What is a Collectable?

Unfortunately, the word "collectable" has become way too common in our society.

Everything from decorative plates to special edition DVDs to motorcycles slap that word on them in a desperate attempt to justify a premium price on a crappy, mass-merchandised depreciating liability!

I mentioned collectables as a type of asset that you should look to buy (please see: "Saving is boring, buy assets instead!"). But it's very important to actually define what a collectable is.

There is one, and only one factor that determines if something is a collectable and here it is:

SCARCITY

That's it, nothing more. If there are a million versions of your collectable item, guess what? It's not a collectable and will not be worth anything.

In our modern, post-industrial society it's almost impossible to find items that are truly scarce. In fact, the only time we come across any scarcity - it's usually manufactured that way. Think about iphones, or the Nintendo Wii, or Tickle Me Elmo. The manufacture of all these items are deliberately held back to create a false scarcity (it also generates publicity which is good for driving future sales).

Most items that are scarce are items that haven't been in production for years. Over the course of time, as things wear out, they are relegated to the scrap heap. The few working models that are still in existence (and in good condition) become steadily more valuable with the passage of time. Examples include classic cars, vintage clothing or antique furniture.

You are never going to find anything collectable in Parade Magazine, or on QVC or at Wal Mart - NO MATTER WHAT THEY SAY! Don't waste your money.

You also have to be very careful about bubbles forming in fake collectables. Probably the most famous example of this is Beanie Babies. In the late 90s the market for these little, plush stuffed animals went crazy. Prices were bid up to unbelievable levels relative to their actual value. Parents stupidly bought tons of these mass manufactured items as part of their kid's college fund.

True story, we actually had two little yellow Beanie Baby ducks that my wife found out were quite "rare". We contacted several collectors in our local market in 1998 (this was before ebay really took off) and were able to sell them for - I swear - $750 each! We then used that money to buy a new refrigerator for a house we just bought. I'm glad we didn't hold onto those things because today I doubt we could get $20 for them.

Then, predictably, the bottom fell out of the market and the Beanie Babies went back to their true value, which was almost nothing. In fact, this past October, we were at the local elementary school for a Halloween fair. One of the carnival games was a fishing game where you could win a random prize. I guess some parent got tired of holding hundreds of worthless Beanie Babies in their house because they were giving away tons of them as a random prize (not even a premium prize for winning one of the skill games) - it only cost 2 tickets and my daughter ended up with a little white seal.

Comic books were another similar kind of bubble that burst in the mid 90s. I had been a comic book collector since I was in grade school. Interest in comics had been growing for years, but it seems like it hit a manic stage when they killed Superman in 1992. Then the "special editions" and "collectable" issues multiplied like locusts and people snatched them up just as fast as they could. It was crazy, there were foil embossed covers, multiple covers of the same comic, little trinkets sealed in a bag with the comic (and don't you dare open that plastic bag or it will be worthless!). Prices on comics, both new and used, skyrocketed. Finally, the whole thing collapsed under it's own weight and all these really expensive comics became nearly worthless BECAUSE THERE WERE TOO MANY OF THEM. I've got boxes of comics at home. Some of them do have some value, but most aren't worth anything. I've been thinking about saving a few of my favorites, selling off the rest for as much as I can get and go out and buy one or two truly collectable comics from the golden or silver age (that's the 1930s to 1960s).

If you decide to dabble in collectables, it is probably the highest risk asset you can own. True collectables have a very limited market, there's only a small pool of buyers and sellers, and so that makes them very illiquid. On top of that, you have to maintain the item and worry about it becoming damaged or stolen.

Still, if you're in the right place at the right time, you can make a killing dealing in collectables.