Following Up a 25-Year-Old Book Investment Scheme
- By Michael Stillman
Rare book investment portfolio proposal.
By Michael Stillman
Books are purchased primarily for two reasons, reading and collecting. While the first purpose is the main reason they are published in the first place, it is generally a one-time shot. Read it once and its usefulness has been depleted. However, collecting has a permanence. It gives books a long term, and likely increasing, value. And once something has these attributes, a third purpose raises its head: investing. Most people who collect books for the sheer love of them are probably aware of this secondary purpose. Still, it isn't often that books are collected solely for investing. Once in awhile, they are, and a chance encounter with a 25-year-old pamphlet gives us an opportunity to look back on such a scheme.
While digging through boxes of old auction catalogues being prepped for the Americana Exchange Database*, we chanced upon a pamphlet produced by Francis Edwards, Ltd., of London, around 1980. Before we continue, we need to point out that this is not the same Francis Edwards of today. Francis Edwards today is again a traditional antiquarian bookseller, just as the firm was for more than a century before this pamphlet was printed. This pamphlet dates from a brief period between the 1978 sale by the Edwards family to venture capitalists to its early 1980s purchase by the current owners. The firm of Francis Edwards is now back to selling books in the British book town of Hay-on-Wye, as well as in London, as it has done through most of its existence since founded by Mr. Edwards in 1855.
During the brief venture capital period around 1980, the firm published this pamphlet, Rare Books for the Collector From the Investor's View, Francis Edwards Limited, Creating a Portfolio. Basically, the plan worked like this. You would invest a sum of money, minimum GPB (British pounds) 500, with the firm. This, they explained, was "the minimum feasible sum which will permit a balanced portfolio of titles across subjects, authors and countries." Then, "specialists identify titles which in their opinion will provide good appreciation over a period of several years." The purchaser could take physical possession of these books if he liked, or store and insure them with Edwards for 2% per year. They could be sold at any time, but the firm explained that this "scheme" (their words, not mine) was designed for those expecting to hold the books for "3 to 5 years."
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Following Up a 25-Year-Old Book Investment Scheme
- By Michael Stillman
These eleven books averaged over a 1,000% return in 14-17 years.
The books would be held in the investor's portfolio. "Should a collector want an item currently in an investor's portfolio the investor would be informed of the fact and the proposed price." It is not stated how collectors would be made aware of what books were held in the Edwards portfolio, though presumably this was addressed. Edwards' commission is not stated, but we can also presume there was one of these. These were questions the prudent investor would undoubtedly ask before turning over a sum of money.
Ultimately, the "scheme" failed. In an email response, Greg Coombes, the current Chief Executive of Francis Edwards, said the portfolio scheme led to a great furor in the book world, including an article in a trade publication. There are undoubtedly some readers out there, longer involved in the book trade than I, who remember this incident. Coombes explained that the firm believed some of the comments were actionable, and took the matter to court. Between what was likely disappointing results in gaining investors and costs of litigation, which proved unsuccessful, the company failed. Present ownership purchased the venerable firm out of receivership in the fall of 1982, and restored it to its traditional bookselling role.
Our point is not to stir up old controversies. Whatever the issues were then, we do not care. However, it can be interesting to look back at this proposal with the benefit of hindsight. Why might this scheme have looked appealing at the time, and were the expectations on which it was based realized in the years ahead, or did the scheme fall short? Those are the interesting questions, as undoubtedly it is just a matter of time before conditions bring about a new plan based on similar assumptions.
It is not surprising that a plan like this would be offered in 1980. Investors were searching for ways to achieve returns which would outpace rising inflation. The stock market had been dead for years. The Dow Jones Industrial Average closed 1980 virtually the same as it closed 1965. So what better time to show investors what books had done over the same period? Edwards produced a chart of 11 items, purchased in the early 1960s and sold in the late 1970s. There was a 1791 Boswell's Life of Johnson, a 1690 first edition of Locke's Essay Concerning Humane Understanding, D.H. Lawrence's 1915 The Rainbow, and eight others. Returns ranged from a low of 271% to a high of 1,946%. That's a low of 271%. Compare that to a flat stock market. The average return was over 1,000%. Not bad for around 15 years.
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Following Up a 25-Year-Old Book Investment Scheme
- By Michael Stillman
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How accurate were these results? Thanks to the million records in the AE Database and our new current value estimating tool*, we can go back and look at the past. Samples of purchases and sales of these titles in roughly the same time period indicate these figures are in the ballpark. There is nothing to indicate they fudged the gains. These books were outstanding. However, whether these books were indicative of the market as a whole is another question. Auction results from these two decades indicate that on average, prices were rising from 3 to 6 fold by the end of the 1970s, depending on whether you purchased in 1960 or not until the middle 1960s. It was a very good time for books. Edwards' numbers were a bit exaggerated, at least compared to the market as a whole. Whether this reflects superior choices on their part, or selective memory, I cannot say. However, if the exact figures were perhaps somewhat misleading, the general impression was right. This was a period in which it was far superior to invest in books than in stocks.
But that was looking at the past. It was as easy as it was irrelevant to tell people in 1980 what was the best investment to have made in 1960. What happened to people who invested in books in 1980? We know that this particular scheme did not last, but what if it had? What kind of returns might people have experienced?
Perhaps this is a good time to recall the apocryphal story about Joseph Kennedy, who when given some stock tips by his shoeshine shortly before the market collapse of 1929, sold all of his holdings. His reasoning was that once little guys like this started pouring their money into the market, the end was near. Nothing nearly so dramatic happened with books. In fact, they continued to do quite well in the decades ahead. However, on a comparative basis, the heyday was over. Our indices show that books as whole grew another three to four times in value over the following two decades. There is nothing wrong with that return. However, if you sold your stocks to buy books, you would have been disappointed. After 15 years in the doldrums, the stock market was poised for one of its greatest bull runs ever, just as Edwards was encouraging investors to put their money in books. Not even that dark day in October, 1987, nor the bursting of the bubble at the end of the century, would make this anything less than a phenomenal run. Certainly, there were areas where investors were hurt. Late '90s internet stock investors received some painful doses of reality, but those who took a more conservative approach, such as investing in the Dow Jones Industrials in 1980, were handsomely rewarded. After a 15-year run in which the Dow Jones advanced not at all, over the next 20 years it would grow to more than ten times its 1980 value. In fact, the growth in the Dow proved to be almost exactly the same as the atypical Edwards eleven described in their pamphlet grew over the preceding 20 years. As we said, there was nothing wrong with the returns achieved by rare books during this period. However, part of their premise, that books appreciate more rapidly than stocks, proved to be false over the following two decades.
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Following Up a 25-Year-Old Book Investment Scheme
- By Michael Stillman
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There is one interesting aside to these numbers. Investments in books rose at fairly consistent rates from the 1960s through the 1990s. Stocks were flat through most of the 1960s and 1970s, but rose spectacularly during the 1980s and 1990s. For forty years, appreciation was similar, but books provided a steadier rate of growth, while stocks had steep climbs and long plateaus. Stocks worked best for those with good timing; books for those without this skill.
One final point needs to be made before you decide to jump into books as the more conservative investment tool. You can buy stocks through index funds or mutual funds, spreading your bets around. There aren't any mutual funds for books of which I am aware. At first, this is what I expected from the Edwards portfolio. However, no such risk sharing was proposed. Everyone owned their own books, and any short list is likely to seriously outperform or underperform the market as a whole. Unless you are able to buy a large quantity of books, or some shares in a rare book library, the risk is likely to be more akin to holding a portfolio of just a few stocks. Your results may look nothing like those of the market as a whole. If you are to make such an investment, you need to understand your books and your field very well. Uneducated purchases are risky ones.
Alternatively, you can seek educated advice, such as that Edwards proposed to offer. However, unlike the recommendations stockbrokers make, which can be offered to many clients at once, you will need individual advice for a one-of-a-kind collection. There is no way this can be offered for the relatively short commissions most stockbrokers charge. Perhaps this was the downfall of their investment scheme. Considering the margins a bookseller needs to make a living, or the commissions charged by auction houses, I cannot imagine how an investor could hope to turn a significant profit in only three years. Books are good long-term investments, but risky in the short range.
*The Americana Exchange Database consists of over one million bibliographic book records, most taken from auctions and bookseller catalogues, which include prices. The AE Database's "current value estimating tool" enables older prices to be converted to current values based on overall appreciation of books. The formulas it uses enable us to look at rates of appreciation during various historical time periods.
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