Calculating the Cost Basis of your Coins

[physics-fan3.14]

Many of us have built our collections up over a period of many years, and have invested a significant amount of money into our hobby. While I consider myself primarily a collector, it is impossible to ignore the financial aspects of a hobby such as this - there is inevitably an investment quotient in any large purchase of this type. As an investor, it is only natural to want to track how my investments are doing. I have no plans to sell my collection any time soon, but a wise manager of money should always know how he is doing. Thus, it is crucial to have an accurate cost basis. While it may seem like keeping the receipt is enough, it isn't. Inflation is a constant drag on your investments, and will eat away your money until there is nothing left. Inflation has been called "the hidden tax" because it is an easy way for governments to reduce their debt - borrow $100, inflate some, and then pay back that $100 (which is now only worth $95).

 

So what is inflation? Inflation is an increase in the money supply - caused by governments printing more money. When the supply of money grows faster than the demand for it (i.e., the size of the economy), you have a positive rate of inflation. We notice this as a rise in prices - the money is worth less, but that shirt or car is still worth the same amount in real terms. Thus, it takes more money to buy it. If the money supply were to grow at exactly the same pace as GDP, you would have zero inflation (Gross Domestic Product is essentially a measure of the entire economic output of a region). The opposite of inflation is called "deflation" and is a general decrease in the money supply, characterized by a decrease in prices. According to the Austrian School of Economics, both inflation and deflation are bad.

 

How does this affect you as a collector? Take, for example, a Morgan dollar purchased in 1975 for $100. If you have it tracked as costing $100, that is only partially true - in 2012 dollars, that $100 would have the same buying power as $434. Thus, your true cost of the coin in today's dollars is $434! If you sell it for $200, you are incurring a 50% loss on the coin - a shocking thought for any investment. While the prices of many coins have increased significantly more than the price of inflation, many have not. If you are a long term collector or investor such as myself, the inevitable cost of inflation is too great to ignore. The ideal scenario would be to plan your investments with the intention of appreciating greater than the rate of inflation. When building a set, this may not always happen - certain coins are always going to appreciate faster than others. However, you should still be aware of the "hidden tax" on your coins.

[RWB]

I suggest you are confusing, and mixing "price inflation" with "monetary inflation." Also, "deflation" is not a "decrease in the money supply...."

 

 

[ldhair]

Lots to think about. Many years ago, I had myself thinking how well I had done picking the coins for my collection. Never thought about inflation. Big mistake on my part. As much as I love my collection, I could have done better. That same money could have been creating passive income all these years. That same income could have built a much better collection.

[Walkerfan]

Lots to think about. Many years ago, I had myself thinking how well I had done picking the coins for my collection. Never thought about inflation. Big mistake on my part. As much as I love my collection, I could have done better. That same money could have been creating passive income all these years. That same income could have built a much better collection.

 

I wished I had started my set about 5-10 years earlier than I did but, after thinking about this, I am glad that I didn't, since I didn't have enough knowledge back then and would have wound up with a 'hodge-podge' of coins some good but many more BAD.

[physics-fan3.14]

I suggest you are confusing, and mixing "price inflation" with "monetary inflation." Also, "deflation" is not a "decrease in the money supply...."

 

 

In the Austrian view (which I subscribe to) price inflation is directly caused by monetary inflation. The two are essentially the same in my mind - which differs considerably from the prevailing Keynesian view.

[Walkerfan]

In an economic deflation, everything falls—prices, output, wages, profits. That doesn't affect the EXISTING money supply but it will have a HUGE impact on FUTURE GDP and LONG TERM money supply and GROWTH.

 

Keep in mind that Inflation is calculated by a rise in the consumer price index. Although, price inflation and monetary inflation are not the same thing they are indirectly related. Price inflation eventually follows monetary inflation.

 

Deflation is caused by an increase in the demand for money (people hoarding), increase in supply, decrease in demand. This is what happened during the Great Depression.

 

In this time of unprecendented US DEBT, deflation is not a real threat, since the government while trying to balance the budget will print MORE money to pay it's debt while simultaneously raising taxes.

[RWB]

The Austrian model does not appear to work well in a post-WWI era, except on a simplistic level. Boehm-Bawerk, Mises, Roepke and friends made important and practical contributions to understanding economies, but capitalism since 1980 has not followed past examples unless one goes back to Venetian state-capitalism. The rate of transactional completion is poorly described in nearly all models, yet is a major factor on the macroeconomic level. Keynes doesn't do much better, either. There is, I think, a Japanese guy working on something different, but I don't recall his name....

 

However, the idea that few collectors (including tax collectors) consider the value of an item vs the value of a currency unit, is certainly correct.

 

The CPI is a defined "market basket" but it is not an accurate measure of either price or money inflation. It is inherently biased by its content.

[leeg]

When I purchase coins the long term investment potential does play a part in my decision.

 

But, it is far from my #1 priority.

 

For me, Eye Appeal, is where the money is. Eye Appeal does not have a grade limitation. A coin in Fine can be just just as appealing as another coin in MS68 or higher. It's all about knowing your series and what is "nice" for the grade and series.

 

What I've found out, the hard way, is "Do Not Overpay For Color!"

 

As an example of this, how about "buying the coin and not the holder" as so many like to preach about but don't follow.

 

 

I bought this example in a PCGS 64 holder. The seller thought it was Cameo, as did I, and it was priced as such.

 

PCGS only designates Copper coins in Cameo that are Red. Their loss and definitely NGC's gain.

 

Enjoy your coins but learn your series of choice.

 

Rick Snow and Mark Goodman, his image, both thought this is one of the nicest 64's they have seen.

 

[RWB]

Nice Indian cent!

[Walkerfan]

That's alota coin for a 64!

[Mr.Mcknowitall]

Many of us have built our collections up over a period of many years, and have invested a significant amount of money into our hobby. While I consider myself primarily a collector, it is impossible to ignore the financial aspects of a hobby such as this - there is inevitably an investment quotient in any large purchase of this type. As an investor, it is only natural to want to track how my investments are doing. I have no plans to sell my collection any time soon, but a wise manager of money should always know how he is doing. Thus, it is crucial to have an accurate cost basis. While it may seem like keeping the receipt is enough, it isn't. Inflation is a constant drag on your investments, and will eat away your money until there is nothing left. Inflation has been called "the hidden tax" because it is an easy way for governments to reduce their debt - borrow $100, inflate some, and then pay back that $100 (which is now only worth $95).

 

So what is inflation? Inflation is an increase in the money supply - caused by governments printing more money. When the supply of money grows faster than the demand for it (i.e., the size of the economy), you have a positive rate of inflation. We notice this as a rise in prices - the money is worth less, but that shirt or car is still worth the same amount in real terms. Thus, it takes more money to buy it. If the money supply were to grow at exactly the same pace as GDP, you would have zero inflation (Gross Domestic Product is essentially a measure of the entire economic output of a region). The opposite of inflation is called "deflation" and is a general decrease in the money supply, characterized by a decrease in prices. According to the Austrian School of Economics, both inflation and deflation are bad.

 

How does this affect you as a collector? Take, for example, a Morgan dollar purchased in 1975 for $100. If you have it tracked as costing $100, that is only partially true - in 2012 dollars, that $100 would have the same buying power as $434. Thus, your true cost of the coin in today's dollars is $434! If you sell it for $200, you are incurring a 50% loss on the coin - a shocking thought for any investment. While the prices of many coins have increased significantly more than the price of inflation, many have not. If you are a long term collector or investor such as myself, the inevitable cost of inflation is too great to ignore. The ideal scenario would be to plan your investments with the intention of appreciating greater than the rate of inflation. When building a set, this may not always happen - certain coins are always going to appreciate faster than others. However, you should still be aware of the "hidden tax" on your coins.

 

An interesting question. But (blah blah) the basis of value Posit may not be correct.

As an example, what was silver value in 1975 vs. now?

 

What is the value of the Dollar now vs. 1975 without regard to inflation?

 

Is inflation static?

 

Is inflation defined only in regard to fiat money?

 

Was inflation in play (positive or negative) when coin was bought?

 

Just some useless thoughts.

 

Respectfully,

John Curlis

 

[physics-fan3.14]

Not useless thoughts at all, John - these are exactly the types of questions you have to ask when examining the true cost basis of your coin.

[Walkerfan]

Also were coins bought over different time periods or same or both.

 

Did you make money or lose money on upgrades, when reselling previous lower graded coins.

 

Also did you pay FMV or + or -.

 

It is all possible to figure out but not very easily.......

[Walkerfan]

I know one thing----I started SERIOUSLY building my Registry set around 2005 and inflation has increased by 16% since then. WOW!

[Ducksoup]

Other questions to consider:

 

What is the enjoyment of owning each coin worth?

What would I have spent that money on if I hadn't bought a coin?

Would the thing I spent the money on instead of the coin bring me any value today?

[Walkerfan]

Other questions to consider:

 

What is the enjoyment of owning each coin worth?

What would I have spent that money on if I hadn't bought a coin?

Would the thing I spent the money on instead of the coin bring me any value today?

 

Yes, I agree. Coins offer an intrinsic value that just can't be quantified.

[FishyOne]

Other questions to consider:

 

What is the enjoyment of owning each coin worth?

What would I have spent that money on if I hadn't bought a coin?

Would the thing I spent the money on instead of the coin bring me any value today?

 

Ahhhh! The hobby factor! I didn't think we were talking about that!

 

I buy and sell, a lot. That's part of the hobby for me, so I'm not really a collector per se, but enjoy coins and numismatics.

 

In the book, "Collecting and Investing in Rare Coins", by D. Bowers he quotes a 14% average annual return for the top collections he's seen. And when Bowers talks about the top collections, he's talking about the best and oftentimes 8 figure numismatic holdings.

 

Anyway, if I were were to calculate cost basis I would use the original purchase price and factor in a reasonable rate of inflation during the years I owned it. Unless you're buying junk, damn unlucky, or over-paying, you will realize a decent ROI.

 

[copper toning]

If I buy to invest I intend to sell immediately. Other wise I buy for my taste regardless of value now or later. Too much analyzation tend to bore it up. Then again my collection is very modest.

[Mr.Mcknowitall]

Not useless thoughts at all, John - these are exactly the types of questions you have to ask when examining the true cost basis of your coin.

 

Thank You for your gentlemanly reply and understanding of my questions.

Respectfully,

John Curlis

[DirtyGoldMan]

It seems to me that folks are using the terms "cost basis" and "opportunity cost" interchangeably.

[Arizonadesertrat]

"...Unless you're buying junk, damn unlucky, or over-paying, you will realize a decent ROI."

 

If only that were true for most collectors. I have been collecting, off and on, for more than 45 years. I have talked with lots of dealers during this time, and one thing hasn't changed. The general opinion, which I share, is that very few collectors (less than 5%) will realize a profit when they sell. Why? Many are overly price-conscious---and buy junk (overgraded and problem coins) as a way of maximizing the number of coins per dollar, they buy very low grade coins less than $100 (these tend not to keep up with inflation) because of budgetary limits, they don't have a well-thought-out 'exit' plan when they decide to sell, or they are forced by financial circumstances to sell their coins too soon. A big problem with coins and other collectibles is that there is a significant transaction cost that has to be overcome before a profit can be realized.

[Houston Investor]

Tomorrow I will be closing a deal with a customer on some bullion related material. The profit on it will be around 500% as bullion prices have gone up considerably since this material was acquired. Its all raw, world collector material with some US thrown in. It includes some ASE's and silver rounds.

 

Should I sit on it and wait for it to go up more? No - I believe in taking profits and as I am in the business the quicker I can move stuff the better. I am trying to get rid of inexpensive bulk material to concentrate in bigger ticket stuff. I moved two expensive coins today bought not more than 30 days ago. One at 30% over cost and another at 67%. So at least my recent purchases are generating something and my business model is working. Its not all peaches and cream as there are hits here and there.

 

I don't regret holding coins for a long time if it takes that to realize my price. Coins produce nothing nor pay dividends. They are a hobby which consumes lots of money and can become an addiction which can lead to things like bankruptcy, divorce. One needs to budget spending carefully. In costing coins for inventory, not only is direct purchase cost allocated but shipping and any buyers fees to the cost of the coin. Show expenses are treated as a variable cost allocable between sales (selling expense) and purchases (inventory cost).

 

I track my investment in coins by comparing Market Value vs Cost. The Market Value of my inventory is aboout 3x its cost. Add inflation accounting to my coin inventory cost - no thanks its complex enough as it is keeping track of cost and MV.

[FishyOne]

"...Unless you're buying junk, damn unlucky, or over-paying, you will realize a decent ROI."

 

If only that were true for most collectors. I have been collecting, off and on, for more than 45 years. I have talked with lots of dealers during this time, and one thing hasn't changed. The general opinion, which I share, is that very few collectors (less than 5%) will realize a profit when they sell. Why? Many are overly price-conscious---and buy junk (overgraded and problem coins) as a way of maximizing the number of coins per dollar, they buy very low grade coins less than $100 (these tend not to keep up with inflation) because of budgetary limits, they don't have a well-thought-out 'exit' plan when they decide to sell, or they are forced by financial circumstances to sell their coins too soon. A big problem with coins and other collectibles is that there is a significant transaction cost that has to be overcome before a profit can be realized.

 

I agree with most of your comments except the last sentence. I've always felt it was relatively easy and inexpensive to sell coins at near retail price levels. Most other collectibles are different. Especially those with large wholesale/retail price spreads.

 

 

[World Colonial]

I suggest you are confusing, and mixing "price inflation" with "monetary inflation." Also, "deflation" is not a "decrease in the money supply...."

 

 

In the Austrian view (which I subscribe to) price inflation is directly caused by monetary inflation. The two are essentially the same in my mind - which differs considerably from the prevailing Keynesian view.

 

Correct

[World Colonial]

 

I agree with most of your comments except the last sentence. I've always felt it was relatively easy and inexpensive to sell coins at near retail price levels. Most other collectibles are different. Especially those with large wholesale/retail price spreads.

 

 

I think both of you are right but it depends upon what you buy and how you sell it. I do not know what most coin collectors do but I suspect they still buy disproportionately at "retail" (from a dealer) and sell at "wholesale" (to a dealer).

 

If this is correct, then this would be a big contributing factor to why they lose money. When I was much younger and buying from a local dealer was the most practical option for most collectors, I was told that dealer buy prices were 60% of retail. It takes alot of appreciation to overcome both that discount and make money after inflation.

 

I also suspect that most coin prices have not matched inflation (as measured by the CPI) since I first started collecitng in 1975 unless the numismatic premium is low and it is tied to the price of silver or gold. The first "Red Book" I bought was the 1977 edition and though I no longer have it, from what I remember, coins like the "key dates", what are now better MS (say MS-64 and above) "investor" coins and early federal coinage have done much better while most everything else has done worse.

 

The coins that have probably appreciated the most are non-US. I say "probably" because I only started collecting them in 1998 and many (though still a small minority) have increased a lot. I just do not know whether they were "dead money" before that.