The Van Tharp Institute

November 09, 2005 — Issue #245

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In this Issue:

Feature Article

Rare U.S. Stamps as an Investment, By Van K. Tharp, Ph.D.

Peak Performance

Position Sizing DVD format

Trading Tip

The Psychology of Profit Taking Exits, By D.R. Barton Jr.

Listening In Excerpt from Moneybag A. Louis, San Francisco Chronicle, November 6, 2005
Special Reports Reports by Van Tharp: Self Sabotage, Changing Markets

View this newsletter on-line, or read back issues

 

Feature

Tharp’s Thoughts

Rare U.S. Stamps as an Investment

By
Van K. Tharp, Ph.D.

 

One of the best investments you could make right now, with no more than 2-5% of your portfolio, is an investment in rare U.S. stamps.  Why?  There are three key reasons: 1) Scarcity, 2)  Investor Psychology, and 3) Market Conditions.  Let’s look at all three.

First, let’s look at what I mean by a rare U.S. stamp.  A friend recently showed me a collection that he had inherited from a grand parent and wondered what it was worth.  Most of the stamps were at least 50 years old, used, and mounted with a hinge in a stamp album in terrible condition.  What do you think it was worth?  He might be able to get $10 for it by searching for one or two items that might have some worth on eBay.  However, most of the collection was worthless and it would have taken him many hours to search for the stamps that might have had some value.

But none of those stamps are what I’d call rare stamps.

What if the same collection had been unused and in pristine condition?  What would it have been worth then?  Again, none of it was rare.  Thus, you could probably add up the face value of the stamps and take 85% of that value to determine the value of the collection.  Yes, old unused stamps, if they are not rare, are worth less than face value.

But again, those stamps are not what I mean by rare stamps. 

So what is a rare U.S. stamp?  Well, a plate block of the third U.S. airmail with an inverted center (i.e., C3a) recently went for $2.9 million at a New York auction on October 19th, 2005. This block of four rare stamps was misprinted in 1918 with an upside down airplane.  In June a single copy of the stamp (there are 100 in existence, including the plate block of 4) went for $525,000.  Those are rare stamps and those are the prices they can command.

 

But what if you could get stamps that are even rarer than C3a for much less money?  Would that be a bargain?  Yes, it would and you can.  That’s the beauty of collecting rare U.S. stamps today.

What are some examples?  Gary Posner, on eBay, currently has a copy of U.S. stamp number 175 (this is the Scott number that is the standard for identifying stamps) for $30,000.  There are only 90 of these know to exist and the one Posner is selling is probably the finest of the 90.  It’s rated at a 95% on a 100 scale by Philatelic Stamp Experts (PSE), the company that grades rare stamps in the same way that rare coins are graded.

The stamp I mentioned from Posner is much more rare than the C3a, but at less than 10% of the cost.  And there are many bargains such as this one.  Incidentally, I own this same stamp.  It’s not in the same condition as the one I mentioned, but it is still only one of 90 known to exist.  And what did I have to pay for it – $4,850 – only about 15% of what Posner is currently selling his high quality 175 for on eBay.  And what’s the potential for this stamp?  You tell me.  Only 90 of them are known to exist.

Furthermore, there are stamps that are much rarer than 175 or C3a.  One example, U.S. 164 is one.  This stamp was printed by the Continental Bank Note Company in 1873.  It has a denomination of 24 cents, is purple in color, and has a picture of General Winfred Scott on it.  However, it is virtually identical to 153, printed by the National Bank Note Company in 1971.  Since no one can tell them apart, all such stamps (without Grills) are deemed to be 153 – except for one.  This one has ribbed paper, only used by the Continental Bank Note Company.  It was discovered in 1967 and certified as the only one is existence in 1992.

Siegel and Company in New York recently sold this stamp at auction for $325,000.  Just think, if you want a complete U.S. stamp collection, then you must have this stamp, because it is the only one in existence.  Yet it only went for $325,000 at auction in December of 2004.  That was when I realized that it was time to again resume my old hobby of stamp collecting.

So let’s look at the second reason to collect rare U.S. stamps: the psychology of the market.  It’s not a popular topic.  I tried to do a teleseminar on how to collect rare stamps and no one was interested except for one or two people in Europe.  And when something is unpopular, that’s the time you want to be buying.  And that’s the reason you can get such bargains in the rare stamp market.  In fact, given what I’ve already said about rare U.S. stamps, just imagine what would happen if about 50 people were willing to spend $50,000 to a million on rare stamps.  Prices would go through the roof.

So what happened to rare stamps?  When I was a child, I collected U.S. stamps.  And I wasn’t alone.  Many young boys and girls collected U.S. stamps.  I specifically collected plate blocks which meant that you bought a block of four stamps with the plate number attached.  In those days postage was 3 cents, later raised to 4 cents.  Thus, a plate block of four stamps cost me 12 cents and later 16 cents.

The U.S. government typically issued 20 stamps each year, so it cost me between $2.40 and $3.60 a year to keep up with the latest issues.  With an allowance of 75 cents each week, I could afford to collect stamps.  However, the government then had a private company take over the delivery of mail, the USPS.  They decided to really promote to collectors.  They made fancy stamps with many colors.  And soon plate blocks were not four stamps with a plate number, but 8 stamps or even 12 stamps.  And today you often need to collect a strip of 20 stamps to get a plate block, or even a full sheet.  In addition, the USPS would often issue 50 or more stamps each year.  Thus, by 1980 when postage was 15 cents, it could easily cost you $50 to $100 each year to keep your plate block collection up to date.  That was even expensive to me as an adult, considering most of these stamps were not appreciating.  And today, the situation is even worse because postage is now 37 cents.  Plus, you can easily triple your annual cost by keeping up with the latest album supplements and the mounts required to save your stamps in pristine condition.

Thus, the USPS basically drove our children away from collecting postage stamps into collecting trading cards of their sports heroes.  And it takes young collectors to typically turn into avid collectors who really want collect rare stamps.

Bill Gross, head of Pimco, the largest bond fund in the world, said that his mother tried to pay for his education by buying him lots of stamps.  Unfortunately, she didn’t buy rare stamps and just ended with a large worthless collection of postage stamps.

However, Bill, one of the most astute investors in the world, now collects rare stamps.  In fact, the folks from PSE say that most pristine rare stamps that they get their hands on are typically bought by Bill Gross.  Generally, most people don’t want rare stamps, but a few of us, at least Bill Gross and myself, are quietly accumulating whatever we can get our hands on.

But it gets even better.  It turns out that it was Bill Gross who bought the plate block for $2.9 million.  It turns out that the most valuable single U.S. stamp ever sold at auction went to Donald Sundman for $935,000.  It’s the famous 85a, which is even more prized than 164.  Well, now that stamp is worth even more because Bill Gross traded his $2.9 million plate block to Sundman for his 85a.  And that gave Bill Gross a complete collection of 19th century U.S. stamps. 

And incidentally, Warren Buffet, the world’s greatest investor also dabbles in rare stamps I am told.

The last reason you should consider rare stamps are the current market conditions.  We are in a secular bear market.  And during the last secular bear market from 1966 through 1982, two of the best investments you could have made were rare U.S. coins and rare U.S. stamps.

However, one should never invest in something until there is a real trend for prices to go up.  And is that happening?  Yes absolutely.

I first went back to investing in rare stamps after writing Safe Strategies for Financial Freedom.  At that time, I was using PSE’s Stamp Market Quarterly to determine what I should pay for my stamps.  PSE grades stamps and then tells you the retail price for each grade.  My goal was to grade each stamp I purchased according to their guidelines and then be able to purchase them for 80% of the PSE price for that grade.

That worked well for about two years and then suddenly, I could not buy stamps at that price.  In fact, dealers were asking for 20-40% higher than the PSE price for that grade.  What does that tell you about the trend?

Furthermore, I talked to Van Simmons, who is a vice president of CLCT, the company that owns PSE.  They grade rare stamps and I asked Van about what they were seeing.  Van said that they were seeing a tremendous acceleration in prices.  He estimates that my collection would be worth five times what I paid for it within five years.

So let’s see, the best investments in the last secular bear market included gold, silver, rare coins and rare stamps.  Bill Gross, one of the most astute investors in the world, is buying rare stamps.  Warren Buffet, also one of the most astute investors in the world is also buying rare stamps.  And most people don’t even talk about rare stamps because they are so scarce that if 50 wealthy investors entered the field, rare stamps would skyrocket out of sight.

Hmm, what do you think about the potential of rare stamps now? 

Steve Sjuggerud just did a piece on collecting rare stamps.  He called gold coins the secret currency.  Well, now he’s calling rare stamps the royal currency.  It seems the English are allowing rare stamps in their pension funds after next year and they could go through the roof.  He’s even got a graph showing how much the price has gone up over the last seven years.  However, rare stamps are still a bargain and, in my opinion, have huge potential.

By the way, as a precaution, condition is very important in buying rare stamps.  Also unless you have a lot of expertise, just about everything you buy should be certified as being authentic.  And, rare stamps are very fragile; a $300,000 stamp could easily become worthless, just by improper handling – making all of the rest of them even more valuable.

If there is enough interest, I’ll write further columns on rare stamps. Let me know if you are interested by sending an email to Van@iitm.com.

 

About Van Tharp: World–renowned trading coach, author and psychologist Dr. Van K Tharp, is widely recognized for his best-selling book Trade Your Way to Financial Fre-edom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors.

Peak Performance Training

Van Tharp Didn’t Invent Risk Control…
He Just Perfected it.

Position Sizing DVD Series

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Trading Tip: 

Trading Tip

The Psychology of Profit Taking Exits

by D. R. Barton, Jr.

In last week’s tip, we talked about profit taking exits and when they are useful.  You can read that article by clicking here. As a way of recap, I mentioned that profit taking exits were most likely not very useful for long-term trend following systems.  In most other instances, today’s choppy markets are increasing the utility of profit taking exits and partial profit exits.

There are also some psychological issues to consider when designing profit-taking exits.  I’ll touch on two of those today.

Issue #1:  Isn't it true that profit taking exits violate the “let your winners run” part of the golden rule of trading?  

There is a common misconception that the only way you can “let your winners run” is to use a trailing stop.   This comes from the pervasive trend following mindset that exists because of the large amount of trend following literature available.  Trend following is fine and good.  I know plenty of folks who do it well.  But it’s not the only way to make money trading!  Counter trend and channel trading are also valid and useful trading methods.

Perhaps a more broadly useful understanding of the golden rule might be “make sure that your profits are bigger than your losses.”  A channel trading system that has winners that are 1.5 to 2 times bigger than the losers is certainly a viable system (especially if your winning percentage is big enough to give you positive expectancy and your frequency of trade is sufficient…). 

Keeping your winners bigger than your losers (on average) certainly upholds both the letter and the spirit of the golden rule of trading.

Issue #2:  “I can’t stand leaving profits on the table when I take a profit target and the market keeps moving in my direction.”

There are some folks whose belief system is so deeply embedded in trend following bedrock that they will never be comfortable taking partial or full profits at profit target levels.  That’s fine! You have to trade a system that fits you.

But others allow perfectionism to creep in and undermine their trading.  (Believe me, I’ve been there!) No exit strategy will allow you to consistently capture 100% of the move.  A good rule of thumb from our good friend Chuck Le Beau is this: if you consistently capture 50% or more of the overall move, then you have a pretty good profit taking exit strategy.  If your exit strategy consistently gets less than 50% of the profits available, then the exit needs some upgrading.

Adding a profit taking exit component can enhance many strategies.  If your system keeps giving back moderate sized profits while trying to hit a home run, consider adding an exit that can capture profits from part of the position while letting the rest run.  You may find that this helps in today’s markets that have a tough time trending smoothly.

Great trading!

 

D. R. Barton, Jr. is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching, and teaching in the markets since 1986.  D. R. has taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. 

His writing credits include co-authoring Safe Strategies for Fin-ancial Fre-edom and co-creator and contributing author on Fin-ancial Fre-edom Through  Electronic Day Trading.

 

Listening In... 

Moneybag Arthur M. Louis, San Francisco Chronicle, November 6, 2005

"Q: I see a lot of ads for stock-trading systems, and want to try one that really works. How can I educate myself about this? Can you suggest any reading material? 

"A: The problem with many of those canned stock-trading systems is that they work only if you apply them to past stock-market movements because they are based on historical prices. There's a strong possibility that they won't work in the future. 

"The people who sell these systems can't guarantee them, yet they are happy enough to accept payment for them. 

"If you must trade stocks, you might as well develop your own trading system -- one that suits your personal objectives and temperament. That is no easy task, but there are some books that will help you do it. 

"One that approaches the problem as intelligently as any is 'Trade Your Way to Financial Freedom,' by Van K. Tharp, an investment teacher and consultant with the Van Tharp Institute in North Carolina. 

"It includes highly detailed, yet beginner-friendly, discussions of the factors that are most important in creating a trading system, such as when to enter or leave the market and how much money to risk on each trade. After absorbing the material in this book, you will have the grounding you need. Then it's up to you." 

Moneybag Arthur M. Louis, San Francisco Chronicle, November 6, 2005

Participate on Van's Trading Forum, a place for traders and investors to share ideas and learn from each other

Special Reports By Van Tharp

Click below to read page one of each report, or to order. 

Self  Sabotage - Two Reports of Self Sabotage

Does Your System Still Work In Changing Markets

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Quote of the Week

Love all, trust a few, do wrong to none. ~William Shakespeare

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Did You Know...

Van Tharp is featured among Jack Schwager's original Market Wizards. 

The Market Wizards books are cited by top traders as essential reading. 

Here's a direct link to  Amazon if you want to learn more about it. Market Wizards

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