Stamp Market Tougher Than It Looks

While tangible investments have their charms in times of market turmoil like today, investors thinking of hedging their portfolios with collectible stamps might just find themselves getting licked.

Newcomers to the market need to understand that it’s a collectors' market first, and so emotion can trump analysis.

“When you come in purely as an investor typically you don’t do very well,” says Charles Shreve, president of Dallas-based Spink Shreves Galleries, Inc., one of the country’s premier stamp auctioneers. “The best collectors have a passion to find the best quality. Investors get murdered.”

Shreve adds the real collectors can put get caught up in the moment and steam roll the more rational. He works with Bill Gross of Pimco, well-known for his stamp collection, as well as his investment theories, to find new items for his collection.

Shreve points out that it took Gross years to finally put together a collection of every 19^th-century US postage stamp, completing the final acquisition by trading away a stamp he’d just bought for $3 million.

“You can’t discount two collectors who’ve been looking for the same thing for 40 years,” Shreve says, counseling newbies to keep from getting clobbered by the stakes at auctions.

The stamp market isn’t huge. In their 2007 philatelic market survey, stamp market bible Linn’s Stamp News pegged the size of American collectible stamp industry at $1.18 billion. That includes all retail store sales, proceeds from online and public auctions, US Postal Service estimates of stamps retained by collectors, and $41 million spent by collectors on books, catalogs and other supplies to fuel their hobby.

And the USPS estimates that while about $200 million in new uncirculated stamps are squirreled away in collections every year, these new-stamp collectors need to take a long, long-term view; the most valuable stamps tend to be from the earliest days of modern postage in the 19^th century. Shreve estimates this high-end collector’s market at about $300-$400 million.

And that market is in the hands of fanatics. Don Schilling, a Glendale, CA collector, says it’s not about the pursuit of the oldest stamp, as people might think with antiques or art. “(Age) doesn’t determine value, it’s condition, rarity that determines value.”

The 62-year-old Schilling first started collecting stamps when he was ten years old and now runs a blog called Stamp Collecting Roundup. While he won’t say how much his collection is worth, he claims he could “put a kid through a four-year college with it.”

He advises new entrants should go slow, and get to know the industry and its participants. For wannabe players, there are many local events and a two national ones— the American Stamp Dealer Association's annual mega-event and the World Philatelic Exposition, which take place in different venues each year.

Asian and American buyers have stayed in the market even through this downturn. Donald Sundman, president of Camden, NY’s Mystic Stamp Co., says he sees more stamps on the market now, but prices have stayed steady. That could also be because new supplies of stamps, from Asian countries with once-restricted markets, make for fresh markets in philately.

These new opportunities expose the risk of thinking like an investor, and trying to corner the market. Sundman, whose firm has been around since 1923 and boasts about 50,000 active clients and 150 employees, says it can be easy to corner the market in a particular stamp category, but once you achieve this ownership milestone, it could cause other collectors to lose interest. No one wants to be the second guy to climb Mt. Everest, it seems.

Right now, he says, one hot item is the Pony Express cover—a cover is a used envelope with the mailing address, stamp and cancellation mark intact—which can fetch “in the hundreds of thousands,” [of dollars] he says.

And the relatively small size of the stamp market, new investors need to be aware of scams.

“Outright forgeries are rare since it’s hard to do,” says Sundman. But if a stamp’s backing gum is less than new or untouched, it can dramatically affect the price, since condition is the cornerstone of value. “Pristine gum is valued,” he says. “It could be worth half as much without it.” And so there is a cottage industry in “repairing” the gum.

Like with art, there are legitimate stamp restoration firms. Shreve and Sundman recommend using a third-party certification service—like the New York-based Philatelic Foundation, for which both men serve as trustees—to obtain a certificate of authenticity.

Stamps also have their own history of alleged Ponzi schemes. In May 2006, the savings of 350,000 Spanish clients were put in jeopardy by two Spanish firms that had offered small investors an opportunity to beat low interest-rate savings accounts with investments in rare stamps.

Police raided the firms — Forum Filatelico and Afinsa – when it suspected existing investors were being paid out with new investor money, Some 4.2 billion euros ($6.0 billion) of investor money is still missing.

As for returns, as a rare tangible collectible, stamps should keep pace with inflation at least.

Sundman says he’s thought of an ETF or a closed-end fund for stamps, but in the end the legal fees made it prohibitively expensive. Even for collectors, the strategy is more “buy-and-love” than buy-and-hold.

“You need to hold a long time to overcome the 25% auction fees,” he says, noting that these transaction costs, as well as the price of storage and maintenance to ensure that the condition of the stamp remains perfect, make it tough to get much back.

(Editor's Note: This article was originally published in September 2009.)