What is... | June 17, 2010

What is stamp investing?

Rare stamps can be very valuable, in line with the well known economic rules of supply and demand. Investors traditionally divide their assets into cash, equities, property and bonds. But there is another class of assets known as alternative investments.


The more well-known of these alternatives can include art, wine and forestry - with collectible postage stamps on the perforated edge of the alternative options. New research claims stamps can be safer than shares in a financial crisis or during an inflationary spike. It also suggests the unusual investment can provide superior returns to some other assets over the long term.

Second class returns
The new research by academics at London Business School and Tilburg University analysed returns on collectable postage stamps in Britain using catalogue prices from a period of more than 100 years. Authors Elroy Dimson and Christophe Spaenjers found the average return for holding British stamps between 1900 and 2008 was 7% a year in nominal terms. Taking inflation into account reduced the return to 2.9% but the pair wrote that it was still the second-best return out of equities, bonds, art and gold. Equities performed best with 5.1%. Stamps outperformed bonds (where average real returns were less than 1.5%), art (on 2.4%) and gold (0.5%).

Delivery times vary
Returns varied over those 109 years. The strongest price rises were in the inflationary second half of the 1970s, when stamp prices increased more than threefold in real terms. But prices fell in the 1910s, 1950s, and between 1980 and 1994 - except in 1987, the year of the stock market crash. Between 2000 and 2008, there was a 13.9% average annual return, thanks to a 35.5% rise in 2008, the worst year for the financial crisis.

Less liquid than wine?
The wide range of returns shows stamps can be a volatile asset. The researchers found volatility was much higher than that of bonds and closer to that of equities. Writing in the Financial Times, investor David Stevenson said volatility would increase further as stamps became a more mainstream investment for private and professional investors.

Sticky transaction costs
It is much more costly to buy and sell stamps than equities. The researchers found the cost associated with a "round-trip" transaction of buying and selling stamps amounted to about 25% compared with 1-2.5% for shares. This would reduce the returns for someone who held a stamp collection for 10 years to 3.9%. The researchers recommended holding stamps for 40 years. Investors also need to think about selling as well as buying. Stamps are less easy to sell than equities, which may make them illiquid at times. ING Group chief economist Mark Cliffe outlined the importance of liquidity - or how easy it is to sell an investment - in a video on lessons from the financial crisis for eZonomics.

In for a penny, in for £44,000
Rare stamps can be very valuable – in line with the well known economic rules of supply and demand. A pair of Penny Blacks, considered the world’s first and (perhaps best-known) postage stamp, reportedly sold for £85,000 in an auction in April 2010. These high prices mean investors should also plan safe storage and insurance for their collection. It is still not certain why stamps attract such high prices. The researchers identified a wealth effect (prices rising during good times), a hedge against inflation and increased rarity over time as possibilities.

Investing

Phil Thornton
Phil Thornton

Lead consultant at Clariti Economics

Have your say

Would you tell your partner about any money worries?