A Novel Way To Book Profits

It’s not just that returns are low for the extra risk and lack of income, there is also no discernable pattern for returns
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First Published: Mon, Apr 29 2013. 01 16 AM IST
Photo: Mint
Photo: Mint
Updated: Tue, Apr 30 2013. 01 58 AM IST
Authors make millions or so, conventional wisdom assumes. But what about readers who buy their books? Rare manuscripts and first editions certainly sell for hundreds of thousands, if not millions. A 2008 sale of Copernicus’s famous astronomical treatise, On the Revolutions of Heavenly Spheres, fetched $2,210,500 at a Christie’s auction. Even though many rare books may not be in the same league, they sell for prices that are several multiples of their cover price. Also, this is not confined to only old books or high-brow reading material. An inscribed 1953 first edition of Ian Fleming’s masala novel, Casino Royale, sold for more than $46,000 in 2012. In addition, what you read as a child may make you rich unless the impetuosity of youth made you colour every page with crayon. A signed hardcover edition of Harry Potter and the Philosopher’s Stone sold for £27,370 in 2006, less than a decade after it was published.
These eye-popping prices seem to suggest that books are a good alternative investment asset, especially in an era where returns from conventional assets are mediocre at best. However, the astute investor chooses to reflect rather than act on first impulse to check dusty shelves in the attic. Books, like all collectible assets, suffer from two main problems. The first is illiquidity that makes it difficult not only to find suitable investments, but also to realize any gains upon selling. Compared to stocks and bonds, a book cannot be sold at will for cash nor is its price known before its sale. The second problem, associated with the first, is of high transaction costs and a large difference between bid and offer prices. Large auction houses such as Sotheby’s or Christie’s charge up to 10% as seller’s commission and a further 12-25% as buyer’s premium. Smaller houses charge even more. Thus, costs substantially reduce the return realized by accounting for up to one-third of the appreciation.
However, these issues are of little consequence if absolute appreciation is high enough. This is where the investment argument starts to look shaky. Not every tome is a Codex Leicester, a collection of Leonardo da Vinci’s scientific writing, which was bought by Bill Gates for $30.8 million in 1994. Moreover, high sale prices may tantalizingly suggest a path to riches, but are meaningless by themselves. If someone told you that they’d doubled the value of their portfolio, you would also need to know the time it took them to accomplish the feat. High sale prices of rare books often conceal the long holding period required for appreciation. Booksellers themselves state that it takes 14 years to come close to doubling your money. This implies an average annual return of less then 5%. A savings bank account seems a more attractive proposition!
To make a reasoned investment decision, one would need to crunch some numbers. However, like most collectibles, a dataset large enough for any meaningful analysis is hard to come by. Just as with art, even when sales are public, they occur too infrequently to construct a comparative price history. The result is that legends and anecdotes about astonishingly expensive rare books bias investors.
Fortunately, some insight can be gleaned from a dataset available on the performance of 49 rare books collected by Kenneth Hill, a former stockbroker. He did a great favour to those who seek to follow him by tabulating the returns from his four separate collections spanning three decades. Hill’s results fly in the face of conventional wisdom. Disappointingly for some, those dusty old books their great-grandfather left them will not fund their Lamborghinis. The average annual return of Hill’s collection is only 9.6%, which falls to 4.4% when inflation is taken into account (versus 13.2% return on S&P500*, or 7.8% after inflation adjustment). ‘‘Risk-free” 10-year US treasuries returned 8.7% over the period, deflating the investment argument further. The myth of extraordinary returns from books is laid bare in Graph 1 that compares the average annual return on books to stocks and bonds from the decade of purchase until 1996.
It is not just that returns are low for the extra risk and lack of income (dividends or interest) over the holding period, but also there is no discernable pattern for returns. Again, contrary to popular perception, there is no correlation between age of a book and its returns or between subject matter and returns (Graph 2). Therefore, it is extremely difficult to select books for investment that are likely to give high returns. In fact, the International League of Antiquarian Booksellers’ code of ethics states with refreshing honesty: ‘‘Members are advised not to promote antiquarian and rare books, or allied materials, as investment vehicles in themselves, or as part of investment schemes.”
Are books, then, another alternative asset class where only the highly informed or lucky can concretize the nebulous promise of fortune? Don’t despair and judge a book by its cover price. Even if returns are prosaic, books are invaluable in your quest to protect and enhance your investment portfolio. Most successful investors are extremely well-read, if not polymaths. As Buffett’s investment partner Charlie Munger said, ‘‘In my whole life, I have known no wise people who didn’t read all the time—none, zero. You’d be amazed at how much Warren reads—at how much I read.”
Wise or not, books help us negotiate the fickle currents of financial markets. For example, those who read Charles Kindleberger would have recognized the hallmarks of the mania that led to the sub-prime crash. Readers familiar with Hyman Minsky would have known the inevitability of government intervention and subsequent rebound. Thus, the well-read investor would have protected and increased his portfolio even as the majority validated Benjamin Graham’s maxim that the ignorant speculator experiences only temporary profit followed by ultimate loss.
As Abraham Lincoln said, ‘‘Books serve to show a man that those original thoughts of his aren’t very new after all.” In financial markets, where cycles of greed, fear and hope occur with metronomic regularity, books can help decipher what makes them tick. In the end, you should remember that books are likely to be more profitable when you read rather than invest.
Shashank Khare is an investment professional and writer. After studying engineering at IIT-D and business administration at IIM-A, he entered the world of credit derivatives before CDS became a four-letter word. Having successfully batted through the crises, he now indulges his passion for economics, finance and policy through writing and trading.
* Computed using Shiller’s data set at http://www.econ.yale.edu/~shiller/data.htm-
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First Published: Mon, Apr 29 2013. 01 16 AM IST
More Topics: Indulge | Shashank Khare | investments | books |