Saturday, May 28, 2005


Coins are lousy investment - Part V

Just so everyone doesn't think we are speaking out of our asses when we talk about the problems of the lack of liquidity and transparency in the coin "market" - and the problems that will come when they try to liquidate them - we provide the following

The first are comments for experts interviewed for James Dao's piece in today's NYT:
Experts in state workers' compensation programs said they knew of no other states that invested in rare coins, largely because they are considered volatile commodities that are difficult to price, difficult to sell and easy to lose or steal. "I just can't imagine collectible rare coins being used as an investment," said Gregory Krohm , executive director of a trade association for government agencies that administer workers' compensation programs. "It's hard to make a market for them."
The next is from the "Coin Community" forum that - at least in this context - provides some fascinating comments about the coin business works:
[Question: W]hat happens to a dealer or private party that may have unknowingly or otherwise ended up purchasing the "missing" (stolen) merchandise? [Reply:] Kind of a touchy subject for me, but many believe that there is NO inventory, only a paper trail. In the high end market, a lot of investors never actually "see" the coins. They purchase the rights sort of like speculation in the stock market and the money is safe from taxes. You can claim losses or profits as you wish. In this case, now that the chips are on the table, it is possible that many of the high end dealers who work with investments are going to feel the microscope.
Elsewhere, another member of the forum suggests:
Noe should get a bunch of lousy coins and get them graded by "Gallery Grading company" as MS66 and he'll be in the clear.
Of course, we don't know jack-shit about coin collecting and there is no way to determine if these guys in this forum know what the hell they are talking about, but from a financial theory point of few they seem on target.

First, there is no independent way of measuring a coin's value. One dealer can legitimately say its worth peanuts because he has no buyers. Another can say it's worth thousands because he does have a buyer. But unlike public equity or private equity investments, there is not a ready market to set the price.

Second, apparently coin "investing" is a lot like investing in futures or forward contracts. Unless there is an unusual occurrence, all everyone normally has to do is settle up the differences in value at the end of a set period. No one typically has to come up with XX number of barrels of oil or YY number of pork bellies. That is, they don't unless there is a "shock" to the market that suggests that some of the parties in these transactions are not "good" for settling. It's kind of like how a bank will suddenly call in an outstanding loan when the lendee is under criminal investigation.

These appear to be the "trade secrets" Noe was trying to protect as he fought the search warrants.

Third, the investments side of this affair will probably take an unfortunate turn and end up prohibiting a lot - if not all - high risk investments. In fact, the problem with the investments was specifically not the risk, but BWC's inability to measure the risk.

Risk, in general is good. Financial theory suggests a direct relationship between risk and reward. We'd be the first to admit that measuring risk is not an easy task - but its a necessary one. It might take a few PhDs on staff, but even more exotic investments in options, futures, forwards, etc. can be readily measured. With those measurements in hand, a big fund like BWC or OPERS can weigh it against other risks to determine if it removes volatility of returns (a good thing) or increases volatility (a bad thing).

However, there is no acceptable way to measure the risk involved with coins and that is about as simple a reason as anyone will offer as to why other legitimate funds have steered clear of this kind of investment. Clearly, BWC's CIO and his AIOs were over their heads and flying blindly. They should step down, too.


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