Is art an investable asset class? How about jewelry or swiss watches?
There are many people who may have made money by buying fine art, collecting classic cars or trading in antiques, but does that mean that these should be considered asset classes?
In a previous post we talked about how it is important to find the intrinsic value of an asset to be able to determine whether you are making an investment or are speculating on it.
Key to this was having a clear picture of how to determine the fair value of the asset in an objective manner.
When thinking about whether something is an investable asset class, I like to check for the traits that Barry Ritholtz, a US based RIA, has identified. The asset class must:
- Be readily identifiable and easily objectively valued
- Have a reliable method for pricing and executing transactions
- Be Fungible – any one unit of them can be substituted for any other, and
- Be legally identical – all are subject to the same laws and regulations
When you think about an investment in a gold coin versus jewelry and put it through this checklist, you will realize that it is much easier to objectively value the coin versus the jewelry. With jewelry, each piece is unique, and this therefore introduces a lot of subjectivity in the pricing of the asset. Beauty is in the eye of the beholder as they say.
Coming back to the question we asked in the beginning of this post. Even though there may be many examples of people that have made money buying art, jewelry, or other such items, you need to understand how repeatable this process is.
For most investors it is far better to first build a portfolio which is based on assets that can be objectively valued and try to invest in a manner where the odds are stacked in their favor in terms of intrinsic value. Luck always plays a role in investing, but the more subjectivity you introduce into the assets you buy, the more you are leaving your investments purely to chance.