Investment in stamps - a professional's viewpoint

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The following article was written by
Philip J Milton & Company Plc
Head Office: Sterling House, 17 Joy Street, Barnstaple, Devon EX31 1HE
Telephone (01271) 344300
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and reproduced with their permission and whose opinions they are.

This article is reproduced to assist clients in forming their own judgement and the fact of its publication does not imply either agreement or diagreement with those opinions.

" INVESTMENT IN STAMPS - AN INCOME IN RETIREMENT?

Stamps can be an excellent investment. However, I and several in the stamp trade as well as leading collectors, are concerned that when stamps are promoted principally as an investment, then difficulties are likely to appear in the market.

Stamps and indeed other collectibles should be accumulated because of the enjoyment and interest they provide to the collector. The most important "return" will be through the appreciation of both the hunt and the enjoyment of assimilating a collection and viewing it, perhaps moving on to displaying it and talking about it to Societies and exhibiting it for prizes.

I am a keen stamp collector, a passion which started when I was seven and something which has evolved over the years, both as I have developed and as have my interests and financial circumstances, no doubt! I have gathered a tremendous knowledge through this pursuit - not only about stamps but about history, geography, current events and so many other subjects all related to these miniature works of art that I have collected. I have built some very enjoyable relationships with dealers, collectors and auction agent alike. I have even bought items because I felt they were cheap, with the objective of selling them on later (although often, "later" never seems to arrive as I never have the time...!). I have accumulated some interesting items in my specialist fields (which in themselves evolve over time, however much I might not have realised it when a particular collecting tangent demonstrated itself!). As yet, I have not disposed of anything which was of greater interest to me long ago although with current high prices, perhaps I should assess things more carefully at present!

My interest has been a little world into which I have been able to escape, something which has helped preserve my sanity over the years, a hobby in which very tiny doses are possible or quite extensive time, a pastime which can be picked up or equally dropped very easily. It demands as little or as much capital as the collector desires and often with quite little space needed. It is an accessible interest for everyone and covering both able-bodied and disabled and where trade with others across the globe is as easy as one's letterbox - let alone the myriad of auction companies with regular sales.

The majority of stamps I have acquired over the years has indeed increased in value. Stamps have proven to be a very good investment, some much more so than others. However, I did not collect as an investment although I have appreciated that the true value of stamps (and other popular collectibles) ensures they are likely to retain their real value and indeed increase over the years. That said, there are revolving fads, too, even within something as specialist as stamp collecting - in 1978 a particular bubble developed and I can remember simple unused British stamp sets from 1972 selling for £7.50 yet today, I might use them for postage, having acquired them at a recent auction for perhaps 70% of their 28 ½ p face value and without considering anything of the inflation since issue!

STAMPS AS A COMMODITY

We must not forget that stamps are just like any other commodity. They are not an enterprise like shares where other features (such as initiative, borrowed money and employment) work together to produce a return in excess of the initial stake. If there are more buyers than sellers of a particular product then the price will rise and the opposite is true, too. Obviously, the supply of a previously issued item is limited and to some extent, that availability will keep diminishing as the years pass - items will become lost or damaged and there will be fewer available for collectors. Condition is important, too. As a true collector, whilst some might want to challenge me, condition is not as sacrosanct as it might be to an investor - there are some collectors who buy items in perfect condition only and naively, they wait to fill a space with a perfect example of a rare item yet it does not exist in that condition! Meanwhile, they do not wish to soil their collection's pages with a sub-standard item even if it is unique! The famous Penny Black has a value (and there are different types of Penny Black and different conditions, etc) but we must not forget it is not unique - it was simply the first stamp ever produced but there were many millions of them, too! That said, it has a much higher price than many other stamps with a similar production run; because it is so famous and specialists can investigate some esoteric differences between the different printing it has a popularity with many collectors, demonstrating a higher value than many much rarer items. There are many stamps where there is only one copy known but some of these will be available for relatively small money compared with the most expensive item (a Swedish stamp which sold for over £3 million a few years ago). Provenance and interest have much to say for the potential value of such an item!

However, we must also consider the availability of the "demand". These days, children have so many distractions that there is not going to be the same degree of interest in collecting. That is to be partly countered by many early-retired individuals returning to a childhood hobby, as well as others being introduced to the hobby but in a different way than might have happened traditionally. There are also far more collectors with powerful budgets and if you have just one or two with almost limitless pockets, prices of key items upon which they compete at auction can almost be as high until one gives up the chase. Of course, if the same item was sold the following week and the loser is not interested, then the realised price could be but a fraction of that paid only seven days earlier!

STAMPS AS AN INVESTMENT

I do have concerns at present. Stamp collecting remains the biggest hobby in the world and the stamp market supports a tremendous quantity of dealers across the world. The internet has opened up even more trading opportunities where almost any collector can become a part-time dealer, switching his spares into cash to buy items he wishes to retain. To some extent, every collector has a little bit of financial interest anyway and the opportunity for an "eye for a bargain" can be no better demonstrated than with the average stamp collector! After all, we all like to buy something at a good price!

However, if you "throw" the odd million at the stamp market then prices which will be paid for more expensive items will be very high indeed - as indeed is being demonstrated by some leading auction sales and prices being secured by dealers, some of whom are establishing "investment portfolios" (regardless of regulatory registration obligations for the promotion of "non-readily realisable investments" and comparing them to the Stockmarket!). There is a major concern here and that is that if you chase a commodity with limited immediate availability then prices will rise but what happens when the market turns and when the collectors, those with the core interest in the first place, are not there or certainly are not prepared to chase items at any price? It is like a game of musical chairs where the majority of seats has been removed and all of the players in the market have decided to find somewhere to sit at the same time. To some extent, the residential property market is a much-multiplied analogy of the self-same thing - at the end of the day we need houses as a roof over our heads only. That has a value that is much lower than the present speculative prices, I suggest. When the market turns and the stamp crowd starts moving the other way, who is going to be doing all the buying...?

DEALING OR INVESTING?

There is no doubting the difference between dealing and collecting/investing. Dealers buy things at a buying price in anticipation of being able to sell an item for a higher sum to generate a profit and cover his other costs and his time. A dealer can enhance his profit by using his specialist knowledge of the market and indeed he may buy something very cheap and sell it for much more. However, that is not investing; that is simply using his specialist knowledge and skills. Collectors can do the same. I have often considered the issue of moral ethics; sometimes, if a dealer finds some special item of great value within a collection he has just acquired from a private collector - should he not go back to that collector and advise him of the find and provide a bigger price? Buying at auction might be a little different where everything is available for the public to see although I remember myself as an eighteen-year-old advising the auctioneer of a prime item in a collection that had been overlooked - the old gentleman vendor was particularly grateful for the £750 which that single item raised in a subsequent sale and he sent me a little reward! Dealers will often buy something speculatively, too - hoping they can sell an item to a collector (or even to another dealer) or perhaps a large collection where they will hope to find something special or prove the rarity of an item where there could have been some doubt at purchase. That is all part of the dealing process and, as I say, collectors can participate in this in a small way as an added interest to their own collecting. After all, many dealers have good collections themselves and I know one or two whose collections are their dealing stock - nothing is sacrosanct if the price is right! (There are some good Inheritance Tax reasons where that is a good idea, too!).

None of this detracts from concerns for the "investment market" for stamps and comparable collectibles. If those investors choose to exit at or around the same time (which can happen often, if panic befalls the market because prices have been falling) then who are the buyers? As I have mentioned above, property is perhaps in that same situation at present and even for that precious and most recognised of all commodities, gold, remember that in 1980 the price of 1oz went above $800 and yet only a few years ago Gordon Brown (and other central Banks) was selling gold at about $250 and having had no interest and no compensation for inflation for all that time. That could happen to these expensive stamps where the only thing to encourage collectors back into the market might be particularly depressed prices of those prize items upon which they had otherwise given up years before, because prices were too steep. Remember, an item can be "unique" but there can be an awfully substantial quantity of individual unique items and frequently, prices based more upon a whim than a ‘fundamental' underlying valuation!

THE PENSIONS ACT 2006 AND STAMPS

On 5 April 2006, residential property, works of art, wine, collectibles and stamps to name a few, are allowed into pensions! There are some in the stamp world who anticipate that stamp prices will increase dramatically through this surge in demand and of course, many people's Pension Funds have substantial capital within them so that only a small amount being converted into stamps would have a dramatic impact on prices. Let us just think about it for a moment. On the one hand, if you fancy a stamp at perhaps £10,000 then in theory, you buy it through your Pension Fund and as a 40% tax payer it will cost you only £6,000 plus costs to the Pension administrator. Now, that is attractive. So what are the problems?

I believe there are many. For a starter, at this stage I am unaware of any pension provider who will be offering the facility. Even a dynamic provider such as Suffolk Life has not committed itself yet, although it is considering its options very carefully. Why are there problems?

What seems like a good idea is not so practical. There is an innocent view with collectors that they could simply convert their stamps into a "Pension Fund" and pocket the tax relief but life is never so simple as that. Will the Trustee be holding your stamps? How will he value them? How will he protect them? Who will be paying the insurance costs? What happens if they are damaged? Do you really want to collect stamps but not have access to them? I cannot imagine many Pension Trustees wanting to bother with lowly-priced items either - you can imagine the regular audit and valuation protocols! Even for works of art where the owner can perhaps retain the item and enjoy it (no doubt for the cost of insurance and security), he must pay quite a high annual fee to his own Pension Fund for the privilege (or a payment direct to the Revenue for the benefit in kind) although even then, as a Pension Trustee I should not be happy - how do I know you have not sold the item in my absence?!

I believe the prestige stamp market has already moved ahead in anticipation of this surge in investment demand as people anticipate adding stamps to their Pensions. I cannot see it happening myself; I speak as an independent financial adviser and investment manager responsible for over £85 million on a discretionary basis on behalf of clients in a myriad of difference investment formats, including Pensions.

OTHER OPTIONS FOR PENSIONS

Stanley Gibbons is looking for regulatory approval to establish a collective investment vehicle in stamps. This could be different in that investors would buy units in the collective fund managed by Stanley Gibbons so most of the practical difficulties of holding stamps as an investment would stay with the Investment Manager. As a quoted Fund, the Pension Administrator could hold it just like any other investment. Of course, that is not the same, is it? Management and holding charges will be very high every year because it is much more expensive holding such items as it is dealing in ordinary investments. Transaction costs will be very high, too - if you buy a stamp from a dealer and then want to sell it back to the market again, you may have to suffer a cost of 30% or 40% even on prestige items. If you buy at auction, you have to pay a Buyers' Premium and VAT and if you sell then you have commission and VAT too. These costs all have to be covered before you start making a profit. The same forces could affect a stamp fund. If there is plenty of money flowing into it then potentially, prices of prestige items would rise as the capital was spent but if interest wanes and people want their money returned to them, then the Fund will be a forced seller, potentially in a market which does not wish to absorb the stock. It would not be unexpected for the Fund to suspend encashment to avoid suffering serious losses on forced liquidations - Henderson Fund Managers had a residential property fund in the 1880's and even it had to suspend liquidations for well over twelve months because of difficulties in the underlying market! It would be much worse with stamps.

Several institutional investors have been buying stakes in Stanley Gibbons Plc instead. That might be the best option although the Stanley Gibbons' Directors have been increasing their salaries quite dramatically and indeed Mr Paul Fraser, Managing Director, has been off-loading his own shares (which also increases marketability in them). They were very cheap a few years ago but perhaps now they are up with events and when investment enthusiasm wanes then their overhead costs have been increased dramatically and they are sitting on many millions of pounds of extra stock upon which they may have paid too much... will Directors cut their pay?... I do share an interest in that I bought a few shares at 14p and still hold half of them! I am watching carefully, however. Overseas, stamp dealer Greg Manning Auctions Inc is a substantial quoted company in its own right although it is not one in which I am buying shares at present.

CONCLUSION

So, I think that stamps generally will continue to increase in value but I hope it is not because of excessive "investment" where the participant has no great interest in the commodity. Of course, if buying them in the first place encourages people to collect, than that will be a positive and different thing but otherwise, I can see trouble. Perhaps "investment" stamps are very overpriced already.

As far as the Pensions Act is concerned, I think that the concept of investing directly in many of the commodities which will soon be allowed is an absolute non-starter and probably, even if people can do it, it is likely to be a poor idea anyway. Of course, if there are funds established for the various commodities, in theory these are already feasible - be it a gold fund or more "normal" commodities from coffee through to pork bellies... Relying just upon the end user of a stamp collector, however, is much more speculative, of course. It is not quite so appealing to the collector, either, to own a "Fund" of prize stamps over which he has no involvement at all, either. However, I should still be particularly wary about the level of costs which could arise from such investment - if you are buying gold bars, for example, the spread between buying and selling costs is quite small but with such items as stamps, spreads can be very high. Independent Fund Directors could be in place, too, to ensure it is not simply stamps acquired from the host stamp dealer and values provided likewise!

FOR FURTHER ADVICE

Philip J Milton & Company Plc, Independent Investment Consultants, celebrated its Twentieth Anniversary in August 2005. It provides an unrestricted range of independent financial advisory services which includes Discretionary Investment Management. It manages in excess of £85 million for clients, within receptacles ranging from Pension Funds through to PEPs, ISAs and ordinary Portfolios. In theory, the Company pursues the investment opportunities which it perceives are appropriate for its clients and if commodities were appropriate then these could be included although typically, this is through participation in quoted companies in those particular markets. For impartial advice without cost or obligation, then please contact the Company direct on 01271 344300 or write to Sterling House, 17 Joy Street, Barnstaple, EX31 1HE or contact it through the Company's informative website on www.miltonpj.net. (there is a direct link under the links section of this website)

This article has been completed by Philip J Milton DipFS CFP FCIB FPFS Fellow of the Personal Finance Society and is available for reproduction in part or fully subject to the above reference to the Firm in the final paragraph. It is based upon the understanding of facts at they stand at present. Independent advice is required in every instance prior to action being taken. The value of stamps and interest in them can wane as well as increase!

Postscript – in November 2005 the Chancellor decided that stamps and other "alternative" investments would NOT, after all, be allowed into self administered pension funds.

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