“There is no friend as loyal as a book.”
I’d imagine writer Ernest Hemingway wasn’t talking investments when he said that, but if the past month is anything to go by, the quote certainly applies to diversifying with rare books.
We’ve all fallen in love with a book or author in our time, but lately, a few investors have been infatuated with more than just the words contained within.
The collectibles market was inundated with exciting, high-profile book sales in May, which once again reminded me that these marvelous tomes are a great asset in which to diversify – there’s a reason so many high-net worth individuals have a substantial library.
First up was Sotheby’s First Editions, Second Thoughts auction, which offered a selection of first edition books that had been additionally annotated by their authors, providing a remarkable opportunity for the discerning book collector.
The sale saw the world record for a first edition of Harry Potter and the Philosopher’s Stone set at $227,993 – a 775% increase on the previous $26,046 record, which was only established in April.
We also saw Truman Capote’s manuscript for Breakfast at Tiffany’s sell for $255,500 at RR Auction, while the manuscript for Oscar Wilde’s Heart’s Yearning set another record at $104,770 with Bonhams.
Yet it’s not just recently that rare books have been triumphant at auction…
In 2002 a signed first edition copy of James Joyce’s Ulysses set the world record for the author’s work at $701,827.
Sumo, a photographic book by Helmut Newton, originally retailed for $1,500 in 1999. In 2000, the very first copy sold for an impressive $430,000.
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Few assets will see a 28,566% increase in value in that short a time.
Yet, like all investments, results such as these are – sadly – not guaranteed. Indeed, it is generally only the most expensive end of the rare books sector that offers the potential of decent price growth over time, and even then you should consult an expert before parting with your cash.
Yet do it right and rare books, like most collectibles, can provide a valuable option for hedging against losses in more mainstream investments.
As well as offering 9% pa returns over 20 years, books come with relatively low volatility (a standard deviation of less than 5%), according to Emotional Asset Research & Management.
“An investment portfolio that includes rare books is better positioned to withstand market cycles and provide long-term growth that extends well beyond retirement day. Rare books have historically proven to hold and appreciate in value in the long run,” Andre Chevalier of Rare Books Digest told Wealth Daily.
Yet, according to some speculators, volatility isn’t such a big deal in the investing world anymore; The VIX Index, a respected indicator of volatility, has declined from the mid-30s in fourth quarter 2011 to just 13 in May 2013.
This is apparently caused by the huge liquidity that has been thrust into the world’s capital market by central banks – I’d beg to differ.
Bonds, like commodities and currency, have actually been increasing in volatility during the VIX’s decline. Fixed-income bond volatility is measured by the Move Index, which saw a massive leap from 49.04 at the start of May to 81.22 on May 30.
Dealer, collector or investor?
In the world of rare books, you must make a crucial, yet simple, decision: are you a dealer, collector or investor?
Believe me, it is well worth establishing yourself as an investor to get round America’s capital gains tax.
The IRS actually favours the investor, who is able to deduct costs of expenses – such as maintaining, managing or conserving your collection – that may have been incurred under Section 212 of the US tax code.
Sadly, for the collector, your books are considered to be for your own personal pleasure and therefore, all the losses are your own, despite the fact that both dealers and investors are likely to also be in the market for the love of books, rather than simply for a tidy profit.
Meanwhile, dealers have the rigmarole of filing their business activities – a lengthy and rather dull experience for all concerned.
And there are even more benefits. As an investor, you can also defer the capital gains tax that you would normally have to pay when selling.
This can be done by using a strategy used in real estate, known as like-kind exchange, where similar assets are swapped with another collector, thereby negating the tax you would have had to pay on your profits.
The key to establishing yourself as an investor and reaping the rewards?
Simply keep tabs on all the performance of your assets, tracking valuations and maintaining good records of your appraisal activities and show them to the IRS occassionally – something I’m sure you’ll be glad to do once your collection starts to deliver.