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Common among most, if not all, collectible alternative assets of significant value is one key trait: scarcity.
When something is scarce, that means it’s deficient in quantity or number compared with the demand for the asset. Simply put, demand exceeds supply, and when we’re talking about valuable collectibles, the gap between the two is quite large.
Scarcity lies at the root of the most basic economic principles guiding collectible market values. When there’s minimal supply of an asset relative to strong demand, the potential for high prices is strong. The assets that are everywhere (think the general release sneakers, the base sports cards, the commercially-produced art prints) have supply that satiates demand fairly well...or even overdoes it. Those values are generally tame relative to more scarce assets in each category.
That’s why present-day collectible manufacturers aim to create scarcity - or at least the perception of scarcity - when developing and marketing products….but we’ll get to that in a bit.
It’s chiefly the demand component that differentiates scarcity from its oft-used and oft-confused sibling, rarity. An item that is rare is seldom occurring or found. There’s nothing in the definition that describes quantity in relation to demand.
An item can be very rare without being scarce. If there are very few of an item in existence, but demand for the item doesn’t overwhelm supply, that item is not scarce, just rare. Conversely, an item can be scarce without being rare. For example, if Nike releases a sneaker in quantities of 200,000 in the US, but demand far exceeds that supply, you’d call that sneaker scarce. It’s not rare - there are 200,000 pairs in the country, and likely hundreds of thousands more that are very close in appearance.
The two words can very often be used interchangeably without issue, and very few will call you out for mixing them up (we won't!) - just know that there is a difference, albeit slight.
Some items are said to have natural or naturally-occuring scarcity. That’s the type of scarcity that develops when, often due to the passage of time, supply of an asset naturally becomes extremely limited relative to the demand for it. It doesn’t have to be due to time passage either - some resources are naturally scarce to begin with. Think precious metals or gold. Natural scarcity can also develop due to overconsumption.
Now, the definition of natural scarcity might be a bit more flexible for collectibles than it is elsewhere. When talking about collectibles, it’s usually the passage of time that leads to an item’s scarcity. Take vintage baseball cards for example. When many vintage baseball sets debuted, while there was an element of artificial scarcity (more to come on that), the coveted cards weren’t nearly as scarce as they are now. But, over time, those cards were lost, thrown away, damaged, or otherwise compromised. Most pieces of cardboard would fail to survive over the course of decades or even a century. Their scarcity today is more naturally-occurring then.
Or take fossils for example. There was a time when woolly mammoths wandered the earth en masse. Their tusks were not scarce then - there was no demand. Fast forward thousands of years after their extinction, and they still weren’t as scarce as they are today. Precious metals and oil miners cast the fossils they found aside, unaware of their value. Today, the number of surviving tusks in museum quality condition is scarce, not because somebody decided they should be, but because natural factors made it so over the course of epochs.
We’ve established that scarcity can lead to increased values for collectible assets. Modern manufacturers of collectible items recognize this reality, and they capitalize on it. It took time to build that recognition though. For example, the sports card industry went through the “junk wax” era of overproduction; when customers realized how many of the cards were out there and how little value they held, many stopped buying entirely, crippling the industry for many years.
Today, brands across various collectible categories pursue a strategy of “artificial scarcity.” What does that mean exactly? The manufacturers release a limited quantity of highly-desired product, so that demand far exceeds supply. They’re effectively creating scarcity. In some industries, like sneakers for example, the frenzy to secure the product conveys the image that the brand is hot, trendy, and coveted, offering momentum and demand to even the non-limited product. In cards, manufacturers create “chase cards,” the low-numbered parallels that consumers will desperately seek by buying pack-upon-pack, box-upon-box, and case-upon-case of product.
These products are scarce solely because someone decided that it should be so. Often, the strategy works, so long as demand is maintained. To some outside of collecting spheres, the results can be astounding. A card executive decided that a black parallel of a sports card should be a 1-of-1, so that card is worth $100,000, while another piece of cardboard featuring the exact same image but without the shiny black look is worth $10. A pair of “Chicago” Jordan 1 Highs sells for $500, while a Jordan 1 Mid with a near identical colorway sells for $135 or less.
It takes some suspension of disbelief on the consumers’ part to enable artificial scarcity to take hold in prevailing market prices. If consumers broadly decided “there’s nothing special about this card, there are actually tens of thousands just like it” or “I actually prefer a mid-top sneaker over a high-top,” these assets would be more rare than scarce. Alas, that’s not how these markets function, and it’s hard to see that changing dramatically in the near term.
At least when talking about collectibles, natural scarcity arises when organic circumstances or the passage of time create a significant supply deficit relative to demand for an asset. Artificial scarcity, on the other hand, is typically created from intentional human intervention and decision making.
Importantly, an artificially scarce asset is often at some level of threat of its scarcity being reduced by other decision making. More of the asset could be produced, and even if there’s a preference for the original, this impacts scarcity and value, while also raising the barriers to understanding what makes the “original” scarce. If they’re not at threat of greater quantity being introduced, they might be at threat of consumers reducing demand by considering alternative, less scarce options and holding them in similar esteem.
Generally speaking, naturally scarce assets do not face the same threats. The supply is less flexible (in reality, it should be totally inflexible), and potential substitutes are far less comparable or completely inauthentic altogether.
Not necessarily. There is perhaps a slightly lower level of risk associated with naturally scarce assets; the supply side of the equation is under less threat. Ultimately though, both types of scarcity are - to some degree - subject to the whims of the demand of the collecting public. Many artificially scarce items are currently among the most popular, particularly with younger generations. Most important is that a savvy collector understands which scarcity applies to their asset of choice and is fully aware of the risks associated with that asset.
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Disclaimer: You understand that by reading Altan Insights, you are not receiving financial advice. No content published here constitutes a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You further understand that the author(s) are not advising you personally concerning the nature, potential, value or suitability of any particular security, transaction, or investment strategy. You alone are solely responsible for determining whether an investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal financial situation. Please speak with a financial advisor to understand if the risks inherent in trading are appropriate for you. Trade at your own risk.
All information provided by Altan Insights is impersonal and not tailored to the needs of any person, entity or group of persons. Past performance of an index is not an indication or guarantee of future results.
Speculation is perhaps more prevalent today than ever before. Crypto, NFTs, collectibles, meme stocks, even sports gambling - no matter the speculative endeavor of choice, more people are taking more risk with their hard earned money. But make no mistake, speculation is hardly a “new” fad. In fact, the history of speculation dates back many centuries.
Be that as it may, engaging in speculation today is inarguably the easiest it’s been in history, with countless avenues for monetary risk available at a few taps of the finger on smartphones. The link between speculation and entertainment is at its strongest as a result. So, what should you know about speculation before embarking down one of these paths?
Speculation is the participation in a financial transaction - in most cases, the purchase of an asset - with the expectation of financial gain, but with substantial risk of losing all of the capital involved. It’s the second part of that statement - the risk - that crucially characterizes speculation. Speculative investments are generally less reliant on fundamental factors and analysis and more dependent on uncontrollable forces, chance, and market psychology. Put another way, the value of a speculative investment is often based less on underlying cash flows and output and instead more on supply & demand, investor sentiment, and the popularity of certain tastes and trends.
Those factors are far more difficult to measure, predict, and control, thus introducing a substantial degree of risk. When those factors turn against you, the downside can be devastating. This is particularly the case in the absence of underlying fundamentals and cash flows, which render selling below a certain level irrational, thus limiting losses.
The primary difference between investing and speculating is the amount of risk taken in deploying capital. While the risk in speculation is quite high, meaning there is a significant chance of total or near-total loss of principal, investing is generally done with the goal of optimizing the balance of expected return and risk, with lower risk of losing one’s entire principal. Investments are generally made on assets with either a history of producing cash flows (which provide clear value to the investor) or a track record of output and a calculable likelihood that output can later lead to profits for the investor.
FOMO, or the fear of missing out, plays a significant role in perpetuating speculative activity. When speculative markets heat up, those winning in the space are generally quick to advertise their gains or newfound riches. These boasts capture the attention of those not yet in the market, who fear they’re missing out on similar opportunities to build wealth quickly.
Motivated by that fear, those individuals enter the market, purchasing assets with the expectation that they’ll experience the same appreciation. When that happens on a wide enough scale, the entrance of new parties to a market will drive market values higher with buying activity. Conveniently, the participants on the other side of that buying activity are the earlier entrants, who are now provided an exit opportunity to crystallize their gains.
In many cases, those motivated by FOMO will not do the requisite research to understand the assets and markets they’re buying into, instead relying on those success stories as sufficient evidence of merit. If you’ve heard the phrase “apeing in”, that’s essentially what we’re describing here. These new market participants may lack an understanding of risks and market drivers, therefore missing signs that a market is approaching peril. When it eventually turns, it’s those participants left holding the bag, experiencing significant losses as a result.
Collectible assets are most typically considered speculative investments. As mentioned above, the values of speculative investments are often driven predominantly by factors like supply & demand, investor sentiment, and the popularity of certain trends. Those are effectively the precise factors driving the value of collectible assets. Perhaps more importantly, collectible assets are categorized as speculative based on what the vast majority of them don’t produce: cash flow. For most collectibles, there is no underlying economic output. Investors in collectibles don’t earn dividends or clip coupons, and they can’t point to improving underlying revenue and profitability trends that would make those things possible in the future.
Instead, at its core, the value of a collectible is most often driven by how much of that asset exists in the market and how many people want that asset. The prevailing market sentiment in a given moment can make the latter fluctuate up or down, and it can also impact the magnitude of their willingness to pay. When times are good and values are in the ascendancy, people are more likely to pursue speculative assets, and the amount that they’re willing to pay for them - with the expectation that they’ll continue to go up - also rises. When economic conditions worsen and people are less excited about the state of the economy and more nervous about their personal financial standing, the opposite happens. For many collectibles, there’s no real hard, quantifiable limit to just how far values can fall (with the exception of to zero), because there is no utility, no underlying economic output.
It’s important to note, though, that highly traditional financial instruments can be incredibly speculative as well. Equities can be very speculative - just look at the Gamestop saga and the money that flowed into and out of AMC. At certain levels, even buying well known and successful companies like Tesla can be considered very speculative. When stocks are trading at astronomically high multiples versus their earnings or, worse, their revenues, there is considerable risk involved, and activity in those stocks can lean far more speculative in nature. Even bonds, which many would consider boring, can be speculative. For example, bonds can be purchased for pennies on the dollar on the basis of a speculative belief that distress won’t turn out to be as grave as originally thought.
So, it’s really less the vehicle used that defines speculative vs. investment activity, but rather the thought process, the expectations around drivers of value, and the corresponding level of risk.
This is perhaps a matter of opinion, but the multitude of individuals, funds, and businesses that have enjoyed repeated success stories in certain speculative markets suggests that not all speculation is uneducated. It’s possible to speculate smartly on the basis of an educated thesis: an investor can lay out a credible case for why demand for an asset or asset class might increase, or why supply and demand are actually imbalanced but the market hasn’t realized it yet.
It’s not uncommon that market participants are able to speculate successfully, armed by robust data, an ability to forecast trends, and a strong understanding of investor psychology and sentiment. It’s logical - if wealth was never accumulated in these markets, they would not rise to prominence in the first place.
The challenge, though, is that investors can develop well-conceived investment theses that are ultimately never validated by the whims of the market and instead lead to significant losses when things don’t play out. In less speculative arenas, it’s more often the case that an investment thesis will revolve around improved business prospects (stronger revenue growth, higher margins, a larger dividend, greater creditworthiness) that eventually work their way into the prevailing market thought around an asset. That’s a core difference: even when speculation is well-educated and savvy, the risk (in theory) can still be very, very large.
We’ve detailed the high degree of risk that is generally commensurate with speculation. Given that high risk, it’s important to discuss risk tolerance in the context of speculative investments. Risk tolerance is the level of risk that a given investor is willing to tolerate or endure to achieve certain results.
It’s often the case that, in order to achieve significant gains, an investor needs to embrace a higher level of risk - the potentially large gains are the reward for embracing that risk. Put another way, an investment in a large, stable corporation that doesn’t fluctuate in price very much is considered a relatively low risk investment. But, because it’s low risk and stable, an investor wouldn’t expect the same high-flying returns possible in growth stocks, where the array of outcomes is much wider.
An investor with a very high risk tolerance is willing to lose a lot of money in the pursuit of higher returns. They can stomach those losses. Typically, high risk tolerance investors are earlier on in their lives or careers, have steady income to replace losses, and don’t require their principal for retirement or other large expenses in the near future. On the flip side, low risk tolerance investors may be in the late stages of their earning years, preparing for retirement, and really can’t afford to have a large hit to their portfolios.
Now, these are just examples of people that might gravitate towards a certain risk tolerance, but in practice, it can be quite personal. However, it’s most important that an investor understand the magnitude of loss possible with any investment, and that they truly consider their capacity to endure that investment going to zero.
This is where it becomes critically important to understand one’s risk tolerance. The lower one’s risk tolerance, the lower the allocation to speculative assets should be. That way, if the worst outcome does occur, and the speculative assets do become worthless, it affects only a very small percentage of an individual’s overall portfolio. A 100% loss on 1% of the portfolio still leaves you 99% intact. That’s not a suggestion that 1% is the “right” number, but it does illustrate how a conservative tact can spare investors from considerable stress.
If an individual has a higher risk tolerance, they might pursue a more aggressive allocation to speculative assets, particularly if they feel they have an informational edge or a very well conceived investment thesis. Even if that is the case, though, it’s generally ill-advised to pursue truly outsized allocations to speculative investment plays, even if they’re spread amongst different categories. Why? Well, as we saw at the beginning of the summer of 2022, it’s not uncommon for speculative assets of wide variety to suffer at the same time. Crypto, stocks, collectibles - all suffered considerably. An investor significantly exposed to these assets would’ve been looking at a significantly battered net worth, margin calls (though leverage is another topic for another day), and maybe even an inability to meet certain liabilities or liquidate assets to cover unforeseen expenses. The regret arising from that situation is likely to be far worse than the FOMO that might’ve inspired the large allocation.
For most individuals (and this is not investment advice), an allocation to speculative assets will not make up more than 5% of a portfolio, and they might thank themselves for keeping it that low in times of distress, even if FOMO makes it seem foolhardy in brighter moments.
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Disclaimer: You understand that by reading Altan Insights, you are not receiving financial advice. No content published here constitutes a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You further understand that the author(s) are not advising you personally concerning the nature, potential, value or suitability of any particular security, transaction, or investment strategy. You alone are solely responsible for determining whether an investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal financial situation. Please speak with a financial advisor to understand if the risks inherent in trading are appropriate for you. Trade at your own risk.
All information provided by Altan Insights is impersonal and not tailored to the needs of any person, entity or group of persons. Past performance of an index is not an indication or guarantee of future results.
A card grader is a firm that receives cards from collectors only for them to be sent back encased in a “slab”--a transparent plastic container--labeled at the top with a grade from 1-10. A card with a high grade imputes a higher value; only the most pristinely printed and maintained cards are given a 10, the most highly sought after grade.
Card Graders have become an essential piece of the hobby’s infrastructure. A decent analogue for graders in card collecting would be to credit rating agencies in financial markets. The card graders are analyzing the quality of the card itself so as to help investors accurately decide on a value; while Moody’s or Standard & Poor’s analyze the quality of the organization, with respect to credit-worthiness, so as to help collectors accurately decide on a value.
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Going clockwise from the top-left:
There are four grading firms that make up nearly all graded cards. They are as follows:
Founded in 1991, PSA is the de facto king of card grading. They grade far more cards than the rest combined and their red and white label has become a powerful icon within the collecting community.
Beckett Media was founded in 1984 covering the hobby with magazines and price guides. In 2001 they began grading cards themselves. Beckett uses a similar 10 point scale to PSA, but they also have additional 'subgrades'. These include: Centering, Corners, Edges, and Surface. These four subgrades are also used by the following two graders.
SGC has been grading and authenticating cards since 1998. They are among the most reputable names in card grading. Although Beckett and SGC do not grade nearly as many cards as PSA, they are still well-respected brands in the space.
CSG is by far the most recent entrant into the sports card grading space. In 2021 'The Collectibles Group' added sports cards to their list grading offerings. The company has previously graded everything from coins to video games. Currently the smallest player in the space, it is still yet to be seen if CSG will be a mainstay in the hobby like the above mentioned services.
The simplest way to understand how a grader determines a final score is by breaking down the scoring rubric. The four following sub-grades are used to analyze the overall quality of the card:
Arguably the most important factor in determining the grade. If a card is perfectly centered it can buoy the overall grade when compared to underperformance in the remaining categories. Ideally, a card is centered ‘50/50’ or in the exact center of the card; the above Ken Griffey card received a 'GEM-MT 10' which implies at worst a 60/40 centering on the front of the card.
Corners are one of the easiest aspects to notice when grading a card. Is it beat up from regular handling of the card? Has it been bent or dented while placing the card into a sleeve? The above Trevor Lawrence card has crisp, 90° angled corners. You can see that the card’s corners have not been damaged or misshapen in any way–allowing it to receive a 10.
Edges can be damaged in many ways, including: taking the card out of the pack improperly, dropping the card, and/or the card being used as a tasty snack; sometimes by a dog, sometimes by a precocious collector who enjoys the sweet taste of cardboard. Any of this damage will reduce the chance for a high grade. Our Steve Garvey example above would likely have fetched a higher grade if not for the beat-up, frayed edges.
Deductions can be made by any noticeable defect on the surface of the card. Wrinkles, scratches, and discolorations caused by the initial printing of the card or otherwise will lower the grade of a card. Our Micheal Jordan example has quite a few noticeable dings and scratches on the top half of the card; each of these hurts the overall grade.
Each Grading firm has slightly varying methodologies on how they come to each grade. These methodologies do have significant overlap that simplifies the comparison between firms. All of these four major firms use scales from 1-10. Each number grade has a 'Quality' code attached to it.
Each grade means something slightly different. For example PSA describes their highest grade as the following:
"A PSA Gem Mint 10 card is a virtually perfect card. Attributes include four perfectly sharp corners, sharp focus and full original gloss. A PSA Gem Mint 10 card must be free of staining of any kind, but an allowance may be made for a slight printing imperfection, if it doesn't impair the overall appeal of the card. The image must be centered on the card within a tolerance not to exceed approximately 55/45 to 60/40 percent on the front, and 75/25 percent on the reverse."
And their lowest grade PSA doles out, save for altered cards reads:
A PSA Poor 1 will exhibit many of the same qualities of a PSA Fair 1.5 but the defects may have advanced to such a serious stage that the eye appeal of the card has nearly vanished in its entirety. A Poor card may be missing one or two small pieces, exhibit major creasing that nearly breaks through all the layers of cardboard or it may contain extreme discoloration or dirtiness throughout that may make it difficult to identify the issue or content of the card on either the front or back. A card of this nature may also show noticeable warping or another type of destructive effect.
All graders use “half-grades” between 9 and 2 in order to give a more accurate grade to each card. In these situations the quality tag will be given a ‘+’. For example: 5.5 would be EX+ and a 3.5 would be a VG+. These cards will have features that would land it at the high end of the lower grade, but not enough to push it up to the next level.
There are a few differences in the syntax of each grading firm. BGS' highest grade is also a 10, but 'PRI' meaning Pristine while their 'GEM-MT' is only a measly 9.5.
SGC separates their 10 into two–’Pristine’ and ‘Gem Mint’. Here, ‘Pristine’ is the top dog. Only cards described as “virtually flawless” will receive such a grade. Their Gem Mint allows for “a slight print spot”, but only if it does not detract from the rest of the card.
CSG also has two 10 grades, but they are 'Perfect' and 'Gem Mint'. Perfect being a card that has received a 10 in all subgrades and be "flawless under 10x magnification."
The quality abbreviations are quite simple to translate, but here is the full list:
There can be differences in values between the same grade from different firms. PSA is the dominant name in the space, which is reflected in the value of their graded cards. If a card is in a PSA slab it has been stamped with the seal of approval from the most powerful name in grading–this can imply a premium when compared to similar grades from competing firms. Although, depending on the card, deciding which grader to use can be a strategic decision. If you believe you are holding onto a card that could fetch a perfect ten then it may be worthwhile to use BGS as it will display a 10 across each category. Since PSA does not list individual category grades on their label, the same card would likely be valued at a discount to a so-called quad ten grade.
For the most part you cannot go wrong by choosing PSA. Although you will see below that PSA understands their stature in the space and has set their prices accordingly.
The following are current prices and are subject to change:
PSA
BGS
SGC
CSG
You can get into the nitty gritty details of each individual population report from each grader, but here is a good overview below for last year.
PSA is by far the leader in total number of cards graded and they have been for some time. More than 78% of all graded cards in 2022 were graded by PSA. The remaining 22% is split up between the remaining three.
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Disclaimer: You understand that by reading Altan Insights, you are not receiving financial advice. No content published here constitutes a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You further understand that the author(s) are not advising you personally concerning the nature, potential, value or suitability of any particular security, transaction, or investment strategy. You alone are solely responsible for determining whether an investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal financial situation. Please speak with a financial advisor to understand if the risks inherent in trading are appropriate for you. Trade at your own risk.
All information provided by Altan Insights is impersonal and not tailored to the needs of any person, entity or group of persons. Past performance of an index is not an indication or guarantee of future results.
You always hear about ultra high net worth individuals buying and selling “investment pieces”. That phrase might refer to art, fine wine, luxury wristwatches, rare books, even historical memorabilia. These people, the rare type that wouldn’t be out of place at a Sotheby’s or Christie’s auction, can afford entry to these incredible asset classes. And many of these asset classes have extensive histories of impressive returns.
Unfortunately, for most people, they’ve been inaccessible. Not all of us can flex like Dwayne “The Rock” Johnson with a T-Rex skull in the background of our ESPN interview.
Instead, those of us who can’t get our hands on a 1952 Mickey Mantle card or who won’t be donating a Warhol to a museum for the tax write-off have long been relegated to the sidelines.
But no longer…thanks to fractional investing. What exactly is that, though?
Long story short: platforms like Rally, Masterworks, Collectable, Vint, and others are democratizing the ownership of these types of assets. But, how does the fractionalization of an asset work? Here's how they do it.
What these platforms do is buy an asset like a sports card or a work of art, and then they put the necessary paperwork in place to register these assets with the SEC. That’s right, the Securities and Exchange Commission. Because what they’re doing is securitizing the ownership of these assets, essentially making them into financial instruments. What does securitization mean? Well, there’s a lot that goes into that process, but at a high level, they’re creating regulated securities that allow mainstream investors like you and I to own a share of a Mantle or a Warhol.
Once they’ve gotten that SEC approval, the marketplace then conducts an IPO - an initial public offering - for the asset. They’ve set an IPO market cap - the total valuation of the asset - and they proceed to offer shares to the public.
Let’s say the asset is a rare book - a first edition copy of Harry Potter and the Philosopher’s Stone. Rally set the initial offering market cap at $72,000 back in November of 2019, and set the price per share at $24. Let’s say I was interested in this asset, and I bought five shares, or $120 worth. That means I own about 0.2% of the book. Okay, not much, but 0.2% more than I otherwise could’ve.
Once an offering has filled and some time has passed, most fractional marketplaces will allow secondary market trading of the asset. So, users looking to sell their stake can get some liquidity, and those that missed out on the IPO have another chance to gain exposure. With that market buying and selling activity, the price per share changes, just like it would in the stock market. Assets in vogue often appreciate in value, and those with less encouraging data points - like weak comparable sales at auction - might decline.
So those five shares of Harry Potter that I bought at $24? By the start of 2022, the share price was $45, and my total $120 investment would be valued at $225, good for an 87.5% return.
And those high net worth individuals we were talking about earlier? If they see an asset they like, they have the ability to submit a buyout offer for the whole thing. Now, that’s a bigger topic for another day, but if that offer is approved - typically by shareholders and the platform - shareholders receive the proceeds from the sale. That’s another way returns are generated.
So, the next time you hear about an “investment piece”, remember it’s no longer limited to the ultra wealthy. Thanks to fractional investing, even the most coveted of alternative assets are finally within reach.
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Disclaimer: You understand that by reading Altan Insights, you are not receiving financial advice. No content published here constitutes a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You further understand that the author(s) are not advising you personally concerning the nature, potential, value or suitability of any particular security, transaction, or investment strategy. You alone are solely responsible for determining whether an investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal financial situation. Please speak with a financial advisor to understand if the risks inherent in trading are appropriate for you. Trade at your own risk.
All information provided by Altan Insights is impersonal and not tailored to the needs of any person, entity or group of persons. Past performance of an index is not an indication or guarantee of future results.
Alternative assets.
A widely-used term with an even wider range of meanings in today’s modern investment landscape.
We’ve got you covered.
First, to understand “alternative assets”, you have to understand what they’re an alternative to. For decades - centuries even - those looking to invest money and earn more than bank deposits have generally looked to two key, traditional investment vehicles: stocks and bonds. Now, there are numerous ways to invest in stocks and bonds, whether through individual securities, mutual funds, or ETFs, but they sit at the core of almost any traditional investment portfolio.
So, when we talk about “alternative assets”, we’re generally speaking about assets outside of the scope of those very common and traditional buckets. It’s a loose term that encompasses all sorts of wide-ranging assets, but the fundamental idea is this: alternative assets are assets other than stocks, bonds, and cash that an investor allocates capital to with some degree of financial intent - whether that’s capital appreciation, downside protection, or hedging factors like inflation.
In the Wall Street world, alternative assets most frequently refer to things like Private Equity, Real Estate, Hedge Funds, and Commodities. But for most people, those categories are opaque or inaccessible. And in today’s investing ecosystem, that definition is relatively narrow in scope.
Sure, alternative assets can refer to land and buildings, they can refer to gold and silver, but they can also refer to interesting assets at the intersection of passion and profits. Maybe that’s what brings you to our site at Altan Insights. Art, wine, luxury items, collectibles (sports cards, comic books, etc.), memorabilia - all of these things are gaining greater attention as alternative assets with each passing day.
Why? Because their financial track records are intriguing.
Take art for example. Masterworks data suggests that the Contemporary Art market has appreciated by 13.6% annually from 1995 through the first half of 2021. That’s ahead of a 9.5% annualized total return for the S&P 500 over the same period. (https://www.masterworks.io/)
Since January of 2008 through the end of 2021, the PWCC 100, an index tracking high-end vintage sports cards, has returned an eye-opening 1,276% return, while the S&P 500 has returned 230% over the same period. (https://www.pwccmarketplace.com/market-indices)
Or how about wine? Since 2006, the Liv-Ex 1000 index has similarly outperformed the S&P, while also offering low volatility and minimal correlation to traditional asset classes. (https://vint.co/)
The point isn’t necessarily to beat stocks. It’s the idea that these assets - which people are passionate about - have historically offered strong financial outcomes, and most importantly, those outcomes are often unrelated to stock and bond performance. That makes them very valuable for diversification purposes.
There’s nothing wrong with stocks and bonds, but the next time you put money to work, you might consider some highly viable alternatives.
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Disclaimer: You understand that by reading Altan Insights, you are not receiving financial advice. No content published here constitutes a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You further understand that the author(s) are not advising you personally concerning the nature, potential, value or suitability of any particular security, transaction, or investment strategy. You alone are solely responsible for determining whether an investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal financial situation. Please speak with a financial advisor to understand if the risks inherent in trading are appropriate for you. Trade at your own risk.
All information provided by Altan Insights is impersonal and not tailored to the needs of any person, entity or group of persons. Past performance of an index is not an indication or guarantee of future results.
If you’re new to fractional alternative investing, you probably have a lot of questions. Perhaps you’ve seen friends investing in collectibles on Rally or art on Masterworks, and you’d like to know how it works. Or, perhaps you want to start with the most basic question: what is fractional alternative investing?
We’ve prepared a robust glossary of fractional alternative investing terms, and regardless of your experience level, you’ll find it useful as you continue your investing journey.
Fractional: Fractional refers to the ownership structure of an asset in which shares of ownership are issued to the public or otherwise divided amongst multiple people or entities. Rather than a single individual owning the asset, individuals or entities are able to purchase a share of ownership.
Asset: In fractional investing, the asset refers to the specific item or items being securitized for fractional ownership. The asset is owned by an LLC, in which investors purchase an ownership stake.
Share: Share refers to an ownership claim on an asset. For each asset, the platform elects to offer a certain number of shares of an asset for ownership. Each share represents fractional ownership of the asset, and the ownership claim per share can be determined by dividing 1 by the total number of shares.
Share Price: Share price refers to the prevailing price of a share of an asset. The share price at IPO is determined by the platform offering the asset. Afterwards, it is determined by the last traded price of the asset, i.e. the price at which the last transaction between shareholders took place.
Market Capitalization: Market capitalization refers to the total value of an asset based on all shares outstanding. It can be calculated as price per share multiplied by total shares outstanding.
Marketplace: In fractional, a marketplace refers to the entity/business that acquires assets, registers them with the appropriate parties, offers and markets them to shareholders, and hosts the secondary trading of those assets. Rally and Collectable are examples of marketplaces.
IPO: Initial Public Offering. In fractional, IPO refers to the initial launch of an investment offering to the public for funding. This is the first opportunity for investors to purchase shares in an asset at a valuation set by the marketplace.
Offering: An offering refers to the formal sale of securities interests in an asset to the public.
Live Offering: A live offering refers to an IPO that is currently open to the public. While an offering is "live", prospective shareholders are able to purchase shares at the IPO price until the asset has been fully funded, meaning all available shares have been purchased.
Share Cap: On certain offerings, fractional marketplaces may institute a share cap. This is a limit on the number of shares any individual user may purchase. Share caps are typically instituted on offerings for which there is expected to be large, widespread demand to allow a larger number of users access to the offering.
Secondary Trading: After an asset has been initially offered to the public and after a waiting period that varies by platform, the asset will begin trading on what's termed a secondary market. In secondary trading, market participants can purchase and sell assets, transacting with other market participants.
Bid: In secondary market trading, a bid represents an offer to purchase a share.
Ask: In secondary market trading, an ask represents an offer to sell a share.
Limit Order: A limit order is an order to purchase or sell shares at a specified price or better. A buyer submitting a limit order at $10 is willing to purchase shares at a price of $10 or below. A seller submitting a limit order at $10 is willing to sell shares at a price of $10 or higher.
Market Order: A market order is an order to purchase or sell shares at the most immediately actionable price. A market purchase order will be executed at the lowest available ask, while a market sale order will be executed at the highest available bid.
Post Only: Post only refers to a trading status in which shareholders are only able to post their respective bids and asks for an asset. Those bids and asked will not be matched and a transaction will not be executed until the asset is open for trading. Post Only status typically occurs between trading days (i.e. after 4:00 or 4:30PM, before 9:30AM, on weekends), or before an asset has begun live trading.
Live Trading: Live trading refers to a trading status in which bids and asks placed are instantaneously matched against each other when placed and certain conditions are met, affecting a transaction.
Clearing: Clearing is a secondary market trading term that refers to the matching of a bid with a corresponding ask, affecting the execution of a transaction. Shares are "cleared", for a simplistic example, when there is a bid for 10 shares at $10 and an ask for 8 shares at $10. In that scenario, 8 shares are cleared at $10.
Trading Volume: Trading volume refers to either the number of shares or aggregate dollar value of an asset traded over a specific time period, whether single day or 30 day. This metric, when shared, can serve to inform the market if price movements have been driven by only a small number of shares or if trading activity has been substantial. It can also serve as a measure of liquidity.
ROI: Return on Investment. Return on investment refers to the profit or loss made on an investment relative to the initial investment size. If an investor invests $100 in an asset, and the value of that investment rises to $105, the investor has generated an ROI of 5%.
Index: An index is a tool that measures a market or a subset thereof to enable investors to compare current market levels with past levels. Indices can be market-capitalization weighted, meaning that the largest assets by market cap have the largest weight, equal-weighted, in which every constituent is assigned the same weight, price-weighted, where assets with the highest share price have the largest weight, or they can be weighted by other considerations..
Buyout: In fractional investing, interested parties may submit a buyout offer to the marketplaces for a certain asset. This offer represents a willingness to purchase the asset in question at a certain value. Upon receipt, the marketplace will typically share the details with the relevant shareholder base, solicit a vote on approval or rejection of the asset over the course of 48-72 hours, and conduct an advisory committee meeting to formally decide upon accepting or rejecting the offer, taking the vote results into account. Trading is frozen during the deliberation of a buyout offer and resumes upon rejection if applicable.
Gross Buyout Offer: The Gross Buyout Offer refers to the top-line amount that a prospective buyer has offered to a marketplace and its shareholders for an asset, before deducting taxes, fees, or marketplace ownership interest.
Net Buyout Proceeds: Net Buyout Proceeds refer to the amount that shareholders would stand to receive from a buyout, after tax considerations, fees, and marketplace ownership interest has been deducted or factored in.
Share-Weighted Vote: In the case of a buyout offer, marketplaces typically weigh shareholder sentiment based on a share-weighted vote to approve or reject. Share-weighted means that votes are given greater weight based on the number of shares each shareholder owns, as each share receives a vote. Some marketplaces also report the equal-weighted results of their survey, which assesses the number of shareholders, not shares, voted in favor or opposition.
What is retained equity? Key terms to know.
Retained Equity: When selling an asset with a fractional marketplace, a consignor may elect to receive cash for their asset, or alternatively, receive cash and shares in the asset offering. Shares received as compensation for selling the asset are referred to as retained equity. This reduces the share of the asset available to the public at IPO, and may give the consignor significant influence in buyout votes.
Shares Offered: In the event there is retained equity in an IPO, the number of shares offered will differ from the shares outstanding. Shares offered refers to the number of shares offered to the public, exclusive of those retained by the consignor.
Float Adjusted Market Capitalization: In the case of retained equity, not all shares of an asset may be offered to the public. The float-adjusted market capitalization refers to the total value of all shares available to the public (total shares outstanding minus shares retained).
Sourcing Fee: The Sourcing Fee is the fee paid to the manager of the offering (the marketplace) as compensation for managing and identifying the acquisition of the asset. Sourcing fees may be paid entirely in cash, or as a combination of cash and equity interests in the series.
Brokerage Fee: The Brokerage Fee is the fee paid to the broker of record and typically is in the amount of 1% of the gross offering proceeds.
Management Fee: The Management Fee is a fee paid to the asset manager (the marketplace) as compensation for ongoing management of the series. This fee is only assessed on free cash flows generated by the series.
Performance Fee (or Profits Interest): Some marketplaces may earn fees based on the performance of the asset. For example, Masterworks owns a 20% “profits interest” in each work. To use a simple example: if they bought a work for $1,000,000 and sold it for $1,500,000, they would earn 20% of the $500,000 profit, or $120,000.
Comparable Sale (Comp): A comparable sale, or "comp", refers to the sale of an asset, whether at auction or otherwise, that may serve as a useful data point to inform the value of a like or similar asset. Comps are very commonly used in fractional investing, and ensuring that an investor is finding and utilizing appropriate comps is of the utmost importance. Utilizing sales of an asset that are not truly similar to the asset in question as comps can lead to poor investment decisions and a flawed understanding of valuation.
Discount: Most commonly used in the discussion of comparable sales, discount means that a fractionally-owned asset is trading or has been offered at a valuation that is less than a comparable sale. One might also say that an auction result was at a discount to a fractional valuation, which reflects poorly on the fractional asset.
Premium: Premium refers to a situation in which a fractionally-owned asset is trading or has been offered at a valuation that is less than a comparable sale. One might also say that an auction result was at a premium to a fractional valuation, which reflects favorably on the fractional asset.
Auction House: The venue of sale for many assets traded fractionally. Auction houses reach consignment agreements with asset sellers to sell the item on their behalf. Select examples of auction houses by category. Art: Sotheby's, Christie's, Phillips. Books: Sotheby's, Christie's, Heritage, Bonhams. Comic Books: Heritage, ComicConnect, Comic Link. Sports Cards & Memorabilia: Goldin, Heritage, SCP, Leland's, Memory Lane, Robert Edward Auctions, PWCC. Video Games: Heritage, Goldin. Historical Memorabilia: Christie's, Sotheby's, RR Auction, Heritage.
Buyer's Premium: At auction, auction houses may charge a fee to buyers of certain items. So, a prospective buyer must be prepared to pay in excess of the hammer price for an item. This fee typically ranges between 10-25% of the hammer price and is typically paid to the auction houses. In certain cases, a consignor may negotiate to receive a portion of the buyer's premium.
Consignor: Refers to the asset seller, both in an auction and on fractional platforms. The consignor is the individual or entity that lists an asset for sale with an auction house or sells an asset with a fractional marketplace.
Hammer Price: At auction, the hammer price refers to the winning bid price, before the addition of a buyer's premium if applicable.
Authentication: Many assets trading fractionally receive superior values if their authenticity has been confirmed after thorough examination by a credible subject matter expert. How this is done varies by asset class, and a few examples are presented here. Sports cards are sent to the relevant grading agencies (PSA, BGS, SGC) to authenticate and grade a card. Sports memorabilia and in some cases their accompanying signatures may be authenticated by companies like MeiGray, Resolution, MEARS, JSA, and others. Comic books are authenticated by CGC.
Population: Population refers to the quantity of an asset in existence. For sports cards,comic books, and video games, this may refer to the population, or total number, of assets in a specific grade, the total number graded by a specific grading agency, or the print run. For other assets, it may simply refer to the total number believed to exist.
Regulation A: Regulation A is an SEC regulation modified in 2015 that provides rules exempting certain parties seeking to offer securities from undergoing the full SEC registration process, while still offering securities to non-accredited investors. Essentially, this regulation enables the existence of fractional investing, as well as non-accredited investments in private companies. Parties may offer securities under Tier I or Tier II of Regulation A. Fractional marketplaces offer their securities under Tier II, which requires that they file offering statements with the SEC, provide financial statements and reports on an ongoing basis, and limit the amount a non-accredited investor may invest in a Tier II offering. Tier II offerings do not require registration or qualification with state securities regulators (Tier I offerings do, but do not require ongoing provision of reports). Companies may offer up to $75 million in a 12 month period under Tier II.
Offering Circular: An offering circular, sometimes referred to as a prospectus, is a document filed with the SEC in connection with an offering of interests that provides prospective shareholders with information relating to an issue. Prior to investing in an offering, shareholders should review the offering circular to better understand risks, use of proceeds, fee structure, ownership structure, financial standing, and other key information.
Broker-Dealer: Each fractional marketplace utilizes a broker-dealer as broker of record (BOR) to facilitate the sale of membership interests. A broker dealer must be appropriately registered under the Securities Act of 1934 and additionally be registered in each state in which the membership interests will be offered. They do not solicit purchases of interests or make any recommendations regarding the interests. Fractional marketplaces are not broker-dealers. Broker-dealers are typically compensated with 1% of the gross offering proceeds.
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Disclaimer: You understand that by reading Altan Insights, you are not receiving financial advice. No content published here constitutes a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You further understand that the author(s) are not advising you personally concerning the nature, potential, value or suitability of any particular security, transaction, or investment strategy. You alone are solely responsible for determining whether an investment, security or strategy, or any other product or service, is appropriate or suitable for you based on your investment objectives and personal financial situation. Please speak with a financial advisor to understand if the risks inherent in trading are appropriate for you. Trade at your own risk.
All information provided by Altan Insights is impersonal and not tailored to the needs of any person, entity or group of persons. Past performance of an index is not an indication or guarantee of future results.
A market is emerging that offers investors an opportunity to co-own and participate in the financial performance of high-end collectible assets. Services have made investments such as blue-chip art, classic cars, fashion accessories, sneakers, sports memorabilia, wine and more accessible to anyone through fractionalization. Each platform's expert investment team selects which high-end assets to acquire, securitizes them with the Securities & Exchange Commission, and issues fractional shares.
Altan covers the collectibles investment markets with digestible financial analysis and news. Whether you're interested in the cultural significance or financial returns of these assets, our research, data, and exclusive interviews will help you make the informed decisions necessary to navigate this new space. Don’t miss out!
