Classic cars and a classic investing mistake

By Barry Randall

classic-car-investing

What does the collector car market have in common with the stock market? Plenty, as it turns out.

I recently tuned in to watch this year’s Barrett-Jackson car auction on TV. For a car nut like me, it’s great theater with interesting lessons in real-time economics.

And like any modern TV viewer, I used my “second screen” to follow some of the non-televised auctions also happening in mid-January in the Arizona desert.

It was tough to top last year’s craziness (a real Batmobile for $4.6 million, anyone?), but I think I found this year’s winner: a 1967 Ferrari in really bad shape. As recently as last year, examples of this model — in excellent condition — had been selling for about $1 million.

So what did the used, rusty, dented, pitted, moldy and burnt (all words used in various pre-auction news stories ) Ferrari 330 GTS go for?

$2 million.

Say what?

The official explanation is that the car was “100% original,” had only two owners ever, and was the fifth of the mere 100 ever produced. In the fetishized world of investment-grade cars, the fact that it hadn’t been kept up and (God forbid) restored by trained professionals made it somehow more valuable. The shorthand for this is, “It’s only original once!”

Well, I’m not sure the Flintstone-esque floor pan or the seized engine are in “original” condition as you and I define that word, but never mind. This bizarre logic puts the new owner in a strange position. If he or she does anything to the car, it will a) cost a lot of money because parts and labor isn't exactly cheap for handmade Ferraris; and b) it will reduce the car’s value because it will become “less original.”

What does this have to do with investing?

Because too often, people buy stocks like they’re regular cars, which only depreciate, rather than collector cars, which are expected to appreciate. When you’re buying a depreciating asset, like, say, a used car, it’s all about utility-per-dollar. That is, the difference between the buying and selling price (a.k.a., the depreciation) divided by the use you’re going to get out of the thing (the utility). Therefore, it makes sense to focus on the price.

But when you buy an asset that you expect to appreciate, the price is of secondary importance. It’s the price of admission, not the first entry in a depreciation table.

I happen to invest in technology companies that are hopefully fast-growing and that I hope will appreciate over time. But too often, clients or prospects will tell me that a particular stock seems “overpriced” and that they’d be uncomfortable buying it today, and would like to “wait for a pullback.” But this is nonsensical.

If you’re going to invest in growth stocks in general, and tech stocks in particular, you have to learn to think of the price as a marker of quality or the size of an opportunity. A premium company or business model ought to trade at a premium valuation. And it ought to be capable of shouldering that valuation up a mountain.

In our Crabtree Technology model portfolio, we try to invest in companies that fit this description.

Sure, all things being equal between two investment opportunities, I’ll choose the stock with the lower valuation. But all companies are not equal. Some business models and market opportunities are better than others.

We can laugh at the folly of paying $2 million for a rusty old car that can’t be economically repaired. But last time I checked, they weren’t making any new 1967 Ferrari 330 GTSs. And the number of billionaires worldwide keeps growing. The Ferrari sold brand new for about $8,000 (in 1967 dollars), more than twice the average cost of a new car. Even though the new owner “paid up,” I’ll bet he was glad he didn’t wait for a pullback.

Photo Credit: DryHeatPanzer

DISCLAIMER: The investments discussed are held in client accounts as of December 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to http://covestor.com or contact Covestor Client Services at (866) 825-3005, x703.

Barry Randall

Barry Randall

Crabtree Asset Management invests in growing technology companies. Barry Randall is the firm's founder and Chief Investment Officer. He has

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