Sunday, May 08, 2005


Coins are lousy investment - Part 1

The Blade has two new stories about Coingate here and here, raising important questions about the criminal side of the scandal.

From a public policy point of view, however, the Dispatch's Niquette, Craig, and Hallett team have one of the better stories that's been written here, along with a historical sidebar by Chainsaw.

But, as we noted before, team writing on Dispatch stories often leads to a watered-down product where the writers pierce the surface waters, but never collectively can go deep enough to hit the target.

The thing that the N-C-H team got close to but missed, in this case, is that the investment in rare coins, based soley upon their returns, was a lousy, lousy, lousy investment.

Why is this important? Because Jim Conrad's best defense so far has been to say, "Hey, Noe might have some problems, but we've made an impressive $15 million back on our investment of $50 million."

Conrad is taking advantage of N-C-H's financial ignorance. In reality, the $15 million gain from an investment, half of which stretches back to 1997 and the other half from 2001, represents a average annual return of roughly 4%-5%.

That is nothing to brag about and Conrad is trying to bullshit the press. This is a horrible investment and it's this kind of return could and should get you fired in at heartbeat at one of the state's pension funds.

And, it's not just the raw rate of return. This pathetic return is actually worse because it needs to be risk adjusted. In other words, riskier investments require higher returns to justify the risk in the first place. Why invest in coins for 5% when a AAA bond could have done the same thing.

Likewise, coins have tremendous exposure to what's known as "counter-party" risk. How safe are the people you must have transactions with. This can be any thing from sheer credit worthiness to criminal history. As events have shown, the coin market is full of counter-party risk.

There are several other risks this kind of investment involves that we won't go into here. However, once all the risks are taken into consideration, our guess is that the coins should have been supplying a return of 30-50% to be considered a sucess and to justify the kind of risk they are exposed to.

As we pointed out before, there exists tremendous risk in this kind of investment because the lack of a liquidity due to a small marketplace. There are only a handful of people in the world that trade in coins this rare, and this particular marketplace is full of asymetries and opacities.

It's no wonder that some experts interviewed for the Dispatch story had this comment, strictly on the merits of a coin-based investment:
It’s surprising the bureau would allow such leeway because the fund was created for coin investments, said J. Richard Dietrich, chairman of the accounting department at Ohio State University’s Fisher College of Business.

Investment experts say they know of no other major public entity that invests in rare coins, and some said they would not consider it because of the risk and questions about whether the market extends much beyond collectors.

"It doesn’t pass the smell test with me," said Michael J. Clowes, editorial director of Pensions & Investments, which covers news about pension funds.
The real laugher is the comment from BWC's chief investment guy:
James S. McLean, the bureau’s chief investment officer, suggested that critics might not fully understand coin investing and that other managers are envious of the coin funds’ profits.
Envious? We doubt there is an investment manager in Ohio that would trade places with McLean to stand in the shitpile he's help create.


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