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Wall Street is learning to respect this 6,000-year-old, high-return, low-risk, 10 Billion Dollar investment vehicle Current bull market offers outstanding opportunities for individual and institutional investors In 2005 I was asked to provide information to a legislative committee regarding the financial merits of allocating a small portion of a multi-billion-dollar institutional investment portfolio to rare coins. The committee asked me to prepare to answer five questions: Is it safe to invest in rare coins? Is the size of the US rare coin market sufficient to provide adequate liquidity? Who among well-known people has successfully invested in rare coins? How have rare coins performed as investment vehicles in the past? What is the current market outlook for rare coins? After my testimony, a new way of thinking about the questions struck me: Managers of endowment funds, public and corporate pension funds, and similar institutional investment funds are fiduciaries. They have a legal responsibility to act in the best interests of the institutions or individuals on whose behalf they are investing. That should mean that they are required to investigate and act on the facts rather than unquestioningly accept conventional investment wisdom, particularly when that wisdom comes primarily from stockbrokers, managers of mutual funds and hedge funds, and investment advisors with a financial interest in promoting stocks and bonds. Individual investors, while not legally required to think outside the box, would be wise to undertake similar fact-finding. As my answers below demonstrate in detail, the evidence is compelling: Investing in rare coins is safe (in fact, because rare coins are a true portfolio diversifier, they decrease risk and increase safety). The market is liquid, with many transactions taking place almost instantly on electronic networks. Among well-known people who have invested in rare coins that appreciated enormously in value are the Rothschilds, Willis J. duPont (DuPont de Nemours & Co.), Josiah K. Lilly, Jr. (Eli Lilly CEO), and former US Congressman Jimmy Hayes. Over the past 25 years, investment-quality rare coins have outperformed stocks, bonds, and gold. The current outlook for the rare coin market is that the bull market that started in 2002 will continue for at least three or four more years from now (January 2006). Let’s examine the evidence. I) Is it safe to invest in rare coins: Since the beginning of recorded history 6,000 years ago coins, particularly those minted from gold and silver, have served as storehouses of financial value. Collecting specific coins (as opposed to just accumulating masses of coins) is a more modern phenomenon, dating back over five centuries. As collectors discovered that some coins were harder to find than others, the concept of "rare coins" arose. The law of supply and demand created a premium for these coins above their face value or the value of the precious metals they contained. In May 2005, a 1913 US Liberty nickel - one of only five of its type known to exist - was purchased in a private treaty sale for $4.15 million. Mike Sherman of Collectors Universe completed a study of all the original 1913 nickels since 1941, when they were first sold individually. (The five coins remained as a set until then.) Sherman recorded the prices from all 20 sales from 1941 to 2005; they showed an average return of 12.2% compounded annually. In 1913 each nickel, including the one that sold in 2005 for $4.15 million, was valued at $80. Although the 1913 Nickel is a low-population (5) coin, many other US rarities have also demonstrated extraordinarily high levels of appreciation. Dr. Raymond Lombra, Dean of Economics at Penn State University, in a study we’ll talk about more, discovered that high-grade rare coins showed an average annual gain of 14.1% in the 25 years from 1973-1998. Primarily in the past 60 years, buying and selling rare coins for investment purposes has taken on a life of its own. Although they participate in the market alongside collectors (and benefit from the demand generated by collectors), many purchasers of rare coins view their acquisitions primarily or entirely as investment vehicles. Read More 1. Why coins hold value Every investment involves risk. Even cash in an FDIC-insured bank account is subject to the erosion of inflation. And even Fortune 500 companies such as Enron, WorldCom, Delphi, and four of the six legacy US airlines go bankrupt, leaving their stock and frequently their bonds virtually worthless. Short of bankruptcy, companies can and do issue additional shares of stock, diluting the shares already held by investors. Governments print money and inject it into the economy, diluting the value of cash; over the past three years the US dollar has dropped about 25% in value relative to a basket of other currencies, and about 60% relative to gold. Even many non-paper assets, such as mass produced collectibles, are, well, mass-produced. When the crazes ended for Cabbage Patch Kids and Pokemon figures, their essentially infinite supply tended to devalue them precipitously. Read More 2. Some investors seeking to balance their portfolios with an asset class not subject to these types of risk are purchasing rare coins. Rare coins are totally immune from bankruptcy and close to immune from dilution. The US Mint will never manufacture another 1913 Liberty Head Nickel. And decades of enormous premiums have pulled almost all rare coins not held in collections into the marketplace. Even when a shipwreck or hoard is discovered, marketing based on the excitement reaches beyond the numismatic community to the public. That has increased the number of serious collectors and investors, so that over the years demand has grown at a greater rate than supply. Coins are not pieces of paper given value only by promises from a government or the future prospects of a corporation. Coins have intrinsic value. Therefore they never lose all their value and they always retain the possibility of rebounding from a decrease in value. In fact, they always have, which explains why, despite ups and downs in the market, rare coins are up 6,466% in 35 years. The first duty of fiduciaries is to protect assets. They should therefore view immunity from total loss and propensity to rebound as compelling strengths in an investment vehicle. So should individual investors concerned with protecting and growing assets for themselves and their families. Read more 3. Rare coins increase safety through portfolio diversification Dr. Raymond Lombra, Dean of Economics at Penn State University, conducted a study entitled Managing Portfolio Risk: An independent economic analysis of the investment performance of rare U.S. coins in diversified portfolios for the period January 1979 to December 2003. Dr. Lombra found that rare coins had a .35 correlation with stocks. (1.0 is perfect correlation, moving exactly in tandem with stocks and offering no true diversification; -1.0 is perfect inverse correlation, moving exactly opposite from stocks - not a good thing if you expect the long-term trend in stocks to be up.) US Treasury Bonds provided somewhat greater diversification from stocks than coins, at .11, but bonds dimmed and coins shined at protecting portfolios against inflation. Rare coins protect against inflation When Dr. Lombra studied correlation with inflation, he found that bonds are adversely impacted by inflation and coins, as one might expect, tend to rise during inflation. For the period 1979-1986, US Treasury Bonds’ correlation with inflation was -.71 (reflecting a huge loss); for 1987-2003 it was -.08. For the same periods, rare coins correlated .69 and .01; stocks correlated .16 and -.06. Rare coins increased return Dr. Lombra compared performance over the 25-year period of 10 model portfolios with a variety of asset allocations. Five allocations were on the more conservative side, with between 31.7% and 33% of assets invested in stocks and between 63.4% and 66% invested in Treasury Bonds and T-Bills. Five allocations assumed more risk, with between 47.5% and 50% of assets invested in stocks and between 47.6% and 50% of assets invested in Treasury Bonds and T-Bills. Each portfolio had either 0% or 5% invested in U.S. rare coins graded MS65 (more later about coin grading), 0% or 5% in U.S. rare coins graded MS63 through MS65, and 0% or 5% in gold. No portfolio had more than a total of 10% invested in these tangible assets. Among the five conservative portfolios, the highest average annual rate of return -10.6% - belonged to the portfolio with 5% in MS65 rare coins and 31.7% each in stocks, Treasury Bonds, and T-Bills. Among the five more aggressively invested portfolios, the highest average annual rate of return - 11.4% - also belonged to a portfolio with 5% in MS65 rare coins. In this case, 47.5% was invested in stocks, and 23.8% each in Treasury Bonds, and T-Bills. If a similar study were conducted for the period January 2002-December 2005, it would show somewhat different results. With interest rates on Treasury Bonds and T-Bills low and stocks moving sideways, there have been raging bull markets in rare coins and gold. For the 4-year period ending December 31, 2005, the portfolios with the highest rates of return by far would be those with 5% in MS65 rare coins and 5% in gold. Read more on independent confirmation of Dr. Lombra’s findings 4. Coin authentication and grading Rare coins tend to appreciate, particularly in inflationary periods, and collectors and their heirs have realized fortunes on the sale of coins that had been held for decades. Until 20 years ago, however, investing in rare coins would have been a dicey proposition for most people. Investors who were not experienced numismatists would have had a difficult time distinguishing between authentic and counterfeit coins and between valuable specimens of a particular issue and coins that has been cleaned and polished to resemble them. Even among genuine, unaltered coins, they would have been unable to detect the fine distinctions that separate one grade from another - distinctions that can yield price differentials of hundreds, thousands, and even tens of thousands of dollars. Investors would have had to rely entirely on the expertise and integrity of their coin professionals. The advent of third-party coin grading services in 1986 opened the way to safe investing in coins by non-numismatists. The grading services encapsulate the coins in tamper-evident transparent holders, known among numismatists as "slabs." Also encapsulated in each slab is a certificate of authenticity and a grade, such as "MS65," which means that on a scale of 1-70, with 70 meaning a perfectly minted and preserved coin, the coin rates a grade of 65. ("MS" stands for "Mint State" and designates the upper end of the grading scale, from 60 to 70.) Rare coins could now be bought and sold like shares of stock. One authenticated 1911 $5 U.S. Gold Indian graded MS65 by one of the respected grading services, such as NGC or PCGS, is considered to be the same as any other (although the most finicky collectors and investors hunt in person for "high-end" specimens within a grade). Every day thousands of rare coins are bought and sold "sight-unseen" through Internet auctions sites and television shopping channels. ("Sight-unseen" is the industry term for these sales; in fact retail Internet auction sites show photos of the coins, and TV shoppers see them displayed on their screens.) 20 years of accurate supply data In the long run, the key to determining the value of a particular type of coin in a particular year and grade is its relative rarity. Take two investment-quality coins. Coin A is selling for the same price as a Coin B, but there are five times as many A’s as B’s available. I would suggest, barring extraordinary factors, that accumulating B’s is the better investment. But, how do you know there are five times as many A’s as B’s? Before the grading services, you could make an estimate based only on original mintage figures (often involving data over 100 years old) and a coin professional’s evaluation of the volume of transactions seen at coins shows, auctions, and other sectors of the marketplace. Since 1986, however, the three top coin grading services, PCGS, NGC, and ANACS, have kept and published highly reliable statistics on the 20-million coins they have authenticated and graded, broken down in the case of US coins by type of coin, year, mintmark if any, and grade. For investors, this data has enormously increased the transparency of the rare coin market. It is roughly comparable to the published information in the equities markets on market capitalization and shares outstanding. CoinStats CoinStats is an investment tool made possible by the data described above. About 10 years ago, based on speaking with a number of rare coin investors who where active in the stock market, I realized that there were many similarities between identifying undervalued stocks and undervalued rare coins. I start out with the "market capitalization" of each coin in the nine most popular series of rare US silver and gold coins, in grades MS63 through MS67. The "market capitalization," or "market cap," of a company’s stock equals the number of shares outstanding multiplied by the price per share. In rare coins, market cap = population (defined as number of coins graded by NGC + number of coins graded by PCGS) times the price of the coin. Comparing the market cap of coins is the first step in identifying undervalued coins. CoinStats goes on to compare the decrease in population of the next grade up to the increase in price of that grade. The largest percentage decrease in population of the next grade up combined with the highest percentage increase in price of the next grade up identifies value coins. As collectors and investors are priced out of the market for the next grade up their attention turns to these value coins, and their prices take off. While it’s not an infallible formula, CoinStats has consistently helped investors outperform even the overall market in investment-quality coins. In a bull market such as we have been experiencing since 2002 (see Section 5 below), where the indexes themselves are increasing dramatically, CoinStats points the way to maximize the profits from investing in coins. For a free sample of CoinStats please contact me at barry@coinmag.com. Industry self-regulation programs Investors choosing to invest in rare coins, from the largest public agency or pension plan to the smallest individual investor, can and should protect their investments by working only with numismatic professionals of the highest standing. They should select dealers who have been members of the Professional Numismatist Guild and the American Numismatic Association for a minimum of 10 years. Institutional and very large individual investors should select fund managers and independent monitors (experts not involved in their transactions) based on the same criteria. Read more 5. Safe coin storage and transport Rare coins do not pay interest or issue dividends. In that respect, they are similar to growth stocks: return on investment comes from buying low and selling high. Between purchase and sale, the coins must be transported and stored safely. Individual investors typically rely for storage on home safes, vaults or bank safe-deposit boxes. Institutional and large individual investors can obtain greater levels of security, as well as personalized storage services, by availing themselves of the specialized custody services offered by a professional depository company, usually for reasonable fees. Such companies provide insured and highly secure storage of assets, holding them in their owner’s name and the off-balance sheet of the depository company itself. In addition to periodic inventory statements, some of these companies may even provide individual third-party transaction confirmations, which verify directly to the account owner every deposit, transfer, or withdrawal affecting each coin in the account, further enhancing the overall security offered by the depository. Rare coins as collateral An investor with a pressing need for cash (for personal reasons to or to take advantage of an investment opportunity) can use rare coin holdings to meet that need - without selling the coins. Read more 6. Is it safe to invest in rare coins? Is the size of the US rare coin market sufficient to provide adequate liquidity? Who among well-known people has successfully invested in rare coins? How have rare coins performed as investment vehicles in the past? What is the current market outlook for rare coins?

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