Living "the good life" doesn't necessarily mean wining and dining, lying on the beach and blowing all your money on roulette wheels in exotic casinos. Indeed, you can make more money (which is the ultimate joy for many anyway) by buying money.

Rare coins are often the currency of the rich and famous -- whether it's historical biblical coins found at archaeological digs or the original silver dollars that launched our nation's currency.

Indeed, there are collectors who, starting from humble beginnings, have amassed fortunes by buying and selling rare coins. John Jay Pittman, for instance, was an engineer at Kodak from 1947 to 1970, making between $10,000 and $15,000 per year. Each year he invested up to half his salary in rare gold and silver coins. Over the course of 20 years, he probably made a total investment of about $100,000, and his collection ultimately sold for over $30 million.

There are two ways one can get involved in coin collecting:

  • Collect your own coins, and master the subtleties of the different coins and grading mechanisms that are used to establish value for each coin.
  • Invest alongside the masters.

I called up Silvano DiGenova, a rare-coin trader who made his first million trading when he was 21. He started out trading coins, then helped work out the process of grading rare coins, and more recently has been running

Superior Galleries

(SPGR)

, a 75-year-old, California-based coin gallery and auction house that trades on the bulletin board.

Silvano buys and trades everything from 3-cent nickels to 1804-minted silver dollars to St. Gauden's gold coins from 1906. When he talks about coins and the value to be found, he can't hide his excitement. "If you take the 12 Piece Gold Type Set, which can be thought of as an index of the 12 most popularly traded coins, and if you had put $1,000 in that "index" in 1970 and held that basket of coins until now, your initial $1,000 would be worth $61,000 now. The same $1,000 put in the

Dow Jones Industrial Average

would be worth only $12,430 right now, despite the huge bull market in stocks from 1980-1999.


Source: Superior Galleries

"The history of money and the history of a country is usually found in their coins," he told me. "Coins are like holding history in your hands. Many of the best artists and sculptors of their times made coins. For instance, August St. Gaudens was hired by Teddy Roosevelt to redesign America's coins. At the time, he was America's top sculptor. In 1999, we bought and then resold a St. Gauden's 1907 $20 gold piece for $1.2 million."

Assessing the value of a rare coin does have similar characteristics to valuing a business. You use comparables and you make sure there is a significant margin of safety. The value of a coin depends in large part on its rarity, which is a function of both the particular time and place it was minted, as well as its current condition.

Depending on these two factors, there are various scales that will assign a grade based on the perceived rarity of the coin. Grades are between 1 and 70, with anything in the 60 to 70 range considered "rare." A coin that is graded a 69 might be significantly more expensive than a coin graded at 68.

The key to "value investing" in the coin space is to acquire coins that might have been graded too low or coins that are more rare than other similarly priced coins. For instance, a 1905 Liberty nickel with a 65 grade might cost $500 now, even though there might be only 157 other 1905 Liberty nickels with a 65 grade. This offers a better margin of safety than a Morgan Silver Dollar that might have a similar price but comes from a population of 3,000 to 7,000. In the long run, rarity of population is the best predictor of future price, much in the same way that cash flows are the best predictor of a company's stock price.

If you don't have the time or acumen to build and manage your own rare-coin portfolio, there are other ways an investor can ride the potential returns of this investment style. There are three public companies in the space that together can be considered as a "Coin Index."

The first company, bulletin board-traded Superior Galleries, is run by Mr. DiGenova, and is probably the only pure play in the space. The company generates income from coin auctions, retail operations (currently launching online coin stores through

Amazon

and

Overstock

) and also makes income from buying and selling coins ("proprietary trading") for its own inventory. Additionally, the company does high-yield, asset-backed lending, where coin collections are the collateral. The company had over 50% year-over-year revenue growth last year and generated cash from operations.

While Superior sells the coins,

Collector's Universe

(CLCT) - Get Report

is the premier grader of coins. Charging a $6 to $200 fee per item graded, the company also grades stamps, autographs and other collectibles. Revenue was up 40% year over year last fiscal year and income rose 200%.

Greg Manning Auctions

(GMAI)

is also in the auction space, but in addition to coins, it sells baseball cards, stamps, art and other rare items. In the past year, revenue is up 22% year over year and income is up 96%.

Coins are here to stay, and like any product of inflation combined with artistry and precious metals, will rise in value forever. Make money off of money: the good life indeed.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Collector's Universe, Superior Galleries and Greg Manning Auctions to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund

and

Trade Like Warren Buffett. At the time of publication, neither Altucher nor his fund had a position in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback and invites you to send it to

james.altucher@thestreet.com.

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