Rare Books Investment Alternatives

Towards the end of last century, antiquarian book dealer William S. Reese presented his much publicized view of “The Rare Book Market Today” at Brown University. In this historical retrospect beginning with the depressed years prior to World War II, 1945 was picked to be the year of the greatest buying opportunity, since rare books were actually common. This was just after the war and just prior to the explosive growth of major libraries that brought the scarcity that we have been experiencing since the 1960s. In the 1970s, Reese argues that inflationary pressures and the loss of government funding in the US slowed institutional growth somewhat, and allowed private collectors to enter the market as a major force. His analysis ends with the effects of the Internet on scarcity of supply contributing to today’s market characterized by “fewer books being pursued more quickly by more people.”

The financial crisis, which started in the summer of 2007 and is still sending aftershocks through global economies, did not leave the rare book market unaffected. For the first time since the depression years prior to World War II, demand for rare books had actually declined from previous years.  Characteristic of an imperfect market, the effects were slow to take toll and, in some segments of the market, caused permanent transformations. While demand has since then recovered somewhat, a new financial sector investment category: “alternatives,”  encapsulated among other collectibles, rare books.

Alternative mutual funds have grown in assets from 180 billion in 2012, to 318 billion in 2014, according to mutual fund tracker Lipper. The financial category of alternatives is broad and it can include a number of tangible asset classes of securities including rare books.  Morningstar created a new category: Multialternative to track funds that have a majority of their assets exposed to alternative strategies. Alternatives are here to stay, according to Dr. Klaas Baks of Emory University in a recent interview for the Wall Street Journal. He went on to add that when used correctly, they can provide additional diversification, a wider set of investments and leverage. Research from Robert W. Baird and Co., which oversees and manages client assets of over $100 billion, has shown that replacing 20% of a typical portfolio with alternatives reduces volatility by 10% and slightly increases returns.

Turning rare books into targeted financial instruments to address fundamental shortcomings associated with other types of investments may not be too far off. Liquid Rarity Exchange says it has patented a method for turning rare objects into publicly traded funds, and is currently seeking New York investment houses backing. The idea is that a number of funds, each focusing on a different collectible, including books, would be created to provide retail investors additional diversification or targeted hedging.

One thing for sure is that demand for rare books in general is growing while the supply remains scarce. Before the financial crisis, book dealers would finance these purchases through bank loans. These days, banks are reluctant to lend, so independent dealers are seeking new ways to grow their business. When Reese delivered his analysis of the rare book market there were no publicly held rare book firms. Now, one of the leaders in the sector, London based, Scholium, is floating on the London Stock Exchange. The firm has two other businesses as well – a high-end art bookshop in South Kensington, London, and Ultimate Libraries, which provides tailored libraries for luxury hotels and individuals who want to own a collection of books, but prefer to ask an expert to pick the right material on their behalf.

Where is this all leading to, only time will tell for sure. The market is changing as global economic conditions evolve with many buyers these days coming from China, Russia, Brazil and India, who often buy works that were published in their home countries. Investors seeking alternatives to enhance their portfolios are also adding to the demand for rare books. And of course some of the large resourceful book firms are finding new ways to grow their business in untraditional ways all far from a market that has traditionally been referred to as “slow but steady.” Hang on it may turn a bit bumpy.



Rare Book Sale Monitor

The April 2012 article titled “Adam Smith’s Classic of Modern Economic Thought,” articulated the difficulty in tracking price changes in rare books that exhibit limited transactional activity. The Rare Book Sale Monitor, which tracks monthly sales from multiple channels and compares them to historic quarterly pricing in order to report on significant shifts in pricing broken down by genre and selected authors, is particularly receptive to the very scarce, very limited rare book trading activity. By definition, a rare book does not frequently change hands and in a marketplace of limited activity, price change trends are sometimes difficult to interpret without human intervention or well-developed analytical systems.

During the past few months, copies of Adam Smith’s “An Inquiry into the Nature and Causes of the Wealth of Nations,” appeared in auctions. First, last May in London at a Christie’s auction, the 2 volume set of the first edition published by Strahan and T. Cadell in 1776, sold for £182,500 ($307,330) including buyer’s premium. This particular copy was presented by Smith to Henry Herbert (later Lord Porchester), member of the British Parliament, Privy Councillor and Master of the Horse. (For details on how the RBSM processes presentation copies and provenance, please read our previous postings titled:  1)Rare Book Sale Monitor update – 4th Quarter 2013, 2) Rare Book Sale Monitor update – 1st Quarter 2014 – Factor of Provenance.)

Following the Christie’s sale, last June, Sotheby’s offered in their New York auction a first edition that was safely estimated to have a value of $70,000 to $100,000. The auctioneer did not entertain below starting bid offers, and the book remained unsold.

Bidding at an auction can become sensational given some favorable ingredients such as wide appeal, participant rivalry, inborn gambling spirit and the teasing uncertainty which tends to keep bidding alive. Such an atmosphere, along with the desire of at least two buyers to win, can turn an auction into a lively event pushing sales beyond unprecedented levels. However, these days the insistent urgency of the final words, “Going once-going twice-going third and last call!” are usually the same whether you are bidding in London or at an auction in New York. The difference between selling above the high estimate and not selling at all is definitely controlled by the appeal generated by the merchandise being offered for sale.

It is pretty obvious that the presentation copy sold at Christie’s is more desirable due to the importance of the dedication. Presentation copies are indeed far scarcer and without a doubt the feature that in this case had pushed bidding above the £100,000 high estimate.  Besides lacking the inscription, the lack of interest at $70,000 exhibited at Sotheby’s originated by some other factor. Both offerings are first editions and both books received restoration during their long lifespan, one with a contemporary mottled calf, the other with a later half-calf.  However, the most likely factor that discouraged bidders in New York seems to have been inherent in the composition of the set which did not include the half-titles (the complete set includes the half-title in Volume II, no half-title called for in Volume I).

Despite such complexities in the interpretation of the auction results, the RBSM, without human intervention, derived the correct outcome – credited the genre of “Business and Economics” as a result of the relative price increase after accounting for the effect of the dedication, generated  by the sale in London. The Sotheby’s event had no effect on any of the RBSM comparisons since no sale was recorded.  For the quarter, an uptick of interest in “Business and Economics” registered through additional sales that included a fourth edition of the “An Inquiry into the Nature and Causes of the Wealth of Nations” traded through Abebooks in June for £4000.

RBSM - Genre Breakdown - 2014 Q2

RBSM - Author Breakdown





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