Speculating in classic cars will leave you staring at the dust

PUBLISHED : Tuesday, 07 September, 2010, 12:00am
UPDATED : Tuesday, 07 September, 2010, 12:00am

Classic cars leave stocks in the dust

SCMP headline, September 5

Classic cars this week, next week it will be old masters, followed by palladium the week after and then classic costumes worn in Hollywood in the 1930s. Even tulip bulbs can take wing and leave stocks in the dust if you really want them to. They once did.

But let's make a distinction between investment and speculation here. Investment is where you put your money into something that gives you a consistent return or, at least, the reasonable promise of one.

Thus a bank deposit, miserable investment though it may be, is still legitimately defined as one. You get the consistent return of your interest payments even if you now need a microscope to see them.

Rental property is also similarly investment. You get the return of rents. They may go up or down and sometimes the tenant may just walk out on you without payment but you still have the reasonable prospect of rental income.

Stocks, likewise, are an investment. You get the return of dividends or profits reinvested in the business.

Of course, you may also get a capital return by selling your property or stocks for more than you paid which is, of course, pleasing. But the point is that the value you set on them is based on the flow of income from them. That's what makes them an investment.

Speculation, in contrast, is purely a gamble on price. It has nothing to do with the regular flow of investment income. In fact, it usually does not have any.

Gold is a good example. It does not pay you an interest rate, a coupon, a dividend or a rent. In fact, it costs you money to hold gold. You need to store and protect it from thieves.

You may, of course, be a buyer of gold for jewellery, for a very few remaining industrial uses or because you are a miser and just like looking at the stuff. But the odds are that you buy it because you think the price will go up. This makes you a speculator.

If you say you buy gold not to speculate but because gold is a store of value, I have a question for you. Be honest with yourself. Would you buy it if you really thought that you would not get anything more back from it than you put in it? That would make it a store of value. Be honest. You are a speculator.

You are also in plenty of company. Most people who call themselves investors are actually speculators, there being many more ways to speculate than there are to invest. These have ranged all the way from gold to tulip bulbs, classic costumes, palladium and old masters ... and classic cars.

They are a classic speculation and a costly one. Leaving aside that the unit entry cost is high, they give you no return and they cost a bundle in maintenance. You have to find a dry, thief-proof garage and you have to run them up every now and then or their engine blocks turn to rust.

Yes, I know they may give you a thrill when you drive them but we are talking of payment in kind here - money for money. If you value them in thrills, then give them a capital value in thrills, 3,000 thrills for an old Mercedes perhaps and 5,600 for an old Bugatti.

In money terms, however, they have no real value. There is no investment income flow and therefore no real way of setting a money value on them. A Bugatti might fetch HK$10 or HK$10 million. Neither is too low nor too high. It all depends on what buyer and seller happen to think that day.

This is the way of pure speculation. There is no restraint on how far up or down the price may go. A thing that has no money value to begin with cannot be either overpriced or underpriced in money terms. It can only be so in thrill terms.

And while the price paid for a Bugatti yesterday may be a guide to what people will pay today, it is fundamentally no more than a reflection of the general level of liquidity in the economy. If money is tight, down goes the bid/offer on the Bugatti. If the taps are opened, up it goes again.

A Bugatti is a futures market on changes in money supply growth.

Here is what comes down to. Classic cars cannot leave stocks in the dust. They are an illusion of investment. They create no wealth. They satisfy you if you buy them because you just like them. But if you buy them to make money, they will probably disappoint you. It is the eventual fate of most speculations.