied and harder to read.
What the future portends remains the imponderable, but a bright light can be seen from the past dozen months -- with the promise of more and greater things to come.
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David L. Ganz
