That’s the number-one commandment of trading, and yet, no matter how many times I say it, no matter how many times I scream it, people just don’t listen.
Here’s another one: don’t confuse buying stuff with an investment.
For example, that diamond ring on your finger. DeBeers is now going to start manufacturing synthetic diamonds at a much lower price point. What effect do you think that will have on the price of natural stones? Replica Wines is using chemistry to replicate the taste profile of fine wines at a much lower price point. What effect do you think that will have on the price of vintage wines?
The watch industry is making it easier to buy, sell and trade collectible watches online. Which on one hand is great, but on the other hand, if it induces people to do stupid stuff with watches that like they do with stocks, then no thank you.
The watch on your wrist, the car that you drive, the house you live in. They are all depreciating assets that require maintenance, upkeep and insurance. Financial assets generate free cash flow, dividends or interest. Stuff, with few exceptions, doesn’t.
The other issue is that today’s collectible is tomorrow’s addition to the shelves at your local thrift store. Jonathan Clements writing at Humble Dollar notes how generational attitudes have changed toward stuff. Household goods like fine china and silverware were once viewed as stores of value. No longer. Clements writes:
But it’s hard to imagine collectibles will shine so brightly in future. Nobody seems to collect stamps. The price of beautiful antiques has collapsed, dismissed as “brown furniture.” This is the Ikea generation. Possessions are temporary. We lease cars, rent movies and stream music. Why bother to buy?
No doubt the pendulum will swing again and things old will enjoy renewed interest. But I doubt the pendulum will ever swing all the way back: Household possessions will likely never again be viewed as significant stores of wealth. They’re just things—things destined to deteriorate over time.
If your stuff provides you with psychic income, or puts a roof over your head or gets you to work, great. We all need some stuff. Just don’t confuse stuff with an investment. Changing technology and shifting tastes all work against stuff holding its value over time. As I wrote a couple months ago:
If have some burning desire to engage with collectibles just recognize that it for what it is: an engaging hobby which provides some measure of status-seeking and an outlet for your desire to gamble. What it isn’t is an investment.