The Good Life: Rare Coins Paved With Gold By James Altucher - 04/28/05
- 07:08 AM EDT
Living
"the good life" doesn't necessarily mean wining
and dining, lying on the beach and blowing all your money
on roulette wheels in exotic casinos. Indeed, you can make
more money (which is the ultimate joy for many anyway) by
buying money.
Rare coins are often the currency of the
rich and famous -- whether it's historical biblical coins
found at archaeological digs or the original silver dollars
that launched our nation's currency. Indeed, there are collectors
who, starting from humble beginnings, have amassed fortunes
by buying and selling rare coins. John Jay Pittman, for instance,
was an engineer at Kodak from 1947 to 1970, making between
$10,000 and $15,000 per year. Each year he invested up to
half his salary in rare gold and silver coins. Over the course
of 20 years, he probably made a total investment of about
$100,000, and his collection ultimately sold for over $30
million.
There are two ways one can get involved in
coin collecting:
Collect your own coins, and master the subtleties of the different
coins and grading mechanisms that are used to establish value
for each coin.
Invest alongside the masters.
I called up Silvano DiGenova, a rare-coin trader who made
his first million trading when he was 21. He started out trading
coins, then helped work out the process of grading rare coins,
and more recently has been running Superior Galleries (SPGR),
a 75-year-old, California-based coin gallery and auction house
that trades on the bulletin board.
Silvano buys and trades everything from 3-cent nickels to
1804-minted silver dollars to St. Gauden's gold coins from
1906. When he talks about coins and the value to be found,
he can't hide his excitement. "If you take the 12 Piece
Gold Type Set, which can be thought of as an index of the
12 most popularly traded coins, and if you had put $1,000
in that "index" in 1970 and held that basket of
coins until now, your initial $1,000 would be worth $61,000
now. The same $1,000 put in the Dow Jones Industrial Average
would be worth only $12,430 right now, despite the huge bull
market in stocks from 1980-1999.
"The history of money and the history
of a country is usually found in their coins," he told
me. "Coins are like holding history in your hands. Many
of the best artists and sculptors of their times made coins.
For instance, August St. Gaudens was hired by Teddy Roosevelt
to redesign America's coins. At the time, he was America's
top sculptor. In 1999, we bought and then resold a St. Gauden's
1907 $20 gold piece for $1.2 million."
Assessing the value of a rare coin does have
similar characteristics to valuing a business. You use comparables
and you make sure there is a significant margin of safety.
The value of a coin depends in large part on its rarity, which
is a function of both the particular time and place it was
minted, as well as its current condition. Depending on these
two factors, there are various scales that will assign a grade
based on the perceived rarity of the coin. Grades are between
1 and 70, with anything in the 60 to 70 range considered "rare."
A coin that is graded a 69 might be significantly more expensive
than a coin graded at 68.
The key to "value investing" in
the coin space is to acquire coins that might have been graded
too low or coins that are more rare than other similarly priced
coins. For instance, a 1905 Liberty nickel with a 65 grade
might cost $500 now, even though there might be only 157 other
1905 Liberty nickels with a 65 grade. This offers a better
margin of safety than a Morgan Silver Dollar that might have
a similar price but comes from a population of 3,000 to 7,000.
In the long run, rarity of population is the best predictor
of future price, much in the same way that cash flows are
the best predictor of a company's stock price.
If you don't have the time or acumen to build
and manage your own rare-coin portfolio, there are other ways
an investor can ride the potential returns of this investment
style. There are three public companies in the space that
together can be considered as a "Coin Index."
The first company, bulletin board-traded
Superior Galleries, is run by Mr. DiGenova, and is probably
the only pure play in the space. The company generates income
from coin auctions, retail operations (currently launching
online coin stores through Amazon and Overstock) and also
makes income from buying and selling coins ("proprietary
trading") for its own inventory. Additionally, the company
does high-yield, asset-backed lending, where coin collections
are the collateral. The company had over 50% year-over-year
revenue growth last year and generated cash from operations.
While Superior sells the coins, Collector's Universe (CLCT)
is the premier grader of coins. Charging a $6 to $200 fee
per item graded, the company also grades stamps, autographs
and other collectibles. Revenue was up 40% year over year
last fiscal year and income rose 200%.
Greg Manning Auctions (GMAI) is also in the
auction space, but in addition to coins, it sells baseball
cards, stamps, art and other rare items. In the past year,
revenue is up 22% year over year and income is up 96%.
Coins are here to stay, and like any product of inflation
combined with artistry and precious metals, will rise in value
forever. Make money off of money: the good life indeed.