A Flip of the Coin
May Be Just What the Doctor Ordered
by Bret Leifer
Unlike stocks, bonds, and other paper assets, U.S. coins can be seen, touched, and admired. They are tangible and beautiful links to our nation's often romantic past. Just as important, rare coins are a proven way to accumulate long- term wealth. Besides, collecting coins can be great fun. Before the late 1970's, most collectors were merely hobbyists. They collected out of a love of coins' beauty and rarity. Today, collectors are often sophisticated investors who use rare coins to add balance to their portfolios and as hedges against inflation and the uncertainties of the stock market and paper assets. The private nature of coin ownership also has a strong appeal for many investors. (Unlike bullion, there are no reporting requirements on the sale of rare coins.)
Part of the transformation of rare coins from hobby to mainstream investment began in 1986 with the creation of the Professional Coin Grading Service (PCGS), which developed a standardized system for grading high-quality coins. PCGS and other independent grading services have brought strict, reliable grading standards to the industry, and the public is the primary beneficiary.
Certified, graded coins are bought and sold in hard, clear, hermetically sealed, and tamper-resistant plastic cases. Each coin is completely visible and protected. A card bearing the date, type of coin, grade, and a unique inventory number is sealed permanently inside the case.
For the first time, third-party certification has created an active and liquid marketplace for rare coins. Coins are now bought daily, sight unseen, on a nationwide electronic trading network (the Certified Coin Exchange). Still, the examination of a rare coin before a purchase or a sale by a quailified numismatist provides another important level of quality control.
Selected high-quality rare coins are solid investments with proven track records of long-term appreciation. They have consistently outpaced inflation by a wide margin. The value of carefully selected rare coins appreciates in much the same way that well-situated real estate appreciates. This solid record of past profitability is not difficult to understand. As the available supply of high-quality rare coins diminishes, the demand can increase. Prices tend to rise accordingly. Yet, their profit potential remains largely unrecognized by the general public.
After years of underperformance, the next bull market for rare coins seem poised to begin. Prices are starting to move up after being soft since 1990. It appears that now may be an appropriate time to buy selected, undervalued coins.
For example, an MS 65 1839 Bust half dollar priced at over $60,000 in 1989 was recently selling for 13,000; and MS 66 twenty-dollar gold piece that sold for $12,000 in 1988 recently sold for $2,900. As the market upturn gains momentum, it will be possible to realize sizable profits, provided you buy the right coins. That means acquiring desirable, accurately graded, undervalued, low-population, and investment-quality rare coins. These are the kinds of coins that have consistently appreciated the most during an up market.
The most crucial step to investing in rare coins is choosing the right dealer. If you don't know coins, it's especially important to know your dealer. Deliberate overgrading and overpricing of coins have been far too common in the industy. If your coin dealer is less-than-forth-right, you are unlikely to make any money, and you may lose a substantial portion of your investment. (Keep in mind that purchasing coins through the mail offers the purchaser the full protection of federal postal laws.)
You can rely on an ethical dealer to sell you properly graded, certified coins, offer a full-refund guarantee, provide guidelines on which coins to buy, sell, and hold, and offer advice on when to trade up to higher-quality coins.
Most people make the error of acquiring lower-priced or low-quality coins. They do this because they feel it's safer to have quantity and diversification than to concentrate on quality and rarity. Historically though, quality and rarity have been winners. If you own coins now, you may be better off exchanging them for pieces that offer more promise. You may even be entitled to a tax write-off.
Rare coins have proven to be a dependable long-term, wealth-building tool: The Numismatic Guaranty Corporation conducted a comprehensive study a few years ago that showed that rare coins attained an average annual appreciation of 16.77% during a 10-year period (past performance is no guarantee of future growth). They are not for short-term speculation though. It's true that some coins have increased in the short term, but investors are wise to sell when this happens. As with any investment there is risk involved, and keep in mind that coins provide no current income.
(Physician's Personal Finances VOL. XI, NO. 2 )
Bret Leifer