Feb

19

I had a nice dinner with Dimson and he told me that the long term real rate of return for almost everything he's studied outside of stocks is 2.8 % including art, housing, and stamps. He points out that bond prices seem to show much more momentum than stock prices, and doesn't believe there's a drift in bond prices. I always learn something from him.

The previous day I had dinner with Martin L. Leibowitz of "inside the yield book " with Homer, and he pointed out that in many cases it's better not to show earnings at all than to show earnings because if you show them, you might get a p/e attached to it. He's a great fan of musicals and we saw The Festival of Song together. I have much to learn and I enjoy making new friends.

Also learned a lot from a visit with TK Marks who told me about how the locals could cushion enforcement actions, the importance of being on the settlement committee, and who is on it, and how a 25 million loss on a barrier option against a former brokerage now a bank was handed and handled and the fine related thereto derived. I have much to listen and learn about.

Rocky Humbert comments: 

These ultra-long term real return results are fairly consistent with the published research on the subject and there are good explanations for why collectible prices (and housing) track demographics and population growth over long periods of time.

However, these results are a bit misleading because they do not take into account (1) transaction costs; (2) tax policy; (3) personal utility/consumption value; (4) generational investor preference.

Any honest collector will acknowledge that round-trip transaction costs of between 10% and 20% should be expected. Hence it can take 5 to 10 years just to recoup the vig (in real terms.) This represents the auction house premium, dealer/broker commissions and other fees and expenses. One should also add annual insurance costs of between 0.25% and 1.0%. Mitigating this is the fact that the collector/owner hopefully gets some intangible utility/pleasure from gazing at the asset — and this value is unquantifiable. So, I'd argue that the ultra-long-term real return is actually much greater than the measured return that Dimson cites (because of the utility value of ownership.)

One must also consider present and future tax policy. I submit that some portion of the gold price ascent over the past decade is attributable to more aggressive global tax enforcement and the loss of Switzerland as an anonymous safe haven for cash. Similarly, some portion of the decline in real estate prices must be attributed to a generally rising real estate tax burden. The use of technology for tax authorities to monitor/intercept cash transactions has never been greater, yet the ability of tax authorities to monitor the transfer of gold and collectibles is no different today than 100 years ago. This bodes well for assets that can be invisibly transferred.

What's most striking about all of this research is the generational mean reverting nature of returns. It seems to take about a generation for investor preference to reach peaks and troughs — the current inflation debate is a good example of this. Hence, anyone who bought gold in 1981 has a lot in common with the guy who bought a Miami condo in 2006. And anyone who is buying big pharma stocks today has a lot in common with the guy who was buying small cap value stocks in the 1990's. It seems to take 10 to 20 years for the fundamentals and investor preference to shift. While Keynes noted, "In the long term, we're all dead," there are important lessons here for what we SHOULD be buying (big pharma/nikkei) and what we should NOT be buying (Green Mountain Coffee, Netflix, 30 year bonds) for our children's UGMA accounts.

Stefan Jovanovich writes:

R-Man

Such common sense advice will earn you the rewards of (pick one or more): (1) scorn, (2) disdain, and (3) outright rejection. As you might have guessed, that makes me eager to join your club . JNJ, SNY and MRK are my favorites. I think a combination of big pharma and small biotechs/instrument companies together makes sense. GILD, RTIX, ANGO are the other end of my barbell. To double the bet, I am also invested in MDT, PMC and GILD - which fit neither category. Those 9 companies are nearly half of the ones that are on my current "Top 20". Here are the others:

ISH
EXC
ETR
PPL
GLT
CHL
GFA
CME
WDC
STRL

The 20th pick is Cash– which remains, by far, my largest investment– as a cowardly lion proxy for being short commodities and bonds.

All the best.

S-Man.

T.K Marks writes:

Rocky's mention of collectibles as an asset class brings to mind an informative Tom Wolfe book that I read many years ago, The Painted Word.

Inside which he skewers not only the monopoly of modern art theory, an oligarchy of opinion makers comprised of a handful of collectors, dealers, critics, curators,and auction house operatives, but the pricing paradigm of works as well.
Wolfe's criticisms were contemptuously tossed aside as rank philistinism by established interests, however much they had to lose. Be that as it may, he raised some interesting if provocative questions about the commoditization of aesthetics and the art world's version of the settlement committee.

It works like this: An emerging or posthumously appreciated artist's works are quietly acquired on the relative cheap. After which, a web of vested interests pull off the art world's version of the time-honored pit trading version of banging the close. That is, waiting till the last possible moment in a trading session and then faux-frantically bidding for everything in site. Provided, of course, one has the fiduciary wherewithal to do so.

One might reflexively think that such an ad hoc distortion would revert back to the mean in ensuing days. But homeostasis doesn't necessarily always happen as a matter of course with physical commodities, as ersatz drift can be plausibly manufactured over time. Including relationships in cross-market terms. So why should the works of an artist that are somehow treated by the seeming cognoscenti as fungible a good as exchange-grade soybeans or silver be any different?

Or for that matter, how is the work another artist thought to be from a similar school not affected in cross-market terms?

Wolfe's thinking would have it that in both cases of abstract art and silver futures there's a lot of leverage involved. With metals one lays out margin. But in art, one may buy a work at auction way beyond estimates from one of the big houses. They just banged the close.

Rather loudly actually, and by doing so drove up the value of their quietly accumulated inventory.

They also did it on margin. Say one supposedly lays $50m for a work previously thought not to fetch nearly as much. It would be wrong to assume that a check was written by the acquiring party in that exact amount, as the auction-established value of the work is now used as collateral to secure the purchasing loan.

So something with no underlying intrinsic value other than the artful arbitrariness of a few is deemed as good as the full faith and credit of the U.S. Treasury.

At its worst, it's a not-so-opaque way of creating value out of whole cloth. No less a curious way of legally shifting large piles of money from one entrenched interest to another.

One is reminded that long before Tom Wolfe considered these very same questions, Norman Rockwell did so as well. It may be the definitive portrait of irony, the cover of a Saturday Evening Post from back in 1962.

First brought to my thankful attention from Prof. Pennington some years ago under the auspices of this colloquy, it leaves one thinking: Does the nattily attired gentleman see Pollockian splashes of brilliance, does he see a related investment opportunity, or is he merely the picture of high-brow posturing?

There are some situations in life that one can know enough about to realize that it's probably impossible to know the rest of and this is probably one of them.


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