Are Collectibles Here To Stay?
Masterworks raises $110 Million Series A and reaches Unicorn status
Are collectibles here to stay? Perhaps a more nuanced way of looking at this question is to ask: did collectibles ever leave in the first place?
Beanie Babies, Comic Books, Action Figures, Trading Cards, Sneakers, Watches, Coins, Art…the list is infinite. “It’ll be worth something one day”
Yesterday Masterworks announced that they raised a $110 million Series A financing at a valuation reportedly over $1 billion. Although this may seem like a head-scratcher to some, I view it as just another data point emphasizing that the collectibles market will remain scorching hot.
But first…what is Masterworks?
Masterworks is an online platform which allows people to purchase fractional shares in fine art. The company’s CEO and co-founder, Scott Lynn, says that his mission is to democratize the art market. Most people cannot afford to buy a rare painting for millions of dollars and hang it on their wall. Masterworks’s value proposition is that they buy and store paintings by world-renowned artists like Banksy, Andy Warhol, and Basquiat and then sell shares in public offerings. Shareholders are able to monetize their investment when Masterworks eventually sells the painting, or they can opt to trade their shares on the company’s secondary market. I personally think that this is a very innovative idea and a unique opportunity for investors to branch out into alternative asset classes. To me, though, this is more than a portfolio diversification play.
What’s Really Going On Here?
A lot of interviews that I have watched credit the raging popularity of collectibles to COVID - meaning that people that are bored in their houses decided to re-engage old hobbies such as trading card collecting. Additionally, StockX published a white paper called The Nostalgia Market in which they credit the increased popularity in sports cards, Pokemon, etc. to adults in their 30’s and 40’s whose children are now forming an interest in the same types of things that they were interested in as a child, thereby fueling a sense of nostalgia.
There is a lot of merit to both of these theories. However, I think that there is a third element: exclusivity and addiction to luxury. What do I mean by this?
Does anyone remember this scene from The Social Network? If it wasn’t obvious, the most important part of this dialogue is the final line, “It would be exclusive.” What did this mean?
In Facebook’s early days the primary user base was comprised only from students that went to Ivy League universities (plus Stanford). The rise in social media, particularly in Millennials and Gen Z, has served as the ultimate catalyst to the notions of exclusivity and luxury lifestyle. Why did everyone want an invitation to Clubhouse earlier this year when most of the famous people hosting chat rooms already had their own separate podcasts or YouTube channels discussing the same thing and were accessible to anyone at any time? Because you had to be invited. That’s why.
The Average American Can Purchase Alcohol, Tobacco, Lottery Tickets, and Gamble at a Casino, but…
The average American cannot invest in private companies because they do not meet the definition of an accredited investor because regulators believe that they are not sophisticated enough. Not long ago the idea of alternative investments was pretty concentrated. For example, unless you had the funds to purchase real estate or had the ability to invest in private companies, there weren’t a lot of creative ways to build wealth other than forming disciplined savings habits and investing your money into equities. This notion is being completely flipped upside down in real time. How?
The rise in things like trading cards and sneakers actually makes a lot of sense. I think that a lot of people who have joined the hobby view it as an innovative (and potentially faster) way to build wealth. The best part? It’s available to anyone. There are no rules and regulations surrounding who can buy a Tom Brady rookie card.
So, what about exclusivity and addiction to luxury?
Whether it’s trading cards, sneakers, or NFT’s, there are a couple of common denominators. Card companies and sneaker manufacturers have changed the landscape such that it’s not just about buying a pack of cards or going to the store and buying a new pair of shoes. Both card and sneaker companies have partnered with artists and celebrities to create limited edition, one-of-a-kind products that people want. The market has proven that people are willing to pay astronomical sums of money to have something rare…to have something exclusive. In some ways the utility of the end product almost doesn’t matter. If it is marketed as something special then someone wants it, and they want it badly. I think this is precisely why NFT’s have become so popular.
Any asset is worth what someone else is willing to pay for it. When cultural icons get involved and make their Twitter avatar a specific brand of NFT there is a ripple effect. Moreover, some NFT roadmaps are promising access to exclusive conferences or custom 3D printed figurines to go along with their six figure jpeg.
Trading cards, sneakers, and NFT’s have become the new private company investments and access to exclusive conferences or online communities are the new country clubs. I would predict that most people buying these new asset types do not know if they will hold value over time. However, the idea that I can have something that nobody else has eclipses any sound logic.
Masterworks and their fractional shares of artwork is just another derivative of what companies like Otis and Fundrise offer. I personally view artwork a bit differently than things like trading cards, sneakers, and NFT’s though. To me, artwork is a bit like real estate. What I mean by that is the time to realize your gains will most likely take an extended period of time; however, artwork and real estate are two of the oldest asset classes ever created. In this sense, there has always been, and I think always will be, demand for them. It’s hard to predict if that will hold true for things like cards, sneakers, and NFT’s.
My Personal Investment Approach
Artwork: I already own fractional shares in one Masterworks portfolio holding. I would love to buy more, but these investments come with a fairly meaningful price tag and a long time to liquidation.
Trading Cards/Sneakers: Although I collected cards as a kid, I don’t see myself getting back into the hobby as a collector. As an investor, I think that the prices of cards and shoes have reached unsustainable levels. Couple that with the unpredictability that a player could suffer an injury or a celebrity be overshadowed and become irrelevant and you get yourself a mixed bag at best. Sure, real estate or a painting could lose it’s value. However, as I said above, both of these asset types have longer time horizons and therefore allow for price fluctuations. I am not sure the same can be reasonably said about an athlete or celebrity.
NFT’s: I’ll admit it…I am becoming intrigued by these things. I struggle to see how a jpeg is worth what people are paying for it and I have concerns about privacy, hacking, etc. But I do like the idea that some roadmaps provide access to private communities, custom merchandise, etc. If nothing else, it’s a way to connect with like-minded people if you are willing and able to pay the price for entry.