People all over the internet have been re-posting and talking about a recent analysis done by The Telegraph that found Lego® sets have been a better investment over the past 10 years than savings accounts, stock and even gold! So should savers start hoarding the Danish construction toys to preserve their wealth, instead of gold coins? We will explore this question as well as a more interesting point the article indirectly makes about fiat money and wealth preservation.
Plastic Bricks vs. Gold Bricks
To be clear, the article notes that when talking about Lego sets over the past 15 years increasing an average of 12% per year, they are talking about sets in pristine condition, almost exclusively those bought as collector’s items and kept unopened in the original box.
The numbers come from their analysis of data from Lego price-tracking website brickpicker.com, which in turn gets its data from ebay sales of Lego sets. I have not crunched any numbers myself on this, but I have no reason to disbelieve their analysis. Further, 12% per year is a very impressive number, so are Legos going to become the new retirement savings vehicle?
Probably not. While the article did a great job grabbing headlines, this phenomenal price increase for Legos is due to it being a collectible item. Note that the article gives evidence to Legos deriving their value as a collector’s item because only unopened sets receive the top prices. Sets that are discontinued are worth more, and sets based on movies or other franchises are usually the biggest winners.
In this sense, Legos are no different than baseball cards, antiques, stamps, numismatic coins or even Beanie Babies. Therefore, Legos could be a great investment, but they come with the additional risks of collector’s items, namely that demand could be just a fad, or the manufacturer could choose to restart a previously discontinued set, thereby eroding the exclusiveness. So just as some people choose to buy a few pieces of art for enjoyment as well as an investment, picking up a few Lego sets could be a fun collectible, but I wouldn’t go crazy and make it an actual part of your savings portfolio.
What Collectibles Teach Us About Money
This brings us to a more important point the article makes in terms of savings and fiat money. Why can collectibles offer a good return in terms of fiat money? The reason is scarcity. People know there are only a limited number of Star Wars Millennium Falcon Lego sets, whereas with fiat money, the government has a license to reproduce as many digital or physical dollars as they like. Because so much money has been created, it is not surprising that items of scarcity rise in value over time when compared to dollars.
So why aren’t collectibles considered, or used as, money? The most obvious reason is that collectibles don’t fit the characteristics of money used as a medium of exchange. They are not homogeneous and cannot be divided up for smaller transactions, and their value can fluctuate, depending on the buyer and the demand for the item.
But there is another reason, and that is what economists and money theorists call the ‘time-inconsistency’ problem, also known as the ‘pre-commitment’ problem. This is the problem the maker of a collectible faces: how do you credibly show people that you are committed to keeping your item scarce through limited production?
For example, the maker of baseball cards will come out with a ‘rare’ card, but the card is only rare because they are artificially choosing to restrict production of the card. Once a Mickey Mantle card sells for over $100,000, there is nothing physically stopping the company from printing up more identical cards and profiting from selling those.
However, baseball card manufacturers choose not to do this, even though they could, because it would destroy their reputation and business. Who would want to trust the company and buy collectible cards from them after they have shown that no card is really an exclusive collectible?
As creators of fiat money, governments face some of the same constraints. Once they lose the public’s trust that they will not continue to print money endlessly, the public abandons that currency and either switches to another currency that is not being inflated as rapidly, or to something that cannot be counterfeited. This is especially prevalent in high inflation or hyperinflation environments.
This is why gold, especially bullion gold, continues to be a trusted source of wealth preservation. It is not subject to ‘artificial scarcity;’ rather, it has true scarcity because the only way to add more gold to the existing supply is either to physically mine it, or to melt it down from an existing source such as jewelry. As a commodity, rather than a collectible, it is not subject to the waning interest of collectors who pursue fads like Beanie Babies. In other words, have some fun with Legos and other collectibles, but I wouldn’t bet my future on the value of gold going away anytime soon.
Chris Kuiper, CFA is currently a student and researcher at George Mason University, pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.