Reading Bower's Book - Questions about "Optimum Collecting Grade" and Investing
BryceM
Posts: 11,857 ✭✭✭✭✭
So I bought "The Expert's Guide to Collecting and Investing in Rare Coins" by Q. David Bowers from the BST here and I've been reading through it. It's certainly interesting and has focused my thinking in a few areas. More than anything it has reinforced the importance of knowledge and experience when selecting coins to own. How do you obtain these traits? Sometimes by buying the wrong things at first I suppose. There are ways to "skip ahead" a few grades, but you really need to be in the game to get hands-on knowledge.
Now, before you start jumping to conclusions about me, let me explain my approach to collecting. I'm probably best described as a fairly new, trying-to-educate-myself collector who deeply enjoys the history behind the coins. I enjoy searching out "interesting" pieces. My primary focus has been to purchase coins I like, not necessarily coins that I think I can make money on. In order of importance, the thought of investing is probably the third or fourth reason I collect. All the same, I like to be smart in my purchases so that I might imagine some future return on investment.
Here's the real question: Bowers talks of many collections that have increased in value at a more-or-less steady rate of 8% per year, when viewed over long periods to exclude market fluctuations. That's a decent ROI for most investment classes. We all know that to realize this, collections must be held for a period of time - likely a decade or more - and they should be sold at the right point of a market cycle to maximize return. Most collectors buy, trade, sell, and upgrade so often that they continually pay transaction costs without the benefit of increasing value over time. Timing is important and it takes more experience than I will likely ever have to recongnize market trends as they are happening. He brings up frequently in his book that the BEST coins are the ones most likely to generate the best return over the long haul. Assuming you are smart enough to know a great coin when you see it, Bowers would not hesitate to set a new auction record in order to acquire a certain piece. It's also pretty clear that he would expect the best collections to produce the best ROI over the long haul.
OK, sure - I can accept that. Then, he seemingly contradicts himself. When talking of which series to invest in, he recommends staying away from those coins at the top of the "condition rarity" scale where the price jumps up quickly with small increases in grade. In the Peace Dollar series, for example, he recommends an "Optimum Collecting Grade of MS64. But, these aren't the types of coins seen in any of the best collections that he raves about in the first half of the book.
Ummmm. So which is it? From purely an investing point of view, is it better to collect a few truly remarkable coins, even if the price to play is steep, or is it better to play in shallow waters with nice, but easily acquired coins?
I haven't finished the book yet, but I'm guessing he never realy reconciles this. I'm not sure that by following his reccomendations you would expect the same financial success as the great collections which have done so well over time. When looking at almost any coin series, the coins that have made the strongest gains over long periods were the nicest, rarest coins in the series. This seems to be generally true for both key dates and "condition rarity" non-key coins.
I think I understand the idea behind his "Optimum Collecting Grade", but I don't see that he makes a strong case for the concept in the setting of collecting for the sake of investing. My guess is that the same money spent on a well-selected "box of 20" could be expected to do better than a collection of a few hundred well-selected "OCG" coins from a handful of diverse series.
What think you?
Now, before you start jumping to conclusions about me, let me explain my approach to collecting. I'm probably best described as a fairly new, trying-to-educate-myself collector who deeply enjoys the history behind the coins. I enjoy searching out "interesting" pieces. My primary focus has been to purchase coins I like, not necessarily coins that I think I can make money on. In order of importance, the thought of investing is probably the third or fourth reason I collect. All the same, I like to be smart in my purchases so that I might imagine some future return on investment.
Here's the real question: Bowers talks of many collections that have increased in value at a more-or-less steady rate of 8% per year, when viewed over long periods to exclude market fluctuations. That's a decent ROI for most investment classes. We all know that to realize this, collections must be held for a period of time - likely a decade or more - and they should be sold at the right point of a market cycle to maximize return. Most collectors buy, trade, sell, and upgrade so often that they continually pay transaction costs without the benefit of increasing value over time. Timing is important and it takes more experience than I will likely ever have to recongnize market trends as they are happening. He brings up frequently in his book that the BEST coins are the ones most likely to generate the best return over the long haul. Assuming you are smart enough to know a great coin when you see it, Bowers would not hesitate to set a new auction record in order to acquire a certain piece. It's also pretty clear that he would expect the best collections to produce the best ROI over the long haul.
OK, sure - I can accept that. Then, he seemingly contradicts himself. When talking of which series to invest in, he recommends staying away from those coins at the top of the "condition rarity" scale where the price jumps up quickly with small increases in grade. In the Peace Dollar series, for example, he recommends an "Optimum Collecting Grade of MS64. But, these aren't the types of coins seen in any of the best collections that he raves about in the first half of the book.
Ummmm. So which is it? From purely an investing point of view, is it better to collect a few truly remarkable coins, even if the price to play is steep, or is it better to play in shallow waters with nice, but easily acquired coins?
I haven't finished the book yet, but I'm guessing he never realy reconciles this. I'm not sure that by following his reccomendations you would expect the same financial success as the great collections which have done so well over time. When looking at almost any coin series, the coins that have made the strongest gains over long periods were the nicest, rarest coins in the series. This seems to be generally true for both key dates and "condition rarity" non-key coins.
I think I understand the idea behind his "Optimum Collecting Grade", but I don't see that he makes a strong case for the concept in the setting of collecting for the sake of investing. My guess is that the same money spent on a well-selected "box of 20" could be expected to do better than a collection of a few hundred well-selected "OCG" coins from a handful of diverse series.
What think you?
0
Comments
Buying the best coins there are is the best way to invest money, because other people will always want the best, not the duds on the market. If you buy a top pop coin, even if there are only 2 or 3 registry collectors interested in that series seriously (there are always more than that), there will always be a fight for that coin that will help it maintain or increase its value.
When he is talking about the OCG, in my opinion, he is refrencing the best grade to buy a coin to get the most coin for your money.
For example, if you take the 1882 Morgan dollar. In 65DMPL, according to PCGS, it is a $5,000 coin, but in 66 DMPL, it is a $25,000 coin. Now that is a pretty extreme example, but he is refrencing that if you were to buy the best 65 DMPL you could buy, for $5,000, you are getting an extreme bargain. You are getting close to a $25,000 coin for $20,000 less. I know my explanation is not totally clear, but I hope it helps a little.
As you can imagine, there are a lot of "moving parts" that you need to consider, especially including your budget and the price point of the coins you're buying.
Basically, my goal - as a collector - is, within the series that I collect, to buy the coins that most other sophisticated collectors want to collect. Therefore, I don't buy coins with "too much" circulation wear and I don't buy coins that are "top pop", because the audiences for these coins are much smaller than coins that are attractive XF-45.
I try to focus on coins that are really attractive for the grade. If I buy a really nice coin (say one that TomB likes), then I have a much greater chance of someone buying it from me at a profit that if I buy a coin that doesn't have as much eye appeal.
Bowers' point about buying the OCG coins is that many other collectors can afford to buy coins in that grade, whereas if you reach for a coin graded one point higher, the audience for that coin will be much smaller when you sell it.
Also, in today's coin collecting world, you have to be really careful about changing grading standards. For example, what would happen to your investment if you reach for an MS-65 coin, but when you sell it in 10 years, the "market" perceives the coin to be a "nice" MS-64 instead of an MS-65?
Also, you should be wary of that "8% a year" claim - don't forget, coins usually have a wider buy/sell spread than stocks do. Unless you're intelligent when buying a coin, you may have to wait a long time just to overcome the spread. (And, depending on the cycle, you may have to wait to overcome the spread anyway.)
I'd suggest that which way you go depends a lot on your goals - if you're putting together a set of Peace dollars, you may want to pay attention to the OCG. If, on the other hand, you're just buying a type coin, then you can afford to wait for the prettiest, most attractive, most in demand Peace dollar you've ever seen.
Check out the Southern Gold Society
Changing grading standards may help you more than hurt. Certainly since the advent of PCGS and NGC as respectable third-party grading services, the trend is for coins to move up and not down the scale, as I believe a loosing occured at least once. Because of our fixation with the higher number, the shift will most probably happen again. HOWEVER, knoweldge of what is strong of weak for the grade is VERY important, moreso if the standards shift and coins are to be regraded prior to selling.
Also, as a collector with some long-term skin in the game, I am certainly more interested in the ROI that equals the Return Of my Investment.
In your own opening post you state;
I think I understand the idea behind his "Optimum Collecting Grade", but I don't see that he makes a strong case for the concept in the setting of collecting for the sake of investing. My guess is that the same money spent on a well-selected "box of 20" could be expected to do better than a collection of a few hundred well-selected "OCG" coins from a handful of diverse series.
I've never really liked that concept (OCG), but it is valuable to some extent. There are grades that are out of reach to many, and very few play in the whale pool, and those prices are almost always set by those few select bidders and buyers, which can drastically change from year to year. Ceratinly top flight under-grades can do exceptionally well, but so can top-flight coins up and down the spectrum.
Much like stock investing, I think many winners in the coin hobbiest-investor game are focus investors. Whether that is focusing on a series, or type, or grade range, or look ... and then really understanding the market for that focus ... and further understanding the prevailing trends ... these will mostly define how financially successful that hobbiest-collector becomes with his holdings at the selling point. Like DaveG pointed out there are a lot of "moving parts".
A well-selected box of 20, that fit time-tested collector demand and reasonable affordability, selected for premium qualities and eye appeal for their grades ... in most cases would win over the few hundred well selected OCG in my opinion.
My 3c nickels worth ...
“We are only their care-takers,” he posed, “if we take good care of them, then centuries from now they may still be here … ”
Todd - BHNC #242
1) buy ultra amazing coins and build a set of them. When I built the seated dollar set, I doubled my money in 4 years.
2) buy ultra amazing coins for the grade and hold them a long time. You need the change in grading, the freshness and the wow factor to break down the price barriers.
3) buy an ultra rarity right and hold it for the right buyer. In a rising market, the ultra rarities almost always go up, up and up.
Note that number two is the option that most collectors will have to follow if they are wanting a financial return.
<< <i>Heres some clarification from what I have learned.
Buying the best coins there are is the best way to invest money, because other people will always want the best, not the duds on the market. If you buy a top pop coin, even if there are only 2 or 3 registry collectors interested in that series seriously (there are always more than that), there will always be a fight for that coin that will help it maintain or increase its value.
When he is talking about the OCG, in my opinion, he is refrencing the best grade to buy a coin to get the most coin for your money.
For example, if you take the 1882 Morgan dollar. In 65DMPL, according to PCGS, it is a $5,000 coin, but in 66 DMPL, it is a $25,000 coin. Now that is a pretty extreme example, but he is refrencing that if you were to buy the best 65 DMPL you could buy, for $5,000, you are getting an extreme bargain. You are getting close to a $25,000 coin for $20,000 less. I know my explanation is not totally clear, but I hope it helps a little. >>
Excellent thread to original poster!
And, I agree with valente151 you have given an excellent example of what took me seven years of collecting to figure out.
It was always in the back of my mind using this theory but I just could not get myself to stick to it
Now I am in the process of cleaning house and quitting my bad habits of buying something that is just soooo pretty only to find out later it may not have as much value
or loose money on the buying/selling process.
.
CoinsAreFun Toned Silver Eagle Proof Album
.
Gallery Mint Museum, Ron Landis& Joe Rust, The beginnings of the Golden Dollar
.
More CoinsAreFun Pictorials NGC
As for a series like Peace Dollars, where QDB might recommend 64's (at least on the keys), the truth may just be that there is no grade that currently offers a great opportunity for investors. In other words, the amazing coins are simply too expensive to justify an investment, and the less-than-amazing coins are too dull to ever pay off in a big way.
Doggedly collecting coins of the Central American Republic.
Visit the Society of US Pattern Collectors at USPatterns.com.
There ARE indeed lots of moving parts. Is it better to focus on one series and gain in-depth knowledge of that one series, or spread out a collection among various niches of the market to diversify and minimize exposure to one little slice of the collecting pool? Morgans and Peace dollars are reasonably hot right now. There are an AWFUL lot of them around though and I could easily see interest in them fading in a big way at some point. If you've got a world-class Morgan or Peace set you might be slammed.
Priorities are often conflicting too. If investing was the only goal, it would make the most sense to make very few well-planned moves to minimize the buy sell spread. Buying one or two great coins a year in a wide variety of series with an intent to hold them for 20 years would seem to be a good strategy. OTOH, for me personally this would be pretty tough since I like the thrill of the chase and one new coin per year wouldn't keep me interested.
Again, investing is NOT my primary or even secondary aim in this hobby, but it is an interesting concept to explore. I still think Bower's concept of the "Optimum Collecting Grade" is better suited to the average collector than to someone truly serious about investing in coins. Funny that drums this concept up so loudly in his book.
I agree that it makes some sense to buy the $2,500 MS64 instead of the $25,000 MS65 but it is entirely possible (even likely?) that the MS65 will earn a far greater return over a period of time. The MS64 might sell for $5,000 in 10 years but the MS65 might sell for $100,000.
I've sat down with pencil and paper and old copies of the redbook to look at what works, and I've found that the multiple between grades is what drives the OCG the most. If the price difference from one grade to the next is a factor of five, you probably won't get as much of a return as a factor of eight. But, it also depends on how expensive the coin is. If the coin is $100 in MS70, then the multipliers below it don't matter. The key is to figure out where price resistance exists relative to the series and the cost of the average coin in the series. For example, if it's reasonably affordable to put together a set of coins at MS65, then, most people will do that. If a key to the series is such that an MS64 coin costs triple of what the typical non-keys cost, and then the price jumps eight-fold for an MS65, then its reasonable that there would be a lot of demand for MS64 coins because MS65 is just too big of a jump.
Here's another concept that kind of blew my mind. For fun, I wrote down all the perceptable grade changes as increments on an X-axis. Then plot the price of those grades as the Y-axis. But...do this on a semi-log piece of paper. You'll see that the points generally fall in a straight line. But some points will fall under that best fit line. Those are relative bargains. And I've seen the redbook play "catchup" with those lower values.
....in other words, you can plot grade versus price on semilog paper, and you'll see that there will be some prices that don't fit the line very well....they are either too high, or too low...and time tends to correct those discrepancies, where they do exist. Even if that discrepancy is with the higher grades.
OK, now, take a look at your redbooks, and figure out why I stockpiled some 1926-S buffalo nickels in Fine-15 when I could get them for $100 or so.
Steve
<< <i>I haven't read the book, but it seems to me that there are many series in which the OCG would be 70 (or as close to 70 as you can get), and for which the absolute highest grades represent both the best value and have the best investment potential. I'm thinking about early coppers, colonials, errors, patterns, pioneer gold, virtually all world coins, for starters. All of these series have the advantage of not requiring insane premiums for additional points on the grading scale. ... >>
One of the reasons I love collecting world coins - I can usually afford the highest grades when they appear on the market.
Amat Colligendo Focum
Top 10 • FOR SALE
"buy the coins you like in the price range that suits your finances"
coins trump grades and always will
coin collecting is about coins
Why is that? Because it is an expectations game, if enough money is chasing the top coins believing they are going to increase even more in value, at some point, someone gets left holding the bag. In most areas of investing, performance chasing eventually leads to poor returns, sometimes terrible returns. Then there is overpaying. For those that can not grade, who do not have superior access, with poor market knowledge, that group is the most likely to over pay and become bag holders.
A novice is best off ignoring the investment side, and focusing on the hobby aspects of learning to grade better and developing closer relationships with dealers and collectors to get better access to better coins at better prices. More money tends to be made or lost on the spreads and quality factors, than on the price guide increases (or decreases). The market knowledge will come, and is best learned away from books.
As for the hobby side, I always write: collect what you like (with hobby money), and enjoy the hobby. An average U.S. coin collector might break even after five years, any more than that is above average. My opinion is that novices expecting more than break even, are likely going to be disappointed. The 8% return mentioned in the book is hindsight selective, and also selective in terms of picking some of the most knowledgeable collectors ever. Anyone can play any investing game very well in hindsight, especially when only picking the top people in that field, and no one, but no one knows the future.
RMR: 'Wer, wenn ich schriee, hörte mich denn aus der Engel Ordnungen?'
CJ: 'No one!' [Ain't no angels in the coin biz]