This Must Be The Place

We start out this week with a shout-out to baseball cards from an unlikely source

Professor Aswath Damodaran teaches corporate finance and valuation at the Stern School of Business at New York University and is considered to be somewhat of a value investment guru. On November 14^th, on the Prof G Marketplace podcast, he stated that he is looking at parking money into collectibles, which he defines as items that are both driven by scarcity and have enduring demand. His reason is that correlation across financial asset classes has risen to the point where diversification within financial asset classes (like buying foreign stocks or bonds) may not be sufficient protection against a downturn in US stocks. You need to find something that does not move with US stock markets.

What just about knocked me out of my seat was that he actually mentioned baseball cards as an example of collectibles, and said that if you have truly done your work on them and know how to invest in them, they can be a viable investment. He also derided Pokemon cards as lacking sufficient historical roots to function as reasonable hedges; take that, TCG people! The professor said that he is not comfortable with collectibles, not his first instinct, but because we have a bubbly stock market that correlates with many other financial investments, and we have set ourselves up for significant inflation due to persistent budget deficits, going to cash to weather a downturn in the stock market is a risky strategy. Collectibles do not carry that inflationary risk; hard assets that do not produce income are principally an inflation hedge. The professor also mentioned that Wall Street titan Ray Dalio has touted a collectible (gold) as a hedge against the inflationary trends, unthinkable in earlier, less correlated times. Probably why precious metals have skyrocketed and art is setting record prices (a Gustav Klimt painting recently sold for $236.4 million), as are sports cards and memorabilia.

What this means for the hobby is unclear, of course, but it is yet another example of this thing of ours being accepted as a serious investment rather than as a doofus-fest. “Go play with the other dipshits” is my wife’s annual invocation to me when I head to the National, but with real finance people taking the hobby seriously, having a non-negligible chunk of my net worth in high quality vintage cardboard with a low cost basis maybe not looking so dumb after all…Except when it goes awesomely, disastrously, epically wrong, as it did for the seller of a 1914 Baltimore News Babe Ruth. For those of you who did not follow the story, a copy of this rare Ruth card sold at auction with REA in 2023 for $7.2 million and the same card was resold by Heritage this year for $4.02 million. On the one hand, I have nothing but schadenfreude for the rich guy who lost over $3 million on the sale, on the other hand, OUCH! My take on this debacle is that when you get into really rarified territory with any card, there are only a few buyers with the bank and the interest to chase it, and if they aren’t in the auction, watch out below. I guess he should’ve bought invidia stock.

From the sublime to the ridiculous. One of the investors in the securitized assets of the dead business formerly known as Collectable got a Delaware court to appoint a receiver to administer the company. For those not in the legal field, it basically means that a court-appointed manager will take over the company. The whole denouement of the fractional interest pioneer seems sad and slimy in my opinion (unlike the NFT crash; the smug wannabe gazillionaires touting those popcorn fart items as investments needed a fat dose of humility). Apparently, the assets of the company, the high-end collectibles it owned and tried to sell shares in, have gone missing, according to the story in Sports Collectors Daily:

“When Collectable was sold to Philip Neuman, a businessman with several LLCs, for $1.6 million in June 2023, a number of sports cards and game-used collectibles were soon moved from the PWCC vault in Oregon to New York. Not a single shareholder was notified. Some of the items were last seen at a Manhattan gallery touted as a “luxury lifestyle brand,” Dretore Gallery. The sales price was for the business and the brand, not the items that were once on the platform.”

Two years ago, I remarked that the concept behind Collectable was an interesting idea, done badly. The assets that had been successfully securitized to that point were income producing. Whenever all your hopes for an investment hinge on an ROI up and to the right, forever, you are playing a dangerous game my friend.

My takeaway from the Collectable debacle is the same as the takeaway from the collapse of Legendary Auctions in the wake of the shill bidding scandal: trusting a stranger to hold an asset for you can be a fraught process. When the value of an investment is 100% a function of an asset’s liquidation value, there has to be something done to prevent whoever controls the asset from using it or stealing it, whether that is an escrow or a fidelity bond, or some other security, is a question that must be resolved by another fractional interest venture if someone wants to try again. Otherwise, only a moron would jump back into that cesspool. In that regard, my free legal advice to you is that if you consign a collection or a really valuable item to an auctioneer or to a vault, by all means file a UCC-1 statement (research how to do this or ask your lawyer). It doesn’t cost much and will make you a perfected secured creditor if the consignee goes tits up, a creditor tries to grab its assets, or the company is sold to a stranger who might harbor impure thoughts. A simple lawyer letter to someone who grabs an asset that is subject to a perfected security interest is often enough to get your stuff back, and it is gold in a bankruptcy. For the minimal effort and cost to file a UCC notice, better safe than sorry, especially if you are storing valuable cards in a vault in some other state to avoid paying sales taxes on their purchase.

On an unrelated issue, but just because I am thinking about cards and finances today, I’ve heard some of the most over the top players advocate pulling funds from retirement accounts to buy cards. They are derided as nuts. Is it crazy, though? It all depends on circumstances. We will all face the dreaded “RMD” (required minimum distribution) if we live long enough, and if we inherit an IRA the RMD can start rather quickly. As I write this, inherited IRAs have to be liquidated within ten years rather than as normal IRAs that you are forced to draw from at age 70, even if you are in your prime earning years when you inherit the account and don’t need the money; just another little “up your ass, middle class” from Washington. I had to make my own RMDs this year for the first time out of my parents’ inherited IRAs and I’m not even retired and a decade shy of RMD mandates on my own accounts. Money is going to come out of these accounts and be taxed as income anyhow, so investing it in cards may be a good play at that point. It really depends on what you can purchase with it. Now, absent the dreaded RMD, it is really, really dicey to pull money out of a tax-sheltered account; the ROI better be stellar to justify the ordinary income tax rate you pay now and the added penalty for early withdrawal. Plus, the retirement accounts offer a level of asset protection that cards...don’t. Even with all that, if someone offers me a T206 Wagner for $100K, yeah, I am digging into the retirement account for as much as I need to make that deal, fugedaboudit.