Buy an 1839 Cent in XF or an MS65 '39D Jefferson Nickel?
WestySteve
Posts: 567 ✭✭✭
Another darn blog entry...this one is about internal rate of return
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Here's a hypothetical situation. Let's say you have $80 burning a hole in your pocket and you want to buy a coin. But imagine also that you're a collector like me. Though the artistry and beauty of the coins excite you...because after all, that's why you collect coins in the first place...you also demand a good return on the coins. Like even though money is tight, perhaps you can justify your purchase because the coins you buy will be purchased at a good price and you're thinking in the back of your mind that you'll start selling off your coins when you retire in 22 years.
So you go down to your favorite brick and mortar coin store and it's really busy! There is a sign in the window that says, "going out of business sale". Oh my God! Your world is crashing around your ears. So you go in and you see old Vick, the owner. You expect him to explain how the internet finally got to him and he couldn't compete. Instead, he's all smiles and tells you that he's won the lottery and is in a hurry to sell off his inventory and move to Florida. Great for him! Vick tells you that he's having a sale and all of the items have been discounted nicely. So you look around, and you see a couple coins that catch your eye.
One is an 1839 Large Cent. This is the Head of '38 Beaded Cords variety. It's in Extremely Fine condition, has original, unmolested surfaces, and it's on sale for exactly $80. It has a guide price of $110. Hmm...this isn't exactly making a killing on it, but its a good deal and you feel maybe you could sell it online for what you paid if you needed to. The other coin that you're interested in is a 1939-D Jefferson Nickel in Gem Uncirculated, MS-65. It's a typical Gem, but it is the key to the series. It is also $80. And coincidently, it also has a guide price of $110 in MS65 condition.
It's at this point that analysis paralysis sets in. "Gee, that nickel is the key to the series...but look at the classic beauty of the cent!" "What do I do?" "What do I do?!"
Then you notice that the cent is exactly 100 years older than the nickel. Is there any significance to that? Is it better to buy the older coin? It is 100 years older. It's gotta be rarer, right?
The 1839 cent is 100 years older, or 173 years old.. It's guide value is $110. The nickel is "only" 73 years old. It also guides for $110, but it's a "new" coin. Surely an "old" coin is better than a "new" one, right?
Not so fast.
Think of it like this: The 1839 cent has had 173 years to grow in value to its $110 guide price. But the nickel grew in value to $110 in only 73 years. It's really hard to estimate what a good starting price would be for each one, but it does seem like the 1839 cent is growing in value slower. So a question that comes to mind is what was that nickel worth...say....72 years ago. Was it still worth a nickel then, or did coin dealers value it at 10 cents because it was the key to a 2 year old series??? Maybe we can't answer that question, but we can approach it another way.
I have in my library, a 1990 price guide. This is the redbook price guide, the same one that quotes $110 for each of the coins in the 2012 edition. In 1990, the MS65 nickel was listed at $55.00. The cent was valued at $85.00! So in 22 years, the nickel doubled in the guide. Yet the cent only increased in value about 30%. If we assume that the rate of increase will continue for another 22 years when you retire, then the guide value of the nickel *MAY* double again to $220 and the large cent *MAY* increase another 30% to about $143.
***Caution...heavy math ahead**** (if math bores you, stop reading now)
So it seems that the nickel is rising in value faster. It is doubling in guide price every 22 years. What kind of return is that? I mean, what percent? Well, there is a really neat trick called "THE RULE OF 72s". The rule of 72s works like this. If you divide 72 by the interest rate, it should approximate the doubling time. Or stated another way, if you divide 72 by the the doubling time, it should approximate the interest rate of return.
For example, if a collectible doubles in value in 9 years, what is the percent return? Well, 72 divided by 9 equals 8. So the answer is 8%.
Another (harder) example, what about a collectible that increased in value by a factor of 8 in 30 years? Well, first, we need to figure out how many times it doubled. If it doubled once, it would be twice as expensive. If it then doubled again, it would be 4 times as expensive. If it doubled one more time, it would then be 8 times as expensive. So if an item is 8 times more expensive, it doubled 3 times, right? If it doubled 3 times in 30 years, then...on average...it doubled every 10 years. So now we know the doubling time....10 years. So 72 divided by 10 (doubling time) equals 7.2 years....or 7.2% return.
Back to our Jefferson nickel. It doubled in 22 years. It's doubling time is 22 years. So 72 divided by 22 is about 3.25...so around 3.25%. Our Jefferson nickel probably stayed ahead of inflation, but barely. And the cent actually lost value compared to inflation!
Something to consider is this. The nickel's guide value is $110, but you buy it for $80. So it seems like your nickel would give you 3.25% of $110 every year...so it should go up in value about $3.50 a year at first. That $3.50 per year is actually a higher percent of your $80 purchase...its probably about 4%. In other words, because you bought it cheaper, your return is higher, because you get the return associated with a value of $110, but you actually only spent $80.
Here's a simpler example. If an item worth $100 is going up in value 5% a year, and you bought it for full price, you'd expect to get 5% return on your investment. But if you bought it for half price, you would expect more return on your $50 purchase. This is because the item will go up $5 in value every year because it's worth $100 and growing at 5%. Yet, you only paid $50, so that $5 increase in value every year actually represents 10% of the $50 investment.
One more extreme example. An item worth $100 goes up in value 4% a year. In the short run, this means the value of the item should increase $4 a year. Now imagine that you cherry picked that item and purchased it for only $5. It will go up in value $4 a year, but you only paid $5 for it. You're getting a $4 annual return on your $5 purchase...thats an 80% return on your money!
You can see that the best way to boost your returns on your collectible "investments" is to buy them for way below guide and focus on things that are moving up in value faster. If you could buy that Jefferson nickel for half price, or $55, then you'd be making double the 3.25% rate of return we calculated....which is 6.5%. That's pretty good in an era when a savings account pays you only 1%. Maybe old Vick would consider selling you the Jefferson for $55 since he just won the lottery.
***********************************
Here's a hypothetical situation. Let's say you have $80 burning a hole in your pocket and you want to buy a coin. But imagine also that you're a collector like me. Though the artistry and beauty of the coins excite you...because after all, that's why you collect coins in the first place...you also demand a good return on the coins. Like even though money is tight, perhaps you can justify your purchase because the coins you buy will be purchased at a good price and you're thinking in the back of your mind that you'll start selling off your coins when you retire in 22 years.
So you go down to your favorite brick and mortar coin store and it's really busy! There is a sign in the window that says, "going out of business sale". Oh my God! Your world is crashing around your ears. So you go in and you see old Vick, the owner. You expect him to explain how the internet finally got to him and he couldn't compete. Instead, he's all smiles and tells you that he's won the lottery and is in a hurry to sell off his inventory and move to Florida. Great for him! Vick tells you that he's having a sale and all of the items have been discounted nicely. So you look around, and you see a couple coins that catch your eye.
One is an 1839 Large Cent. This is the Head of '38 Beaded Cords variety. It's in Extremely Fine condition, has original, unmolested surfaces, and it's on sale for exactly $80. It has a guide price of $110. Hmm...this isn't exactly making a killing on it, but its a good deal and you feel maybe you could sell it online for what you paid if you needed to. The other coin that you're interested in is a 1939-D Jefferson Nickel in Gem Uncirculated, MS-65. It's a typical Gem, but it is the key to the series. It is also $80. And coincidently, it also has a guide price of $110 in MS65 condition.
It's at this point that analysis paralysis sets in. "Gee, that nickel is the key to the series...but look at the classic beauty of the cent!" "What do I do?" "What do I do?!"
Then you notice that the cent is exactly 100 years older than the nickel. Is there any significance to that? Is it better to buy the older coin? It is 100 years older. It's gotta be rarer, right?
The 1839 cent is 100 years older, or 173 years old.. It's guide value is $110. The nickel is "only" 73 years old. It also guides for $110, but it's a "new" coin. Surely an "old" coin is better than a "new" one, right?
Not so fast.
Think of it like this: The 1839 cent has had 173 years to grow in value to its $110 guide price. But the nickel grew in value to $110 in only 73 years. It's really hard to estimate what a good starting price would be for each one, but it does seem like the 1839 cent is growing in value slower. So a question that comes to mind is what was that nickel worth...say....72 years ago. Was it still worth a nickel then, or did coin dealers value it at 10 cents because it was the key to a 2 year old series??? Maybe we can't answer that question, but we can approach it another way.
I have in my library, a 1990 price guide. This is the redbook price guide, the same one that quotes $110 for each of the coins in the 2012 edition. In 1990, the MS65 nickel was listed at $55.00. The cent was valued at $85.00! So in 22 years, the nickel doubled in the guide. Yet the cent only increased in value about 30%. If we assume that the rate of increase will continue for another 22 years when you retire, then the guide value of the nickel *MAY* double again to $220 and the large cent *MAY* increase another 30% to about $143.
***Caution...heavy math ahead**** (if math bores you, stop reading now)
So it seems that the nickel is rising in value faster. It is doubling in guide price every 22 years. What kind of return is that? I mean, what percent? Well, there is a really neat trick called "THE RULE OF 72s". The rule of 72s works like this. If you divide 72 by the interest rate, it should approximate the doubling time. Or stated another way, if you divide 72 by the the doubling time, it should approximate the interest rate of return.
For example, if a collectible doubles in value in 9 years, what is the percent return? Well, 72 divided by 9 equals 8. So the answer is 8%.
Another (harder) example, what about a collectible that increased in value by a factor of 8 in 30 years? Well, first, we need to figure out how many times it doubled. If it doubled once, it would be twice as expensive. If it then doubled again, it would be 4 times as expensive. If it doubled one more time, it would then be 8 times as expensive. So if an item is 8 times more expensive, it doubled 3 times, right? If it doubled 3 times in 30 years, then...on average...it doubled every 10 years. So now we know the doubling time....10 years. So 72 divided by 10 (doubling time) equals 7.2 years....or 7.2% return.
Back to our Jefferson nickel. It doubled in 22 years. It's doubling time is 22 years. So 72 divided by 22 is about 3.25...so around 3.25%. Our Jefferson nickel probably stayed ahead of inflation, but barely. And the cent actually lost value compared to inflation!
Something to consider is this. The nickel's guide value is $110, but you buy it for $80. So it seems like your nickel would give you 3.25% of $110 every year...so it should go up in value about $3.50 a year at first. That $3.50 per year is actually a higher percent of your $80 purchase...its probably about 4%. In other words, because you bought it cheaper, your return is higher, because you get the return associated with a value of $110, but you actually only spent $80.
Here's a simpler example. If an item worth $100 is going up in value 5% a year, and you bought it for full price, you'd expect to get 5% return on your investment. But if you bought it for half price, you would expect more return on your $50 purchase. This is because the item will go up $5 in value every year because it's worth $100 and growing at 5%. Yet, you only paid $50, so that $5 increase in value every year actually represents 10% of the $50 investment.
One more extreme example. An item worth $100 goes up in value 4% a year. In the short run, this means the value of the item should increase $4 a year. Now imagine that you cherry picked that item and purchased it for only $5. It will go up in value $4 a year, but you only paid $5 for it. You're getting a $4 annual return on your $5 purchase...thats an 80% return on your money!
You can see that the best way to boost your returns on your collectible "investments" is to buy them for way below guide and focus on things that are moving up in value faster. If you could buy that Jefferson nickel for half price, or $55, then you'd be making double the 3.25% rate of return we calculated....which is 6.5%. That's pretty good in an era when a savings account pays you only 1%. Maybe old Vick would consider selling you the Jefferson for $55 since he just won the lottery.
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Many members on this forum that now it cannot fit in my signature. Please ask for entire list.
not attached to, cause that could complicate things
Steve
It's called a joke.
"Keep your malarkey filter in good operating order" -Walter Breen
<< <i>if the World economy crashed and all you could get was face value you'd be ahead with the Nickel, even though it probably couldn't even buy you a glass of water. >>
If the world economy crashed, I'd think melt value, not face value, would likely be most relevant.
As I write this a nickel has a melt value of 5.5 cents. A large cent has 8.7 cents. Obviously a global economic meltdown could change those values, but in any event it's not clear that "face value" would matter at all, especially when talking about face value most recently backed by fiat.
Coin Melt values
<< <i>.................
Here's the best I can do. My '39 D and a Large Cent I have lying around:
I'm glad nobody pegged me on the concept of: "past results are not an indication of future results". I did try to stress that, but after re-reading it, I didn't stress it hard enough.
Nextly, I should have explained that this analysis is only valid for coins that have been around for a while...like more than 25 years. There needs to be a decent established track record.
Also, while '39-Ds are available by the roll, the growth is because are so many collectors putting together Jefferson Nickel sets relative to those looking to put together a set of Large cents. I think that's the different. Present company excluded, most people today only buy Large cents for their type collections. But Jeffersons are still being put together for the set.
I would choose the XF large cent, if I had to bet.
RMR: 'Wer, wenn ich schriee, hörte mich denn aus der Engel Ordnungen?'
CJ: 'No one!' [Ain't no angels in the coin biz]
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Box of 20
SeaEagleCoins: 11/14/54-4/5/12. Miss you Larry!
<< <i>All that from two data points per coin? Your analysis won't work because the coin market doesn't behave as cleanly as you want it to---one certainly cannot take two points (1990 and 2012, which define a line) and use these to predict the future as far as coins are concerned. There are cycles----sometimes the entire market crashes, sometimes just one or more series go out of favor. Go to a small B&M shop and ask to see middle date large cents and also gem Jefferson nickels. Shops that have any of the former typically have heavily circulated, beat-up (aka 'scudzy') coins. And note that many, if not most, large cent collectors are getting priced out of the early date large cents---they are moving to middle and late dates as a result. The correct financial choice is not obvious to me. >>
The exercise is to compare one against the other. Its not really two data points because the interest rate return was calculated from information 22 years apart and the rate was basically the straight line slope if you plotted it on a semi-log paper. An average IRR. Yes, the coin may have moved in fits and starts, but a 22 year span does smooth that out. Perhaps it was flat until a year ago and then doubled last year, but I doubt it. One could use more guides from in-between time periods to feel better about how smooth the curve is. But we all know that redbook prices aren't exactly "jumpy".
However, you can't argue with the fact that it took the Large cent 176 years to reach $110, yet the Nickel did it in 100 years less time...only 76 years. To me, thats 176 years of data.
But again, it was meant to be a "food for thought example". I used the same logic about 10 years ago when I got serious with Jeffersons. I'm glad I did.
Steve
<< <i>And note that many, if not most, large cent collectors are getting priced out of the early date large cents---they are moving to middle and late dates as a result. >>
They are definitely getting priced out of the early dates - not sure if they are moving to the middle and later dates as a result or not, but I hope so. The 'high prices' on the early dates drove me to collect high grade middle dates starting about 20 years ago. Those have changed little in value over the years, but the early dates continue to go higher and higher.
I couldn't find an example of the 1839 Beaded Cords variety in XF on ebay. So I widened my search to find any XF's of similar vintage with a comparable XF price. Found this one:
theycanbefound
It's a nice coin, and its probably really hard to find a particular cent in a specific grade, but if you want to find a nice type coin in a specific grade, they aren't so rare that they can't be found for guide prices. (yet) They may be "due to move". So might the Jeffersons. Who can say?
Likewise, here's a MS65 Jefferson
Jefferson
There was also one that sold in a competitive bid for only $61. I think what hurt it is that the photos were very fuzzy.
My Adolph A. Weinman signature
That, and I prefer copper.
Just buy what you like and if it goes up, better. One should know which they find more appealing, a jefferson nickel, or an old piece of copper.
What about the inherent inaccuracy of the Redbook (or any other price guide)? Buy/sell spreads and that for various coins they may be different? The non-linear rate of return on coins? Changing grading standards? Reversion to the mean? The possibility of zero or negative return for either coin? The possibility that the buyer missed a serious flaw on the coin or coins?
Nonetheless, I might use some of this pseudologic on my wife, the next time I get questioned for a large purchase on a coin, so I guess I should be thanking you.
<< <i>I decided to forego reading War and Peace again this evening and read the OP instead. I think that there are many assumptions, some naive and some dangerous, which make the whole exercise nearly worthless, especially to a forum full of mostly serious collectors. Actually, it may even be a disservice to younger and less experienced collectors, who might buy into the logic and arguments.
What about the inherent inaccuracy of the Redbook (or any other price guide)? Buy/sell spreads and that for various coins they may be different? The non-linear rate of return on coins? Changing grading standards? Reversion to the mean? The possibility of zero or negative return for either coin? The possibility that the buyer missed a serious flaw on the coin or coins?
Nonetheless, I might use some of this pseudologic on my wife, the next time I get questioned for a large purchase on a coin, so I guess I should be thanking you. >>
Ouch! I hope the readers are smart enough to realize that these are "ceteris paribus" arguments. Consider that all of your factors could actually cancel each other out too, rather than work together to get further off the mark. Anything COULD happen, but we can only go with the information we have at hand when we make a decision. The longer the timespan taken, the less influence those cited factors will have on the initial calculation of return rate...even if one of the coins just took a nosedive and the other jumped...these would still be smallish in the scheme of things. You do agree that a coin that takes an extra 100 years to reach the same price probably isn't increasing in value as fast, right? The ideas put forward are intended to be more helpful than a blind guess. In the end, that's what investing is...you use the information you have and take your best guess.
I have to say this because it was mentioned by you and others...an internal rate of return does not make a linear increase. If you plot it, you'll see it curves upward. For example, if an investment goes from $10 to $40 in 20 years, it's price doubled twice. It's doubling time is therefore 10 years, and by the rule of 72's that means it grows at 7.2%. Note that during the first 10 years, it only increases $10, but in the second 10 years, it increases $20. The increase, in dollars, is constantly getting larger, so the slope of the line, which is dollars over time, is getting steeper. Trust me...I actually did pass the Mensa entrance exam.
Steve
<< <i>I like the obverse toning on that 1939-D, I will take it! >>
Thanks. I think you've see it before. I'm going to have to reshoot it with my "better" camera and repost it. It has better color than the photo shows.
<< <i>1839 cent in XF no questions asked. The potential for a bajillion more XF or better large cents being certified is virtually none since most of the nice ones have already found their way into slabs (with the exception of those purposely kept raw by EAC enthusiasts.) Meanwhile, there are still quite a few uncertified 1939-D nickels out there in uncirculated grades. Over time, the population of this coin will only go up and up in Gem as more and more become certified. The population for better large cents might go up a bit too, but certainly nowhere near as fast as Gem 1939-D nickels. >>
Sorry for the triple play, but I thought your comment was very interesting.
Since both coins are valued the same, dollar-wise, in the guide, then roughly, the market considers both coins equally as desireable RIGHT NOW. So yeah, the real question is what will the market find more desireable in the future? If the trend with Jefferson nickels continues, it will become more valuable (of course). This implies that it has a faster growing base of collectors even though it's more common.
So the real question in my mind is...which population of collectors will grow faster? Will the nickel collector ranks double in size faster than the large cent collectors? Hard to say. One could go crazy trying to figure it out.
I'm with MikeInFL and tightbudget re: their reasons for choosing the copper over the nickel.
However, I do award points for your use of "nextly" and "ceteris paribus" (although, as a Latin phrase, the latter should have been italicized).
Keep up the good work.
<< <i>
<< <i>I like the obverse toning on that 1939-D, I will take it! >>
Thanks. I think you've see it before. I'm going to have to reshoot it with my "better" camera and repost it. It has better color than the photo shows. >>
I would love to crack that baby out and put it in my album collection. Let's see the better photos please!
My guess is that the population of type collectors will grow faster than the population of either Jefferson nickel or large cent collectors. If this turns out to be the case, then the large cent will win the valuation prize - there are fewer of them around.
My Adolph A. Weinman signature
<< <i>Nonetheless, I might use some of this pseudologic on my wife, the next time I get questioned for a large purchase on a coin, so I guess I should be thanking you. >>
Now that is useful information!
<< <i><< So the real question in my mind is...which population of collectors will grow faster? Will the nickel collector ranks double in size faster than the large cent collectors? Hard to say. One could go crazy trying to figure it out. >>
My guess is that the population of type collectors will grow faster than the population of either Jefferson nickel or large cent collectors. If this turns out to be the case, then the large cent will win the valuation prize - there are fewer of them around. >>
Well thought out. You could be right.
I don't think the "rule of 72" works for measuring the rate at which a collector coin should or actually has gone up in value.
Applying this rule while trying to compare price performance of two coins,each in different series, only serves to confound an already flawed premise.
I like this,posted earlier in this thread:
"Just buy what you like and if it goes up, better. One should know which they find more appealing, a jefferson nickel, or an old piece of copper."
I actually found a 1939 D nickel out of the change machine one day at the local laundromat.Put 50 cents in the machine,you get 10 nickels in return.Every now and then,a Buffalo nickel would be with the other nine nickels.The owner of the laundromat did not appreciate me and my buddy emptying his change machine of its nickels.It was 1964.
Well,I have this newly found 1939 D nickel,XF or so,a nice one,and hand it to my buddy to admire and what does he do? He was so jealous of my find that he threw my nickel onto the concrete floor of the laundromat,stepped on it and then ground it into the floor with his foot.
My 1939 D nickel now has a terrible gouge on Monticello from his senseless act.
I would buy the 1939 D Nickel and take my chances.
Whoever is careless with the truth in small matters cannot be trusted with important matters.
Knowledge is the enemy of fear
Here's a sensitivity analysis:
If the coin took a 25% dive in price right before you sold it, your net return would be 5.65%. If it jumped 25% right before you sold, you'd get 8.35%. Seems to me that a 7.2% is a decent estimate, all other things being equal.
Other food for thought: If that average "date and mintmark collector" has 30 large cents....and they quit the hobby...or (God forbid), pass away from eating too many cheeseburgers, it would take 30 type collectors to absorb their collection. Will there be 30 new type collectors entering the hobby for every date and mintmark collector who leaves?
Steve