I’m not sure how the topic surfaced, as we six trekkers sat with our guide on rickety aluminum camp stools and enjoyed a candle-lit dinner inside a heavy canvas tent.
Somehow, Dave – the 71-year-old guy from Britain – got to talking about cars. We quickly learned that he owned several sports cars and that enjoyed driving them as often as he could. I probably should not have been very surprised by this, as it was pretty apparent over the course of several conversations on the trails of the Huayhuash in the Andes that Dave had been a very successful executive. He had worked for the French tire company, Michelin, in their IT department. That division was eventually sold to IBM, and when Big Blue determined that it was not pulling its weight inside the huge conglomerate, it was shut down. Dave was offered a very attractive early retirement package, including a full pension in his mid-50s, and he gladly accepted.
Over the course of the next 15+ years, Dave had taken some big international adventure trips, which included trekking on the flanks of Mount Everest, and climbing Mount Elbrus, Mount Kilimanjaro, and Mount Aconcagua, all members of the Seven Summits. So, I knew Dave was a thrill-seeker and it didn’t surprise me that he was into fast sports cars.
What did surprise me was his somewhat offhand comment that he felt the cars were better investments than other things he had considered. Given that I’ve spent my career advising clients on investing, his view got me wondering. While I know that some wealthy people (e.g. Jay Leno) invest in cars, I never really considered them “good” investments. But over the course of the next few days trekking in the Andes, I decided I’d look into the matter when I returned home.
I got Dave to provide me with the specs of his cars: make, model, year, etc. I told him I wanted to ask a friend of mine, who is a car dealer, about his collection. When I got back to our office in Portland, I sent my friend an email and asked him for current valuations for Dave’s cars, and also about their historic values. I wanted to get a sense for how much they would have appreciated had they been purchased, say, 10 years ago. My friend didn’t have the information, but he referred me to another dealer, who values collectible cars. That dealer responded to my questions by saying that, while it would probably be possible to get current values for Dave’s cars, it wouldn’t be possible to get historic values for them.
What can we learn from this small exercise? Well, it’s important to remember that a fundamental attribute of any investment is its value. You have to know what something is worth before you can contemplate what you might be willing to pay for it. Sure, valuing some things (e.g. real estate) can be somewhat subjective. For example, you might be willing to pay more for a great view than someone else. But price – or value – is generally established by what a willing buyer and seller agree it is. So, if I couldn’t reliably establish prices for Dave’s cars and if it wasn’t possible to know what those cars were worth 1, 5, or 10 years ago, I really couldn’t evaluate them as investments compared to other alternatives.
I sent my friend the car dealer another email and asked him another question that I had been pondering. What would it cost to sell a collectible car? He replied said classic car consignment businesses charge a fee of 20-25%. Wow! So, if a car is valued at $100,000 and is sold on consignment, the owner would pay up to $25,000 in sales commission. By way of comparison, investors can sell $100,000 of a mutual fund or ETF for less than $5 at Charles Schwab.
There are a variety of other costs associated with in investing collectible cars. To list just a few, they include insurance, storage, maintenance, and licensing. Also, the market for classic cars is extremely small when compared to the market for stocks, bonds, mutual funds, and exchanged-traded funds. The limited market means that pricing transparency is a problem and transaction costs, as we have seen, can be very large.
I came away from this little exercise concluding that, while people like Dave may say they own collectible cars as investments, they really aren’t. I think Dave owns these cars because he loves to drive them, and he probably has a lot of fun talking about them with family, friends, other car enthusiasts. Dave’s a smart guy and I think he probably knows that owning these cars is not a good investment. But it helps justify the costs of owning these cars, if he tells others that they’re investments.
If you really want to buy a classic car, go ahead. Just don’t consider it an investment.
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