Philatelic investment - AbsoluteAstronomy.com

Philatelic investment is investment

Investment

Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...

in collectible postage stamp

Postage stamp

A postage stamp is a small piece of paper that is purchased and displayed on an item of mail as evidence of payment of postage. Typically, stamps are made from special paper, with a national designation and denomination on the face, and a gum adhesive on the reverse side...

s for the purpose of realizing a profit. Philatelic investment was popular during the 1970s but then fell out of favour following a speculative bubble and prices of rare stamps took many years to recover. Investing in rare stamps requires a high degree of expertise and can be very risky for the novice. Rare stamps are among the most portable of tangible investment

Tangible investment

A tangible investment is something physical that you can touch. It is an investment in a tangible, hard or real asset or personal property. This contrasts with financial investments such as stocks, bonds, and other financial instruments....

s, take up little space but require careful storage as condition is one of the most important factors in determining the value of a stamp. Other tangible investments include art, antiques, precious metal

Precious metal

A precious metal is a rare, naturally occurring metallic chemical element of high economic value.Chemically, the precious metals are less reactive than most elements, have high lustre, are softer or more ductile, and have higher melting points than other metals...

s, rare coins and many others that are all termed alternative investment

Alternative investment

An alternative investment is an investment product other than the traditional investments of stocks, bonds, cash, or property. The term is a relatively loose one and includes tangible assets such as art, wine, antiques, coins, or stamps and some financial assets such as commodities, private equity,...

s. Interest in stamps as an investment has increased recently as traditional investments have faltered and investors have sought alternatives. The increasing age of the population in western countries has also been credited with a resurgence in interest in stamps.

A British auctioneer recently warned: "Unless you know what you are doing – and this only comes with many years of experience – it is very difficult to buy sensibly and at the right prices. When you buy on a retail basis, you have to overcome the profit margins the dealer has built into his selling price, plus VAT

Vat

Vat or VAT may refer to:* A type of container such as a barrel, storage tank, or tub, often constructed of welded sheet stainless steel, and used for holding, storing, and processing liquids such as milk, wine, and beer...

. When you sell, you also have to overcome dealing charges, whether you sell to an auction house or a dealer. That would consume an awful lot of value. To overcome that mark-up and sell at a profit would require quite a few years of appreciation."

Before investing

A stamp investor should have a good knowledge of:

Classification
Categorization
Categorization is the process in which ideas and objects are recognized, differentiated and understood. Categorization implies that objects are grouped into categories, usually for some specific purpose. Ideally, a category illuminates a relationship between the subjects and objects of knowledge...
Condition grading
Authentication
Philatelic expertisation
Philatelic expertisation is the process whereby an expert is asked to give an opinion whether a philatelic item is genuine and whether it has been repaired or altered in any way....
Handling and storage
The stamp market
Philatelic literature
Philatelic literature
Philatelic literature is written material relating to philately, primarily information about postage stamps and postal history- Background to philatelic literature :...

The prospective investor will also benefit from attending stamp clubs, auctions, philatelic shows and having a relationship with a knowledgeable dealer.

The value of a stamp

The value of a stamp is determined by a number of factors including:

The number available on the philatelic market.
Demand from collectors inside and outside the country of origin.
Condition
Stamp condition
The condition of a stamp, used to grade postage stamps in the stamp collecting market, is superficially expressed by how well centered the stamp is and how wide the margins of the stamp are:...

. A damaged stamp is worth only a fraction of one in fine condition.
Thematic appeal.
Perceptions as to current or future value.
Current events. A news event may temporarily increase values, for instance the death of Diana, Princess of Wales.
The place of purchase or sale. Values vary according to where the transaction takes place. Prices vary from country to country for the same stamp and prices realised at an auction may be different to those charged by a dealer or in a private sale between collectors.

Buying stamps

There are a number of places where a prospective investor can buy stamps:

The internet.
Auctions.
Stamp dealers.
A few specialised stamp investment firms.
From a collector in a private sale.

Stamps purchased for investment are usually old classic stamps in fine condition, such as British Victorian stamps or American stamps from before 1900. These may be thought of as the equivalent of buying a blue chip share or an old master

Old Master

"Old Master" is a term for a European painter of skill who worked before about 1800, or a painting by such an artist. An "old master print" is an original print made by an artist in the same period...

painting. Although future prices may vary, as long as there is a hobby of stamp collecting there is likely to be good demand for these stamps.

Stamps typically included in an investment portfolio will be rare and priced in the thousands of dollars or pounds but they will probably not be the greatest rarities as those unique items are typically sold at public auctions and may reach prices approaching or exceeding $1 million US.

Some collectors and investors also try to anticipate future trends and buy low now, this however, is difficult to get right and may take a long time to pay off. Investors may try to identify a developing country with an expanding middle class who may have the time and money to pursue a hobby like stamp collecting as the developing domestic demand may help to force prices up. Recent examples have been India and China.

Some firms are developing collective or mutual fund

Mutual fund

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...

s where money from many investors is pooled and each investor owns shares or units in the fund. The fund then invests the money in stamps.

Size of the market

Unlike stocks and shares, the majority of transactions in the philatelic or stamp market take place informally, by mail order or in retail environments, and therefore the size of the market is hard to determine. The market is certainly much smaller than the financial markets but it is not trivial. It has been estimated at £5 Billion. The majority of these transactions, however, are likely to be low value items rather than investments. In a 2007 interview, Mike Hall of Stanley Gibbons estimated that "About $1 billion of rare stamps trade annually in the $10 billion-a-year stamp market." The number of collectors worldwide was estimated at 30 million in 2004. In 2009, Adrian Roose of Stanley Gibbons estimated the figure at 48 million including 18 million in China. It is not known how many of these are serious collectors.

The Merrill Lynch/Cap Gemini Ernst & Young World Wealth Report 2003, based on 2002 data, showed high net worth individuals, as defined in the report, to have 10% of their financial assets in alternative investments. For the purposes of the report, alternative investments included "structured products, luxury valuables and collectibles, hedge funds, managed futures, and precious metals". By 2007 this had reduced to 9%. No recommendations were made in either report about the amount of money investors should place in alternative investments, nor were stamps specifically mentioned.

Historical data

While there are long term records of retail stamp prices, the first catalogue being prepared in 1862, there is little objective historical data about the past performance of stamps as investments. No long term indices like the Dow Jones

Dow Jones Industrial Average

The Dow Jones Industrial Average , also called the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow...

or FTSE Index

FTSE 100 Index

The FTSE 100 Index, also called FTSE 100, FTSE, or, informally, the footsie , is a share index of the 100 most highly capitalised UK companies listed on the London Stock Exchange....

exist, although some figures have started to be compiled by Stanley Gibbons and Stamp Magazine in the UK.

Since 2002, Stanley Gibbons have compiled a SG100 Stamp Index based on retail and auction prices for the "top 100 most frequently traded stamps" in the world. This index now appears on the Bloomberg website. In 2004 they also launched an index of 30 rare British stamps. According to Stanley Gibbons, rare stamps have averaged an annual compound return of 10 per cent over the past 50 years, however, it is important to remember that this figure has been calculated using backtesting

Backtesting

Backtesting is the process of evaluating a strategy, theory, or model by applying it to historical data. Backtesting can be used in situations like studying how a trading method would have performed in past stock markets or how a model of climate and weather patterns would have matched past...

as stamp price indexes are a recent innovation. In addition, the prices in the indexes are based in part on Stanley Gibbon's own retail price lists.

Stamp catalogue prices are not considered reliable as they are nothing more than estimates at the top end and represent a retail selling price at the bottom end of the market. Auction realisations may be more reliable but are difficult to use as the investor has to personally analyse the realisations from many auctions over a long period of time in order to come to any useful conclusions. While most trading in shares is on a recognised stock exchange and takes place transparently in public, that is not the case with stamps where only auction transactions take place in public view.

Stamp investment scandals

There have been a number of scandals in this area over the years.

In Ireland in the 1950s, Paul Singer, a Bratislavian Doctor of Philosophy, ran a Ponzi scheme

Ponzi scheme

A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...

under the name Shanahan Stamp Auctions. The scheme collapsed when a mysterious robbery took place at the company's office on 9 May 1959, the eve of a major auction, when more than ₤300,000 worth of stamps went missing. Singer was charged with fraud, but was acquitted and vanished.

In the 1970s, the bursting of a speculative bubble left investors unable to realise their investment at the price they had paid. Prices took decades to recover.

In 2006, two Spanish firms Afinsa

Afinsa

Afinsa was the world's third largest collectibles company, after Sotheby's and Christie's, and with its controlling stake in Escala Group operates in many European cities, the USA and Asia...

and Forum Filatelico collapsed and left around 350,000 investors with investments worth as little as 10% of the price they had paid.

Selling stamps

There are a number of ways to sell stamps, as there are to buy, and each has its own advantages and disadvantages.

Auctions may achieve the highest prices but the costs are also high.
Dealers may be able to act quickly or pay cash but are likely to offer a price at least one third below the normal retail sale price for the stamp as the dealer needs to make a profit on the transaction. Some dealers aim to double their money on every transaction.
Private sales. Many sales take place between collectors, however, an investor who is not a collector is unlikely to have the personal contacts to secure such a sale.

There is no equivalent of the stock exchange

Stock exchange

A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...

for stamps.

Risks and disadvantages

Investing successfully in stamps requires a high degree of specialised knowledge. This takes time to acquire and there are many pitfalls for the inexperienced investor. Some of the risks and disadvantages are:

The return is not guaranteed.
The cost of buying is high compared to most other forms of investment.
The cost of selling is also relatively high.
Purchases may be liable to a sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....

, for instance VAT in the European Union, which the buyer may not be able to reclaim.
Stamps may need to be expertised, for a fee, to ensure that they are what they appear to be.
As tangible items, stamps may need to be insured and are at risk of physical damage or deterioration.
The future market for the sale of philatelic items is uncertain. The demand for philatelic items comes principally from collectors, not investors, and the majority of collectors are aged over 50 in western countries. There are relatively few younger collectors in Europe and North America that would be expected to be the buyers of the future, although anecdotal evidence suggest that may not be the case in India, China and other developing countries.
In the longer term, the future existence of postage stamps may be in doubt as people use electronic communications more and more and send fewer letters. If stamps are no longer sold for postage they may cease to be collected and if they are not collected, the vital collector demand that underpins the investment market may disappear.
Stamps have little intrinsic value, they do not have the raw material value of a gold coin, they do not represent a share in a business like equities, and they usually lack the enduring visual appeal of a great work of art.
Stamp investment is relatively unregulated compared with, for instance, investments in a mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...

and investors may have little protection if things go wrong.
The size of the philatelic market is small compared to the value of the stock market and vulnerable to aggressive buying by speculators which may distort prices. This happened in the 1970s when a speculative bubble was followed by a collapse in prices.
Stamps do not generate any interest or dividends.
It may be impossible to determine the current market value of your stamps without selling them.
Stamps packaged as "investment portfolios" may be charged at prices higher than their normal market value.
Stamps may be relatively illiquid as finding a buyer may take time.
There is very little reliable historical information about the performance of stamps as investments.
A long term view is necessary. A quick purchase and sale is unlikely to be profitable.
When more traditional investments are doing well, interest in alternative investments like stamps may quickly wane.
Special instructions will need to be given to spouses or executors in the event of the owner's incapacity or death as they may be unfamiliar with philatelic items.
Stamps may take time to be sold unlike cash, equities or mutual funds which can usually be realised with minimal delay.

Advantages

Stamps are not highly correlated with other forms of investment and may therefore represent a valuable diversification within a wider portfolio.
Stamps are highly portable stores of wealth and are easily transported over national borders.
An ageing population in western countries means that investors approaching retirement may resume childhood hobbies.
There are millions of enthusiastic stamp collectors around the world creating a global marketplace.
There is a finite supply of classic stamps.
Stamps are not a financial asset and so may perform better than cash in times of high inflation.
As a tangible asset, a stamp cannot go out of business like a company quoted on the stock market.
Stamps are a relatively confidential investment. Unless bought at a public auction, ownership is private and there is no public register as there is for many investments in equities.
The investor is able to hold and admire his investment, and enjoy its aesthetic
Aesthetics
Aesthetics is a branch of philosophy dealing with the nature of beauty, art, and taste, and with the creation and appreciation of beauty. It is more scientifically defined as the study of sensory or sensori-emotional values, sometimes called judgments of sentiment and taste...

aspects.
Many stamps have an interesting historical background.

Regulation and investor protection

Stamps purchased for investment do not normally have any special regulatory protection for the purchaser. In the United Kingdom there is no regulation of this area at all from the Financial Services Authority

Financial Services Authority

The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...

. Rules elsewhere may vary. Where investment is collective through a mutual fund there may be some regulation of the activities of the fund depending on where it is based.

External links

The source of this article is wikipedia, the free encyclopedia. The text of this article is licensed under the GFDL.