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Sunday, November 14, 2010

Practical Advice: Investment Criteria for Stamps

What determines whether a particular issue is a good investment, and what criteria should one use when considering which stamps to target?

A stamp is similar to other commodities in that its value is determined by supply and demand. Unfortunately, there is very little hard data regarding these two determinants which may be used to "screen" for worthwhile stamps in the same way that one may screen for a list of stocks.

The simplest of these determinants, supply, is a function of the number of stamps issued minus those destroyed or damaged due to attrition. Often, quantity issued information is unavailable for a particular stamp, so it may be necessary to estimate the number issued based upon known quantities issued of similar stamps of comparable value. The number of stamps of a particular issue which have been destroyed or damaged is almost never known, but it may sometimes be possible to make an "educated guess" regarding an approximate range of surviving examples in collectable condition. For most stamps, the vast majority of those issued are used as postage and discarded, so it is sometimes possible to arrive at a notion of a range of usage rates based partly upon the difference in value between the stamp in unused vs. used condition.

Another form of supply attrition results from the damage to stamps in collections or accumulations due to poor storage or other forms of neglect. This, of course, is impossible to calculate, but as a general rule, it applies mostly to inexpensive stamps rather than the more valuable ones which the owners are more likely to take greater pains to preserve. This higher attrition rate is main reason that inexpensive stamps tend to increase in value at a faster rate than rarities do, over time.

Gauging a stamp's scarcity can sometimes rely partly on a hunch based upon one's knowledge and experience of the stamp market. A collector or dealer who has traded in stamps for decades may develop a "feeling" for which stamps are common and which are scarce, when no solid quantitative information is available.

Predicting future demand for an issue is somewhat less straightforward, and is as much an art as a science. There are two main constituents of demand: interest in the stamps of a particular region, or country (and/or its colonies), and interest in a particular topic, theme, or subcategory of philately. Projecting trends in future demand is mostly based on demographic considerations, and these focus mainly on the prospective increase in the number of "serious collectors" seeking a stamps of a particular country or topic. This cohort usually constitutes between 5% and 10% of the general population of stamp collectors. Of course, the majority of stamp collectors (who are less serious about their hobby) also affect demand, and some may eventually become more "serious." However, as they are less committed, they tend to spend less, and their effect on the market is less predictable. Defining who is a "serious collector" is subjective and varies from country to country; my own "rule of thumb" is that such an individual spends at least 1% of his income per year on stamps.

Collecting stamps on a serious level is a leisure activity which requires that the individual who engages in it have sufficient time and money to do so. Therefore, the number of serious collectors within a country usually correlates with the size of its middle class. The growth of a country's middle class is dependent upon two variables: economic growth, and the extent to which that growth benefits the population as a whole. A situation in which a country's prosperity is not sufficiently shared but mainly benefits only a tiny ruling elite does not augur well for the country's stamp market.

Significant demand for a particular country's stamps may extend beyond the collectors within the country, however. If there exist large numbers of immigrants from the country (or their descendants) living in other countries, such groups may have a cultural or sentimental bond with their former country. Also, as some countries are former colonies of European nations, there may be a demand for a country's stamps among those who collect the former mother country and its colonies. Thirdly, certain groupings of countries (such as the Baltic States, Latin America, etc.) are often collected as regions. Thus, in many cases applying criteria of economic growth may be complicated by the dual or multiple "overseas" appeal of a particular country's stamps.

Similar growth trends apply to topical or "thematic" collecting, although since topical collecting is generally a worldwide phenomena, the trends are usually more difficult to quantify. For instance, one may recognize that Soccer is popular in much of the developing world, and should grow in popularity as a collecting topic, but attempting to analyze the trend on a country-by-country basis would not be practical. Certain topics, such as National Heroes, apply only to individual countries, and the growth in their popularity may be projected using the same data that one would use to gauge the trends for the country's stamps generally.

A number of miscellaneous factors can also significantly affect demand. If a stamp has been extensively forged or faked, but is not valuable enough to be worth expertising, then demand for the stamp may be adversely affected, even if authentic examples are scarce. The reason for this is that most collectors will tend to value even the authentic stamps as if they were fakes, because they will not be able to distinguish between what is authentic and what is not. This is the case with many overprinted issues. If major catalogs consider an issue "illegitimate" (i.e. issued mainly as a means of profiting from sales to collectors, rather than for postal use), and do not list it, then that also may dampen demand. Every once in a while, a postal service will issue a stamp with innately self-destructive qualities, such as high-acid paper or gum, or gum containing chemicals which otherwise degrade the stamp over time. Such stamps present special preservation problems which may adversely affect demand, although since these problems often result in accelerated diminution of supply, collectors who take the necessary steps to preserve such stamps may be amply rewarded.

In summary, the following criteria should be considered when evaluating an issue as an investment:

1) Quantity issued, or if not known, an estimate thereof
2) Estimated quantity remaining
3) The population and economic prospects of the country of issuance (i.e. economic growth and growth of a middle class)
4) "Overseas" appeal of the country's stamps
5) Topical appeal, and trends affecting growth of the topic
6) Miscellaneous factors

Obviously, in those instances in which the investor must rely mainly on estimates and educated guesses, it is prudent not to "rush in where angels fear to tread." Otherwise, one might wind up trying to walk on a nebulous cloud combining unjustified optimism and ignorance.

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