Alternative Investments

Ferrari 1962 250 GTO  Source: blog.classiccars.com

Can you believe it, 38.1 million USD for a set of wheels! What’s more you'll still have to wind the windows down, there's no GPS, power steering and no heated seats to keep your rear warm on a subzero winters' morning either. But who cares because if you have got that kind of loot to burn on wheels, your rear pocket would probably be bulging with a wallet so stuffed with notes that it would be bullet proof. Fair enough, this isn't just a regular runner to take the little darlings to school and pick up a few provisions at Tesco. Not at all it's a Ferrari 1962 Ferrari 250 GTO, an elegant mechanical masterpiece on wheels. Nevertheless, 38.1 million USD for a chassis an engine and four wheels seems incomprehensible.

The recording breaking amount of cash shelled out for the 1962 Ferrari 250 GTO Berlinetta that sold this month at the Bonhams Quail Lodge auction in Carmel, Calif was just one of many that set records. Nine other Ferrari models set records, as did a Rolls-Royce once owned by Elvis Presley, and several Maseratis. Even a 1962 Austin Mini sold for a record $181,500. The week’s sales total hit $400 million, a 28 percent increase from a year ago.

All this has not only grabbed news headlines but it has also revved up the entire classic car market. Consequently, it has got many investors asking; What about the classic car market, as an alternative investment option?

Hagerty’s Blue Chip Index of 25 classic cars rose 34.5 percent over the last year, which far outperformed major stock and bond averages. “Without exception, we’re seeing every segment of the market, and nearly every model, hitting new all-time highs,” said McKeel Hagerty, chief executive of Hagerty Insurance, which specializes in insuring collectible cars and produces a price index (similar to the Dow Jones industrial average) for car collectors.

Maybe the classic car market might be next great asset class. However, the message from some observers is not to let your optimism run too wild. Bearing in mind that even a Mini these days is selling for six figures, so perhaps we are experience that all too familiar bubble. Apparently, something like that happened back in the late 1980s when prices for Ferraris and Jaguars escalated only to come crashing back down again.

Perhaps this is a classic story about what happens in a prolonged period of loose monetary policy, where central banks pump the market with funny money, what we end up getting is a small elite club, who have access to the cheap money and they distort the asset values of such rare items. If there is any trickle-down effect, lowered down the income scale its likely to be swallowed up by inflation.

“I’m becoming increasingly uneasy,” Scott Grundfor recently wrote in his newsletter for car collectors. (Mr. Grundfor’s company also restores and consults on classic cars.) “I’ve firmly believed at least 50 percent of the dramatic rise in car values can be attributed to the printing of money and the manipulation of interest rates by central banks.”

So the implication here is should the Fed start tightening its monetary policy we might also see price corrections in the classic car market too. Until that happens, classic car prices continue to appreciate.

What about at the other end of the food chain, is there any value to be gained by investing say between 1,000 to 5,000 pounds on a “potential” classic car, A ford Capri might not be every-ones cup of tea, but surprisingly this car has approximately doubled in the last 18 months. Current prices for a Capri vary from 2,000 to 10,000 pounds. Remember the Peugeot 205 Gti, they are also starting to move up, typical price varies between 1,000 to 3000 pounds. An MGB that could have been bought five years ago for 5,000 pounds could now set you back more than 10,000 pounds.

But you'd have to ask yourself this question, how much money was spent on spare parts, and labour (your time if you are mechanically minded) in keeping that MGB roadworthy during those five years? If you had to take it to a workshop every time something went wrong, it might just be a bottomless money pit. Maybe a more suitable  option for the motor enthusiasts than the pure investor.

What about buying wine for profits and pleasure? Apparently, there's a general rule followed by gentleman wine collectors. It goes something like this; buy five cases of claret and store them in a cool, dry place out of the sunlight, preferably a cellar if you are fortunate to have one. Then just wait 10 years, meanwhile for your patience you get to drink two of the cases. What about the remaining three cases; sell them and from the profits realised, there will be enough to buy another five cases of younger wine and start all over again.

The wine expert reassured me that if it were done on a year-on-year basis I would have a constant supply of excellent wine, more over it would be self-financing due to the wine's inclination to increase in value. He was a damn good salesman because I bought the idea. I figured that I couldn't lose because if things went pear shaped I'd be stuck with a few crates of fine quality wine and that wouldn’t be too unpalatable.