Investing Beyond the Basics: Exploring Alternative Asset Classes

In this week’s episode of Retire in Texas, Darryl Lyons, CEO and Co-Founder of PAX Financial Group, dives into the fascinating world of alternative investments and their place in a balanced portfolio. From guns to sports cards and even wine, Darryl shares insights on why these assets gained popularity during the Covid era and how they fit into your financial strategy. Using a business lens, he examines key factors like liquidity, rate of return, and risk, while emphasizing the importance of keeping these investments within a reasonable portion of your overall wealth.

Key show highlights include:

A breakdown of alternative asset classes such as guns, sports cards, and wine.
How the political and economic landscape impacts the liquidity and value of these assets.
Insights into the rate of return, fraud risks, and storage considerations in alternative markets.
Practical advice on how to incorporate these assets into your financial plan without overexposing yourself to risk.
Why traditional investments remain essential and how to strike a balance between conventional and alternative assets.

PAX Podcast Ep. 146 – Transcript

Hey, this is Darryl Lyons, CEO, Co-Founder of Pax Financial Group. Thanks for tuning in today. You’re listening to Retire in Texas.

This information is general in nature only. It’s not intended to provide specific investment, tax, or legal advice. Visit Paxfinancialgroup.com for more information. Okay, so I was reading an article in the Wall Street Journal, and it was about luxury watches. And we have a couple clients that are into the luxury watch thing, and I just talked about how they were going down in value.

They had dropped, according to this article, and this one specific company that sold specialty watches, they had a 13% drop over the last year. And then if you look in the article, there were some really interesting things I didn’t know about, like the innovation that took place or is taking place or has taken place in the watch market.

There’s a website called Watchcharts.com that you can track your watch collection, and it just got me thinking about what has happened over the last several years with money in our economic system. There was a lot of money that was pushed out from the government balance sheet. Actually, they used debt. And if you look at track where that money went, a lot of it went into the United States, consumers and businesses.

And so, imagine that, like the government took a picture of water imported into a coffee mug, and that coffee mug was the net worth of an American citizen. What happened is that the coffee mug overflowed, and the American citizen decided, I don’t want to just do stocks and bonds. That’s not scratching the itch. It overflowed into other asset classes, other ideas like, okay, I don’t want to just, I got a little extra money.

I don’t want to just do stocks and bonds in my 401K. Maybe I could try watches or handbags or jewelry or gold, or maybe we can even make something up called crypto. And so, this overflow of money went into these other asset classes. And I wanted to talk a little bit about that because I think we can learn some things about this not dilemma, this environment right now.

And I want to frame it up and I want to help you think about this dynamic in terms of making investment and business decisions. And so, the way I want to lay this out is I’m going to look at three different what we consider alternative asset classes that kind of gained momentum during this Covid era. And I want to look at them through a business lens.

And so, there’s five elements. There could be more. But I’m going to just use five elements that I’m going to discuss relative to these asset classes. So, I’m going to look at liquidity, rate of return, fraud, leakage, and purpose. So those are the five things I want to look at. Liquidity, rate of return, fraud, leakage, and purpose. And I’m going to look at three different asset classes.

I wanted to do art, but I didn’t think I’d have enough time today. I thought handbags might be interesting, but I landed on three. All of them are kind of different. And so, I figured, let’s run with it. I’m going to do guns because I have a lot of clients that own guns, as you would imagine in Texas.

I’m going to do sports cards because I’ve collected sports cards for years. I thought that’d be interesting, at least for me. And then we do wine because we have a lot of clients that collect or store or drink wine. And so, I want to talk about those three alternative asset classes that have all gone up during the Covid era, because there’s overflow.

And I’m going to look at them through the lens of liquidity, rate of return, fraud, leakage and purpose. So, let’s go. So, let’s start with guns. Pretty big market as you would imagine in 2019, about a $6 billion market. So, as you know there’s plenty of guns out there. And there’s also guns that are not exactly registered.

And of course, you have to be licensed to buy and sell guns. The liquidity in the market does change as administration or rhetoric changes. I mean, everyone knows Obama was the best gun salesman. And it’s funny because when George W Bush, in his eight-year term, there were only 28 million guns that were produced. I say only that’s still a lot during the eight years.

But in Obama’s first term as president, 26 million guns were produced. So almost as much as all of eight years as president. So, it’s very much the liquidity. The ability to buy and sell is very much a function of the political environment. And so, if you do buy and sell, if you buy it, then of course, when you buy it, oftentimes you get it from a dealer and you’re going to pay a premium in some regards because they’ve got to make money.

And then of course taxes and other things. Now you could buy it through a consignment shop so somebody else is selling it, and then there might be a markup there. And then of course selling it. So that’s buying it. But then selling it, you might look at your gun and say, man, I get 500 for this gun. But at the end of the day, in order to sell that gun, it can be done in the private market.

But if you do it through a store or consignment shop, you’re not going to get that $500. You’re probably going to get like 450 or something, maybe 400, because whoever is facilitating this exchange is going to get a cut. So, liquidity is pretty good. There’s a lot of buyers and sellers out there. But the real challenge is what you think it might be worth in your hand in order to sell it.

You’re probably going to get 80% of what you think you’re going to get. So, let’s talk about the rate of return, by the way. So, it’s really hard to find the rate of return on guns. A lot of times when I’ve done my research on this, a lot of people were afraid to really pinpoint a rate of return on guns.

Many people talk about how they’re holding their value, and even when somebody says that I don’t really know what that means because is that relative to what you bought it at, or is that an inflation adjusted value? So, if you bought it for $500, 10 years ago and you could sell it for $500 today, that didn’t hold its value because of inflation.

And so, I’m not sure what that means when people say guns hold their value, I really don’t know. But there was one group called Rock Island Armory that did track guns, and they looked at guns with similar conditions passing through their auctions from 2015 to 2020. And they said during that time period, they saw an increase in value of 32% of the guns that were sold at the beginning of the period to the end of the period, and that’s about a 6% rate of return.

To me, that’s probably a fair number. And so, if that was the case and you said guns hold their value, then that would be true both from a value that you bought it at and an inflationary number, I hope that makes sense. But based on this data, it seems like it could keep up with inflation, which would be nice.

Again, you have to be careful in the gun market because some guns will hold their value like a Smith and Wesson J-Frame revolver, that’ll hold its value. But other ones, like even the modern rifles or the AR and the accessories, those will typically go down almost like a car. So, you just have to know what you’re getting into in terms of rate of return, if that’s a priority for you.

And then, of course, we really want to talk about fraud because that exists, as we know in any marketplace today, if you’re buying guns and you’re asked to use Zelle, I think it’s Zelle, Venmo, I use Zelle, Venmo, crypto or anything else, by the way. I don’t use it to buy guns. I just use it for transactions periodically.

But yeah, if you’re using any of those things, you don’t want to be using those types of tools to buy guns because you can’t get your money back if you get a raw deal or if it’s fraud and you only want to buy from somebody who is a holder of a federal firearms license. Now, there is a lot of leakage in the gun space, as you would imagine, leakage being like, okay, so suppose that we did get a 6% rate of return.

For us to really get a pure net rate of return, we’d have to consider the cost of acquiring the gun, whether it’s commissions or anything like that, and then also storage cost or insurance or anything else that we might buy. So that has to be considered, even ammo for that matter, like storing ammo. Now, some people love to stockpile ammo and that makes sense.

Now, I didn’t know that you can actually use a third party that’s called Ammo Square to actually have your ammo stockpiled at a warehouse facility that’s not your closet or wherever you store your ammo. And that’s pretty interesting. So, you just store it at another place, and they charge you a fee. They are actually what’s interesting about this place.

So, this is almost like a market in and of itself. So, you’ve got the gun market, but then you also have the ammo market. I looked at their chart. It’s on ammosquare.com. And they showed the prices of a 36. A round of 36 went from $0.96 to $4.25 over the last six months. That was a variation. So, the low price that it sold to the high price, a very interesting ammo market, kind of as a subset of the gun market, but ammo would be considered a leakage.

But it’s kind of interesting because it also holds its value to a certain degree. Now, at the end of the day, many people own guns for an apocalyptic scenario. If things kind of go crazy, they have guns. That’s fair, but some people just want to own it for the history, for an appreciation for maybe who held it. I know that a Teddy Roosevelt gun that was engraved sold for $1.4 million.

So, there is some value in the story if you can confirm the story behind a gun. Those have a ton of values. That same gun, by the way, had it not been Teddy’s would be worth about 50,000. So, it’s the story that really matters. So, the people that love history and love war, the history of war, the appreciation for where they came from, even geographically.

And then, of course, an apocalyptic scenario. You can shoot more zombies if you have a lot of guns. Okay, so let’s move to sports cards real quick. It’s a bigger market. It’s about two times the gun market. So, a little bit more liquidity than the gun market. But it doesn’t really give you an apocalyptic scenario. I mean what are you going to do if you have a Patrick Mahomes rookie, and the zombies are coming.

So that doesn’t really work. But a really big market, about a $13 billion market and really trending in a really interesting direction, namely because it’s almost a spin-off of the gambling. If you’ve seen the sports gambling industry, it’s absolutely nuts. Now, in the sports cards market, the graded cards and the autograph cards are worth more graded, meaning that somebody has examined the card and considered it in perfect condition and then encapsulated it, and put a label on there that says it’s in perfect condition.

Those cards, along with the autograph cards, are really, really doing well. And the innovation in this space is very interesting too, because I’ve never done this before. But you can own a fraction of a card. Not sure why you would want to do that, but like you could own a fraction of a Jackie Robinson rookie card. And on eBay it’s just made this market just very, very liquid.

It’s so easy to buy and sell through the auction platform on eBay. The rate of return is interesting because there’s a lot of different ways they measure sports cards. There’s actually an index, which is a sampling of cards that are static. They don’t move and then they track that over time. And that’s called a PWCC index.

They track 100 cards, and they have different indices. But according to the PWCC index. And again, all these notes, all these data points will be in the show notes. That was up 313% from January 2008 to December 2020. That’s over a 20% rate of return. And that index includes kind of old school cards like Mickey Mantle. But that ends in 2022.

I haven’t looked at this, but if you look at 21, 22, 23, 24, you’ve seen those cards start to decline as the liquidity in the total economic system has not been as prevalent as when the United States government was flying helicopters and throwing dollar bills everywhere. So, it has trickled off. There was a guy named Garyvee who’s a social media superstar that was collecting, and then went out there and started telling everyone he loves it.

That spiked the cards as well. But yeah, I mean, you can certainly make good money on cards if you have a Michael Jordan. There’s a 97/98 game worn patch jersey. That was a Michael Jordan that sold for 2.7 million at an auction, or that Mickey Mantle that you probably had when you were a kid, 1952, that sold for 5.2 million.

And, I mean, these cards go all the way back to the 1860s, and you certainly have to be careful with fraud here. There’s one guy that I heard that he paid $7,500 for a card, and there was a sticker, like the price sticker at the bottom right-hand corner, and it was covering up a little ding on the bottom of the card.

And so, he bought it and it was slightly damaged. And that slightly damaged, took the card down from 7500 to about 4000. So, you had to pay attention for fraud. And then in terms of leakage, where are you going to store it? The good news is the cards aren’t that big. So, storage is not a huge issue. But you sometimes buy bad players, like if you’re into the modern card market and you bought Mark McGuire before he went on steroids, that would be a bad bet.

Or guys like Ricky Williams, the running back for, you know, University of Texas, he kind of faded out, or Dennis Rodman, some of these guys that were popular one time and you bought their cards at the peak, you’re going to lose money that way. And so, I think for the most part, owning sports cards in general is very much a nostalgia and an enjoyment and not necessarily an apocalyptic kind of scenario.

I don’t think it’ll help you much there. The last one is the wine market, which is ten times the size of the sports cards market. It’s a $417 billion market. So very, very liquid. In fact, it’s funny, when I was doing research on this, the profiles of the three groups of the guns, all the YouTubers had it like a really southern accent.

The sports cards were kind of youthful, almost. I don’t want to say nerdy, but they had the baseball caps on backwards, as you would imagine. And then the wine you would imagine. All of them had British accents. So certainly, different profiles. And it’s fun because I have friends and family that do all three. And so, this market is a very liquid market because it’s so big.

There’s more exchanges. There’s one called a live exchange. And I think the catalyst for the wine market was this guy named Robert Parker, who created this grading system that graded the quality of wines. And that grading system really made the market distinguish itself within itself. So, in other words, wines have certain gradings and a high-grade wine is worth more, as you would imagine.

And also, scarcity in regions and different producers and vintages. All of these factor into the value of a wine, and when you look at the rate of return, it’s really hard to tell because it’s actually a little bit more robust than the other two markets, the guns and the sports cards. It has a lot of different ways you can invest.

It’s much more sophisticated, frankly, in one report. Again, this will be in the show notes. I think it was the Liv-Ex index. I have to double check the show notes. And I only want you to just know this as a general number. It had an average rate of return of 10% over the last 15 years, which again, I don’t anchor to these returns because I’m skeptical whenever I see returns because I’ve had to study returns from organizations over the years.

And I just it’s my responsibility as a fiduciary to ensure that the rate of returns have integrity. These look pretty good. And the sophistication of the market leads me to believe that there’s reason to trust the returns. But I did not do that level of due diligence. So, when I say it’s averaged 10% over the last 15 years, take that with a grain of salt.

Now it’s interesting on the index, this Liv-Ex index. Again, I know I’m repeating myself. There’s an incredible research report on wine specifically in the show notes. So, you can see all these returns and make a judgment call for yourself. But it was interesting that the Liv-Ex index when in 2020, when the S&P 500, the stock market fell by 23%, the Liv-Ex index only dropped 4%.

So that was interesting how you have this different correlation between the stock market and wine. The wine had outperformed according to this research report. Those watches that I talked about cars, art, but it did not perform. One specific alternative asset class now is whiskey. Whiskey actually did better than wine over that period. There is fraud. I heard one story of a guy with a very sophisticated scheme.

He filled up these vintage wines with fake house wine. It’s almost comical that people were enjoying this wine for so long and talking about what it did to their palate and all that stuff, and it wasn’t even real. And so, this was a very sophisticated fraud that somebody did. They ended up getting caught. But yeah, there’s very much fraud in the wine business.

So, you have to be careful there. You got to know your stuff. And of course, leakage exists. You can spoil your wine if they’re not stored in proper conditions. You have to have the right light, vibrations are problematic, constant temperature and humidity. If these elements don’t exist, then your wine, you’re spoiling your wine, but the main leakage is not the storage nor the insurance.

It’s the drinking of it. And you know, that happens. And so, for that reason, it’s probably much less of a 10% rate of return after you drink 1 or 2 bottles here and there. But some people enjoy it. And frankly, the strategy behind it for most people is just enjoying the history, the region, the community. It is a very sophisticated community, and it’s of course global in nature.

Whereas the guns aren’t necessarily global in nature nor sports cards. To some degree, but not like wine. So that’s just an interesting approach. When you think about business in general and investing, you want to think about liquidity. Can I buy and sell this? The rate of return? What fraud exists here, what leakage exists? And really what’s the purpose behind this investment?

Actually, when I did this due diligence on these different alternative asset classes, I began to appreciate the stock market and the bond market that we use regularly because in terms of liquidity, it’s really easy to move things around the rates of return. I feel very comfortable looking at historical returns and being able to make judgment calls, because I trust the integrity of many of the strategies that we look at, understanding that there is fraud that exists.

But really, I feel comfortable just because I’m in this space a lot, and then there’s not really any leakage in terms of, you know, you have to store stocks, certificates or bonds, and then of course, the purpose is very clear. So, I think when we look at the alternative investments, we recognize that there is a place for them.

But they certainly don’t replace your traditional investments that you use. And that’s why when somebody is investing in some of these alternative investments, we typically suggest no more than 5%. Even that would be high, 1% would probably be more realistic of your total net worth. So, I know this was a little longer than normal. I was kind of just enjoying the research and the conversation with you guys and just sharing this information with you.

This is a lot of depth here. And so that’s why I put a lot of show notes for you to do your own due diligence. And at the end of the day, whatever you do, make sure that you carve out those asset classes within a reasonable amount and number, like I said, 1 to 5%. And then as always, you think different when you think long term.

Have a great day.

References:

Tune in to this episode to gain a better understanding of how alternative assets can play a role in your financial journey, without losing sight of your long-term goals. For more resources, visit http://www.paxfinancialgroup.com. If you enjoyed today’s episode, share it with a friend!

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Investing Beyond the Basics: Exploring Alternative Asset Classes

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