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I’VE NEVER BEEN MUCH of a collector. As a kid, I tried collecting comic books for a short time. I found that, after I read them, I had little use for them. I stored the comic books in an open box in my closet, where their translucent sleeves attracted a thick blanket of dust but little interest.
Later in life, I started a small wine collection. I didn’t get too far. It turns out I drank the wine at a rate far quicker than I acquired new vintages. At least I didn’t need to dust the bottles.
Collectibles like comic books, wine, works of art, baseball cards and cryptocurrencies are considered alternative investments, and quite different from shares of publicly traded businesses.
A collectible has value solely because a group of collectors believes it has value. Its price fluctuates based on a number of factors like uniqueness, cultural significance, condition and prevailing fashion trends. A collectible’s value is what we might call “culturally constructed.” A collectible doesn’t “do anything,” so it has no intrinsic value—only a price.
Arguably, the U.S. dollar is a collectible of sorts, especially when it’s held in cash form rather than invested in, say, a certificate of deposit or a savings bond. The dollar has value because large numbers of people agree to use it as a medium of exchange. But one can’t eat dollars for nourishment, or plant it to bear fruit, or grow it into future building material. If we collectively stopped believing in the dollar, it would cease to have value. But the dollar’s status as the world’s reserve currency imbues it with a particular value that makes it quite different than a collection of Pokémon cards or your mother’s closet full of Beanie Babies.
Unlike a dollar, which as of this writing will earn you more than 5% interest in a money market fund, bitcoin earns nothing. Zero. It isn’t backed by any central bank or government authority. It has been likened to a “pet rock” by JPMorgan CEO Jamie Dimon.
Bitcoin doesn’t do anything. It’s a purely speculative bet on some fantastical deregulated future in which the governments of the world allow fiat currencies like the dollar, yen, yuan and euro to be “disrupted”—in other words, replaced— by a privatized collectors’ item. Bitcoin embodies the worldview of teenage boys who spend way too much time playing the video game Grand Theft Auto and opening loot boxes in Counter-Strike: Global Offensive. To borrow from an old Dead Kennedys song, bitcoin is “anarchy for sale.” Yet there are plenty of buyers and sellers who have created a market for the digital token and sent its price to the moon based on a story they tell themselves.
Gold is another example of a pet rock. Fear the crypto bros and their artificial intelligence bots are ushering in the end of the world? Buy gold, some say. Why? Gold has withstood the test of time as a store of value, they say.
While gold is a precious metal and has various industrial uses, it too fails the intrinsic value test. Gold does more than bitcoin, in the sense that it has an actual use-value, but that’s not saying a lot. The amount of gold on the planet is limited, which makes it rare, but scarcity alone doesn’t imbue something with intrinsic value.
In contrast to both gold and bitcoin, a wheat farm has intrinsic value because it produces a yield of wheat. People eat wheat to survive. The price paid for a bushel of wheat fluctuates based on a host of factors, but the farm’s value is derived from its capacity to produce wheat. In other words, the farm does something. The farm is an enterprise that produces a commodity. The farm also has the potential to grow and increase its yield of wheat. Unlike a collectible, in which price and value are indistinguishable, the farm has an intrinsic value potentially divorced from its market price.
For example, the market could determine that the world is oversaturated with wheat this year. A farmer who wanted to sell shares of his or her farm might need to accept a lower price than if wheat was in high demand. But as long as the farm maintained its capacity to produce wheat, and wheat continues to be a staple of the human diet, the farm would continue to have some intrinsic value. This kind of discrepancy between the farm’s price and its intrinsic value provides opportunity for active investors.
While I’m not an active investor, I’d rather my total market index fund own shares of an enterprise like a wheat farm than a collection of pet rocks. The successful wheat farm not only produces regular earnings, but also it possesses the potential to increase those earnings as the business expands. Pet rocks, on the other hand, may appreciate in price based on the stories their owners and celebrity shills tell. But pet rocks can’t reproduce themselves, nor can they grow. They are, after all, just rocks.
Jamie Seckington grew up on the beaches of Southern California listening to punk rock and raging against the machine. Decades later, he now lives a quiet life in north Idaho and reads HumbleDollar regularly. He has learned to appreciate the many ironies that life offers. Jamie’s previous article was Testing My Faith.
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Another well written article. Agree with every word. Quickly becoming one of my favorite Humble Dollar writers.
They say being a good investor takes patience. Perhaps being a good oenophile takes ever more.
Last fall, I asked myself about gold, the dollar, and the money supply. I did some research and found, basically, that gold, from 1 Aug 1971 (just after it was no longer backing our currency) to 1 Nov 2023, has had annual appreciation of about 7.6%. The Dow Jones, my proxy for stocks, appreciated about the same. The money supply, M1, increased about 8.6%. Thus, gold and stocks may be ways, over the long term, to keep up with Uncle Sam’s printing press. You can call gold a pet rock, but that pet rock has done quite well over time. Waterfront real estate also.
Which brings me to bitcoin. I began studying it, then investing in it slowly at first, then with more vigor since 2022. Call bitcoin whatever you want, but it’s not going away. The book Broken Money, by Lyn Alden, is a masterpiece in explaining the history of money, its inherent nature and use over time, why fiat currencies are problematic, and how bitcoin works as a new technology for money. At the end of the day, the U. S. can’t repay its debt, can’t balance its budget, and can’t default, so there is nothing left to do but inflate our way out of this mess by keeping inflation higher than the rate of interest. So the question is, how does one manage going forward in a financial world which may very different from the past?
History is a guide, not a rule. For instance you reference waterfront property, but rising seas, increased storms, reduced availability and increased cost of hazard insurance (and perhaps no availability) could change that dynamic. Who knows what stresses could impact bitcoin? Everything else of value has had an intrinsic, pragmatic use, or at least esthetic appreciation, vs. contrived creation. Bitcoin seems so much like Franklin Mint, china commemoratives, etc., that are bought on the assumption that scarcity secures value, whereas it is only demand that creates value – and no one wants that crap regardless of how beautiful or rare.
Enjoyed the article. Thanks
Nice article Jamie. I have similar thoughts on Bitcoin, gold, …. I’ve never understood the apocalytpic view of gold’s value. If the world goes to heck, I’d rather have canned goods.
My wife and I like wine, and I enjoy learning about it, and even making wine. A few years back I looked at my wine rack and realized that I had become a collector. I decide to stop buying and do more drinking.
I collected baseball cards for several years in the early/mid 50s when I was around 10 years of age. I had cards for all the great players of that era including rookie cards for some future HOFers. They were kept in a desk drawer at our home. Fast forward 30 years and old baseball cards were a valuable commodity. I had a neighbor who was a collector and he told me how valuable some cards were. I guessed that I had at least $10k worth of cards.
All excited, I called my mother and asked if the cards were still there. She said, “Oh no, I threw them away years ago”. Thanks Mom.
That was my only experience as a collector.
My father-in-law, who passed in 2007, had for over 40 years routinely purchased sheets of US Postage stamps thinking that someday they would be worth more than their face value. Unfortunately, after WWII, the post office discerned that exploiting stamp collectors was a way to help fund the post office and printed more than was needed, and the stamps have no value except when used for postage. By 2007, the use of metered postage machines meant that no businesses wanted stamps you had to lick.
As the executor/trustee for his estate, the question was what to do with $5,000 worth of stamps.
So, today, we are using two 25 cent stamps and one 18 cent stamps to mail the few letters that we need send these days. We will not run out in our lifetimes, and at the rate that postage prices have been escalating, in the future we may not be able to find room on the envelopes to place the stamps. Does anyone want a sheet of 100 three cent stamps?
Would the Kardashians be in the same investment category as Pet Rocks?
Asking for a friend.
Nice article. Reminds me of the differences between gambling (pure chance like roulette), speculation (where we believe a story which may or may not be true), and investing (which still has risks but is much more based on business fundamentals). I believe some folks confuse speculation with investing.
OldITGuy,
100% correct.
And there are even those who confuse gambling and investing.
So true.
Thank you for the interesting article. My collecting was sets of baseball cards, not individual cards. My investing is the same with Market wide Index funds instead of individual stocks.
Many businesses are similar but different. One might try to sell pet rocks while another buys land, excavates it, sells the soil, the rocks, and uses them to make concrete. The key is choosing the correct one, I choose to purchase both
Oh yeah, I remember you Jamie. You’re the guy that tried to tell me that the world isn’t flat! Another great perspective and article. Keep ’em coming brother.
Very interestingly perspective, very accurate as well. Yes, they are just rocks. I never could understand the actual value of gold or diamonds other than someone is willing to always pay more for them.
Don’t get me started on abstract or modern art That’s an even bigger mystery than Bitcoin.
Pollack and Rothko leave me cold. I was once in a Florida art museum and one room had a pile of garbage on the floor “art” with a name no less. Now that’s value.
Would your Mercedes have the same “intrinsic value” to you if it was painted purple or chartreuse?
A great deal, but I will stick to silver. My ten year old Mercedes has emotional value as well. That’s the only reason I have not traded it in, that and all models after 2014 are smaller with smaller trunks.
Richard, in the Art Institute of Chicago there is “Untitled, ” essentially a pile of candy, but with a story. https://www.artic.edu/artworks/152961/untitled-portrait-of-ross-in-l-a
PS Give me the Dutch masters any day…
We were at the Museum of Contemporary Art in LA with our son and his partner, who worked there. In a corner was a string of bare lightbulbs with a couple of the lights burned out. I commented to James that I didn’t ” get it”. He gave me a 10 minute explanation about the symbolism of the work…I still don’t get it.
I agree. I once took a drawing course with an “artist” who turned out to be an abstractionist. When I asked him to explain one of his paintings he ignored me the rest of the class.
Read the Painted Word by Tom Wolfe