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When Possessions Are Confused with Investments

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All too often, I come across stories of broken nest eggs that make me feel truly awful. One such story can be found in this 8-minute documentary on YouTube regarding a former soap opera star who spent about $100,000 on Beanie Babies with the expectation of making sufficient profits to put his five kids through college. You may recall the Beanie Baby Craze of the 1990’s when people would line up and wait for hours to get the newest and cutest stuffed animal. To prevent hoarding, the retailers instituted a policy of one Beanie Baby per family. It is somewhat comical to hear the man in this documentary talk about his strategy of recruiting family members, friends, and neighbors to wait in those horrid lines, so that he could acquire at least five of every new Beanie Baby, one for each kid. At that time, there was a robust secondary market for Beanie Babies where sellers could turn a handsome profit over what they spent at the toy store. Of course the time spent acquiring the Beanie Babies could have been better spent in more meaningful and enjoyable ways, but that’s beside the point.

While we may dismiss this story as completely irrelevant to us because we know better than to get caught up in a fad that is perhaps one small step above the “pet rocks” craze of the 1970’s, we commonly see other behaviors that are not so far removed from hoarding Beanie Babies. One example is buying gold and silver. The essential idea is that somebody down the road will pay you more than what you paid for it. We call it “The Greater Fool Theory,” and that is exactly how recent buyers of gold and silver must feel, seeing that they are now about 30% and 60% below their recent highs, respectively.

I often hear people say they are buying an expensive bottle of wine or work of art as an investment. I am quick to point out that while these things may be worth the price for the enjoyment they provide, they should not be considered investments, because they have no expected real return.  If sheer enjoyment is the predominant expected dividend, then an investor really shouldn’t expect an appreciation in the price of the investment other than what can be attributed to inflation. This is not to say that somebody cannot make money in these ventures, but chances are that someone else is a true connoisseur in the field and has easy access to potential buyers who trust they are receiving a genuine masterpiece, not a counterfeit. And when it comes to a rare bottle of wine, keep in mind that it can only be enjoyed once.

While I have always encouraged my clients to get a hobby, I caution them not to conflate it with their investments, as this will often result in learning a bitter lesson. Alas, amassing beanie babies may be fun but not profitable.