Dancing For Money

Another Fundamental Question

Today we tackle the correlation (or lack thereof) between securities and cards. Fans of a theory of strong correlation between domestic stocks and cards simply cannot believe that cards don’t move in lock step with stocks, perhaps with a slight temporal gap. Many fallacies underly the close correlation belief, the most significant of which is that all investors in an asset class are the same people investing in the same things from the same places in life with the same goals and will react the same way to a given situation.

It isn’t, they aren’t, and they don’t.

There is no card ‘market’; there are many. The ‘market’ on cards is highly segmented with the various segments rarely crossing over, likely because the underlying driver of real expertise in an area of cards sufficient to allow intelligent investing still is a love for that area of cards, like T206 or Babe Ruth. I guarantee you that the dweebs waiting in line to buy the latest Pokémon cards then flooding PSA with their pulls are not the same people buying Goudey Ruth cards. Which cards to invest in is a highly personal choice based on taste and interest, like which art to buy. I like Babe Ruth; I don’t like trading card game cards. Dollar for dollar, give me a Ruth Exhibit over a Pokemon rarity every day of the week and twice on Sunday. Stocks are not appealing that way in and of themselves; no one cares whether they own Tesla or Pfizer, aesthetically and emotionally speaking (unless they are a Musk nut-hugger), and there is basically one highly correlated pool of domestic stocks. Sure, some sectors do better than others but the expansive nature of the indices that can be bought in various vehicles like S & P 500 index funds means that when the market shits the bed, the whole market shits the bed; defensive stocks just get the scoots instead of amoebic dysentery.

In terms of card investing, risk is much more a product of class and wealth than with stocks because the Hobby is far more democratic than the stock market. Most credible estimates are that 90% of domestic securities are owned by the top 10% of Americans, while the bottom 50% of Americans own just 1%. That is why a record stock market doesn’t translate to incumbents winning elections; the benefits amass to relatively few voters. There are a lot more people of modest means investing in the low entry point areas of the Hobby than in stocks. Look at the dealer composition at any local show. Most of the cards up for sale are recently made shiny sold by young, less financially stable people and working class and lower middle class people to people like them.

The economic diversity of collectors means that they will be all over the map financially in terms of what adversity they can handle and how they will react to a downturn. Many of the younger folks need the money they generate. If they get hit in a recession, they go down hard. The people who can afford to spend thousands for vintage cards and build long term holdings over years generally have a strong base of other assets and resources with the cards occupying a small percentage of their portfolios. They do not flip cards for a living, do not need to desperation sell their cards at the first sign of a downturn to make the rent, nor are they likely to sell their beloved 1933 Goudey set instead of some stock because of the emotional component to owning cards that isn’t there with other assets. The guys buying Pokemon on a credit card, maybe not so much. Guys like me who can afford to ride things out will buy those desperation sale inventories at pennies on the dollar and hold until prices rebound.

From where I am sitting, therefore, the main risk related cash-out argument right now is a short-term mindset that most applies to the modern segment of the market because of who is in it. I think you can say that the market for the vast majority of modern and especially ultramodern is correlated with the general economy in that sense rather than the stock market itself because those folks don’t have stocks. Candidly, those folks and their shiny shit investments don’t interest me. I am looking to figure out the rest; what is likely to happen to the segments of the market that aren’t driven by side gig guys who need the cash flow. The argument as to those segments being correlated with domestic stocks just is not sound.

The theory driving the correlation hypothesis for other segments of the market is that wealth concentration, both in society and in investments, increases the risks of economic volatility and therefore threatens the segment of the card market that is the playground of the wealthy but not rich collector. The key factor to the hypothesis is that the top 10% of Americans by wealth and income account for 50% of all consumer spending right now (in an economy that is roughly 2/3 consumer spending driven) and also own 90% of all securities. The scenario is that a hiccup in securities would rip across a relatively small constituency in the 90%-98% range that currently plays an outsized role in the economic life of the country, trigger a quick contraction in consumer spending on their part, and push us into a sharp recession and further market downturn, all of which would drive down card prices in non-shiny segments.

It’s a pretty compelling narrative, I gotta give the devil his due, because the compounded risks I’ve outlined are real. However, the further assumption in the hypothesis is the one that does not bear out: that members of that cadre will panic sell because they can’t buy their kids the GI Joe with the kung fu grip for Christmas if they don’t. The history is a lot more interesting, actually. A typical stock market correction or recession is over before a wealthier collector ever gets to the point of needing to sell his beloved T206 collection, and a rich collector simply isn’t going to sell off his E107s because his net worth declines from $100 million to $50 million. They are not in the same bucket as the guy making $2K a month on a card side hustle to cover the family bills and it is pointless to pretend that they are. As a result, one fascinating characteristic of past downturns in the economy that sets the wealth-correlated segments of the card market apart from stocks in a pretty dramatic way is that when the economic shit hits the fan, high quality material dries up rather than being sold off. Collectors who can afford the really good stuff tend to park it in their safes or vaults when things go badly and the rare card market goes largely dormant. In every downturn since 2000, I’ve heard tons of bitching about the lack of good cards for sale. No duh, the people who own them just hang on to them and wait for the rebound…or they die waiting and their (ungrateful, shitty) wives and kids sell their beloved cards.

In that context, to me, the selling argument sounds a lot like timing the market, which is something that wealthier investors do not do. If you miss just the top 30 days of upswings in the stock market over a ten-year period, you leave most of the gains on the table. Also, there is a contrary view that has pretty good legs too in my view. As I reported last month, financial opinion makers looking at these very same risk factors for people with real money are starting to think about alternative investments like cards in part because they are not strongly correlated to domestic stocks. When investment gurus bless something that men are inclined to pursue anyway because they like it, it is like a dietician telling them to eat more bacon for heart health. We might paradoxically see people used to spending big money on art moving towards cards now and increasing prices for the best stuff as those financial whales overrun all the rest of us. That seems to be the story behind the $12 million Kobe-MJ Logoman card sale.

Am I an enthusiast for this stuff? Yeah. But that doesn’t make me wrong. My point is that there is no broad-brush conclusion to be made about how the Hobby correlates with the stock market. The more you mull it over and understand that there are no good answers, the more paralyzed you can get. So Happy New Year: my advice is to have a cocktail, watch a parade, and forget this money stuff for a few days.