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High-End Collectibles

• Established 2007 •


Vinyl Record Investing: The Magical 4%

While the everyday use of records has vanished, they have transgressed their use as vehicles of sound. Instead, they have have moved into the area of alternative investments. Along with fine art, coins and stamps vinyl has found its place in many a long-term investment portfolio where it serves its purpose just perfectly. Given the six digit dollar amount that a recent sale of a Velvet Underground acetate generated, the potential payoff is a given. But how do you pick the right records? That’s what we will delve into in this post.

Obviously, most vinyl records will never appreciate in value. This holds true for a majority of paintings and other artifacts as well. In alternative investments, the Pareto Principle is just as much at work as in traditional stocks and commodities. What this means is that only 20% will ever be of interest. Given the Pareto Principle’s gravitation toward fine granularity, I’d like to go one step further and condense it down another 20%, which leaves us with 4%. This 4% is where the real money is.

What, then, do the records in this 4% segment have in common?

  1. Rarity & scarcity: the market forces of supply and demand have a huge impact on whether a record appreciates in price. While short runs may create rarity, they do not automatically effect demand. Demand is stimulated by a ‘shared’ interest of a social in-roup such as collectors that reinforce interest in an item between one another. For example, while Ornette Coleman records may not have mainstream appeal, they do enjoy enough interest to keep the demand on a steady level. Takeaway: a record must have a sufficiently high rate of interest in it shared by a certain number of people. This can be measured by haves/wants rates. (similar to ask/bid)
  2. Relevance: This pertains to cultural relevance. As an example, a Beatles record has cultural relevance in the sense that it exemplifies the music of an entire generation. Just as Caravaggio is the representative of the type of Chiaroscuro painting that made early baroque painting stick out, so too certain categories of records become representative of the times they emerged in, which boosts their perceived value beyond mere commodities. This factor is highly sentimental, which leads us to the next point. Takeaway: Cultural relevance can boost value when its perceived importance is shared by enough people of influence (curators, archivists, historians)
  3. Irrationality: Markets are often irrational. Whether something appreciates is not always a question of inherent value in terms of ‘usefulness’ but of perceived future appreciation. While theoretical models may project estimates, they have a high chance of falling prey to the irrationality of the masses. Just as the tulip mania made many people extremely wealthy, so you too can use it to your advantage. Takeaway: Don’t rely on analysis alone, take the power of irrationality into equation and add it to your strategy.
  4. Volume: This is a question of liquidity. How often does a particular item change hands? If an item is high in demand but is rarely ever sold this means one of two things: either it is over-priced or there’s not enough demand, percentage-wise. Takeaway: Some records may be hard to sell even though there’s interest that would warrant a big price tag.
  • Side note: the 20% of 20%, which equals 4% in total, is a recurring percentage in sales and true conversion rates. While the 20% of a whole may constitute a segment of interest, it is generally too vague to provide any useful conclusions.
November 15, 2020

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