‘Buy what you know’ valuable advice

There is a sensible bit of financial advice to only invest in what you understand and know. If you don’t understand the nuances of a possible investment, your risks of a loss go way up.

The same advice applies when purchasing numismatic items. Let me share an anecdotal story that demonstrates the importance of this recommendation.

My company was founded in 1971 by R.W. “Bill” Bradford. For the next decade while working as a day-to-day dealer, he would ask people when they were selling their rare coins two things: did they make a profit and what was the extent of their numismatic knowledge.

The answers were highly uniform. He told me that people who had purchased rare coins and were serious numismatists for at least five years reported selling at a profit more than 90 percent of the time.

In contrast, there were many sellers who had acquired a “portfolio” of rare coins simply because they heard from someone or were told by a sales representative that numismatic purchases had a highly profitable track record. They paid attention to the word “profits” but did not bother to actually delve into and study rare coins. Bradford reported that such “investors” sold at a loss 90 percent of the time.

In the 1970s, one of the largest brokerage houses produced an annual list of price performance of various collectible niches, such as rare coins, Persian rugs, diamonds, stamps and works of art. This report frequently showed that rare coins were among the top performers on an annual basis and almost always on a multi-year comparison.

When the components of the index were revealed, it turned out to include only extremely rare pieces that almost no collector could ever afford. Another problem with this index is that it did not compare the differing buy/sell spreads for various “investment” categories. There were some categories where an owner would be lucky to sell the item for half of what it would currently cost to purchase (which in my mind disqualifies such things from being investments). While rare coins, on average, have a closer buy/sell spread than many other collectibles, they are not as tight as trading stocks and bonds or even bullion-priced precious metals.

If you think about it, buying rare coins where you have studied the grading standards and practices will help you get a better value than if you rely solely on someone else’s classification. This is a potential problem that even independent third-party grading services cannot fully resolve. You may have two coins of a matching grade in the same service’s holder, but one may trade for double the price of the other on the basis of attractiveness above and beyond the technical grade.

Also, studying a series of coins over time gives some insight about relative rarity compared to published mintages and certified coin populations and whether a particular coin is more or less desirable at the current price levels compared to other coins in the series and to other coins outside the series.

Here’s a personal example that demonstrates the value of studying numismatic market cycles. Back in 1968, I purchased a 10-coin lot of Mint State Morgan dollars for $20. I could have purchased a 10-piece lot of extra nice specimens for $30, but didn’t have the money at the time. Figure that the coins I did buy would grade MS-60 to MS-63 and that the nicer ones graded an average of MS-65. In 1986 the coins I purchased were worth about $60 apiece while the nicer lot would have been valued at about $1,000 per coin. Obviously, the higher grade coins would have been the better purchase back in 1968.

Now jump forward to today. The coins that were worth about $60 in 1986 are now worth $40-45 while the high grade coins have fallen well below $200. So, a purchaser in 1986 would have fared better going for the lower quality coins, but would have been best off to not have purchased either.

Ultimately, the value of a rare coin, like anything else, is determined by what someone else is willing to pay for it. While rarity or condition may influence current value, there are many other factors that also affect price.

Perhaps the easiest way to understand the value of buying what you know is for seasoned collectors to look back on their purchasing patterns early in their coin collecting days. I’m confident that every one of us has stories about the number of “mistake” purchases made that declined in frequency as we gained grading and other numismatic knowledge.

Today, more than ever before, information on grading, price histories and reference catalogs on various series of numismatic items are much more available and more affordable than in decades past. There is no excuse to not become a more knowledgeable coin collector so that anyone can benefit by being able to “buy what you know.”

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He is the owner emeritus and communications officer of Liberty Coin Service in Lansing, Mich., and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed here. Other commentaries are available at Coin Week. His radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing.

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