Market Whimsy: The Rational Collector

Imagine that you could have every coin you wanted. What could possibly go wrong?

By Charles Morgan and Hubert Walker ….
Charles and Hubert’s column Market Whimsy, which originally appeared in the American Numismatic Association (ANA) magazine The Numismatist, won the 2016 Numismatic Literary Guild’s award for Best Column, Non-Profit Large Publications.

This article consists of four columns that were first published August-November, 2015: “Making a Monster”, “Perfect Knowledge”, “Timing Is Everything” and “Mountains of Money”, respectively. It has been updated where necessary.

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The sale of the Pogue Family Collection by Stack’s Bowers and Sotheby’s is a once-in-a-generation event. Never before has such a collection been assembled, and some argue that it may never happen again. We realize that not all collectors follow the auctions, and that extremely high-end coins (like the finest known 1804 half dollar) are wish-dreams or academic exercises at best for many collectors. And that’s fine. There are lots of different yet equally valid versions of the hobby out there to satisfy all tastes and budgets.

Our point here is that legendary collections like the Pogue, not to mention the collectors that built them (Gardner, Eliasberg, Newman, Green, etc.), have a lot to teach us about coin collecting in general. For anyone interested in what we call “Theoretical Numismatics“, these collections are like volunteers in a tomato patch–field tests cropping up out of nowhere that bear all manner of fruit, and all you have to do is pay attention.

Years ago we started a little thought experiment but weren’t sure where to go with it. With such collections and collectors in the news, however, its time may have come… monster though it be.

The Rational Collector

We use the term “Rational Collector” (RC for short) to label our model. This Capital-C Collector is “rational” in the economic sense: he or she makes decisions based on his or her best interests. So like any proper economic model (of which ours is an amateur imitation, in the best Cahiers du Cinéma meaning of the word), we’re already dealing with complete fantasy. But mankind is driven to understand the world in which we find ourselves, and since that world is an incredibly complex and multidimensional place, the human mind in its regular state doesn’t possess the storage capacity or the frame rate to process the raw data.

We have to start somewhere. We have to simplify.

The Rational Collector, therefore, is meant to represent any self-interested collector going about the business of collecting coins (or currency, or medals, or casino chips or whatever).

But after analyzing the classic commemorative market for almost a year (for our own amusement–don’t judge), the barstool philosophy started to get interesting. What would happen to the market, we wondered, if collectors were unencumbered by the usual limitations?

What if money were no object?

What if collectors had perfect knowledge of the market?

What if they had all the time in the world to see a return on their investments–whether that was their primary goal or not?

We began to jokingly refer to questions like this and the ideas they produced as “Theoretical Numismatics”. But they proved too fruitful to dismiss, and soon our speculation culminated in a vision of a collector who did have all the time in the world, who did have perfect knowledge, who had riches beyond imagining.

What would he or she do?

This is why Pogue, Gardner, Eliasberg, Newman and Green are so instructive (we should add King Farouk for good measure). When we started, we looked at these gentlemen as being as close as the real world could get to the RC, nothing more. The first Pogue sale changed that.

The Pogues set out to put together the best collection of early federal coins ever assembled–Q. David Bowers called every coin a masterpiece. But not every coin in the Pogue collection is the best example they could possibly have owned. Even with all of their wealth and more than 40 years of effort the Pogues didn’t achieve what the Rational Collector would set out to do.

But it appears that, in the case of some coins, they chose not to. Maybe the price was wrong, or the timing was bad. Maybe they didn’t agree with the grades the coins were given. Chalk it up to the eccentricities of a flesh-and-blood person if you like, but we’re not so convinced.

At this point we should probably mention that once you start talking about the means, motivations and behavior of some kind of Übercollector, the existence of other strange objects becomes necessary. For us, the first of these objects was what we call the Grand Set. This is the collection (or set) of all the best examples of every coin there is–a feat not impossible for the RC by definition. But then like Georg Cantor’s “infinity of infinities”, we realized that it’s not so cut and dry. Is the Grand Set limited to the United States or do we include world coins? Does each individual country have a Grand Set? What about ancients? And so on and so forth.

What Pogue reminded us is that maybe the Rational Collector wouldn’t see the Grand Set as their ultimate goal. That, too, seems straightforward, but one avenue of thought seems to suggest that the Grand Set might be the only possible goal for the RC. An argument for another day…

For now, however, we’d like to leave you with this: what would happen to the hobby if such a beast as the Rational Collector were set loose? Would he or she become the ultimate arbiter of taste and beauty? What effect would that have on the third-party grading system? Would institutions such as the Smithsonian suffer or thrive when an incredibly rich donor could score previously off-the-market public holdings and replace entire collections with second-finest-known specimens? What would coin prices look like for the rest of us? Would the RC drum up enthusiasm in new collectors, or scare them away?

Should we even let one person own all of the finest coins?

From the perspective of mere coin collecting mortals, the RC might be seen to behave like a monster of the highest order. Stephen Hawking and Elon Musk have warned us about the rise of a self-directed Artificial Intelligence and its implications for the survival of humanity. In the coin industry, that’s the Rational Collector.

Perfect Knowledge

You have X and Y axes both in motion. So I’m not too sure that anyone can do anything absolute. – Q. David Bowers

The “Rational Collector”, as we just defined the term, is an all-seeing, all-knowing collector for whom time is no limit, money is no object, and the pursuit of the “best of the best” of all coins isn’t just the goal but the inevitable outcome if they’re in any way serious about collecting coins.

But really, it’s what any of us could become without the constraints of reality.

Therefore, we wanted to describe some of those limitations and see what the ramifications of these constraints are on the coin market and how they play out on a daily basis, starting with the Rational Collector’s first and perhaps most important advantage: PERFECT KNOWLEDGE.

Based on the economic concept of complete information–a key factor in a truly competitive market where participants must accept the market price of goods and cannot influence it–“perfect knowledge” means that, to the Rational Collector, the coin market is an open book. He or she knows exactly how rare any given coin is since the RC knows all surviving population numbers and original mintages. He or she knows which coins are truly the “best”, regardless of whether or not it’s slabbed, or whether or not it was graded correctly. The Rational Collector knows who’s sitting on what coins. And so on, and so forth.

We’d have to assume that such a thing is impossible in real life.

But it should point out how inefficient the numismatic market is as it currently stands, the principle cause of this inefficiency being imperfect information. We don’t have unlimited access to dealer stockrooms, nor should we – people have a right to conduct their own businesses as they see fit. We don’t know precisely how rare a coin is because much of the information that would allow such knowledge has been lost to history, and in many cases intensive research is necessary to begin to glean even an approximation. We can’t tell you which coin in a series is graded most accurately because grading can be highly subjective.

To illustrate the way imperfect knowledge affects the market–and the collectors caught up in it–let’s take a trip back in time and watch the sale of a single coin.

The date is January 7, 2003, and the item up for bids is an 1853 $5 gold coin, PCGS MS64. At the time of the sale the coin stood alone as a “population one” coin with none finer. The auctioneer is Bowers and Merena and the sale is The Rarities Auction.

The cataloger described the coin this way:

Richly lustrous and very attractive. Medium to light yellow gold. Above average strike. A very nice example of a date which is available readily enough in circulated grades, but which at the MS-64 grade, and with nice eye appeal (as here), can be called a condition rarity of great importance. Indeed, PCGS, the experts of which have seen as many coins as just about anyone, has never seen its equal- certainly a significant statement.

When the hammer struck, the coin brought $12,650 USD, and for a time the owner of the coin had the distinction of having the finest-known five dollar gold coin struck at the Philadelphia Mint in 1853.

In 2015, however, Professional Coin Grading Service (PCGS) stated a population of two in 64, two in 64+, one in 65, and one in 66. For its part, Numismatic Guaranty Corporation (NGC) counted four in MS-64 and one in MS-65.

None of this could have been known by the winning bidder. The 2003 buyer and auction cataloger both possessed imperfect knowledge. And while everything stated in the description was accurate at the time it was written, it was sorely incomplete. Today, an MS-64 1853 gold $5 has a market value of about what the coin brought in 2003, which would make the coin a loser in terms of the buyer’s return on investment. Meanwhile, the coins that graded better are worth multiples more. For now.

Yet even this fails to take into account an all-important question. To put it bluntly, are the coins represented in the population reports real? That is, do the 11 reported examples represent discreetly different coins, or are some coins double-counted in the same (or different) grades?

Which brings us back to the Rational Collector. With perfect knowledge, he or she either avoids this 1853 $5–or any coin like it–because they know it’s not the “best of the best” and is therefore unworthy of the Grand Set (see above), or the RC buys it and makes out like a bandit, because he or she knows, regardless of what the services say, that this particular example actually is the best.

Either way, the Rational Collector moves with skill and precision in a way the rest of us can only dream of. In a numismatic landscape that sees the X and Y axes always in motion, the RC seizes the opportunity to differentiate the Grand Set from every coin collection ever assembled before.

Unlimited Time

In thinly capitalized markets (and you can certainly count the rare coin market as one of them), timing is everything.

Buy or sell coins at the right time, and profit is yours.

Buy or sell at the wrong time… and you may get buried.

Almost every coin in virtually every circumstance is subject to this rule, and no coin or coin expert is immune to the whims of the marketplace.

If you bought a 1995-W Gold and Silver Eagle Proof Set for $999, you did very well for yourself. If you made the decision to pay $86,000 including buyer’s fee for a 1995-W Silver Eagle in 2013, well, what can we say?

Timing can also extend beyond a collector’s entry and exit points in the market on a transactional basis to time in and out of the hobby on a macro scale. This directly affects a collector’s ability to buy the coins they need for their collections.

Simply put, we’re all gonna die. Obviously our time as active participants in the rare coin market is finite; finite from an active interest standpoint, finite from a financial standpoint, and finite from the standpoint of timing.

For those seeking to assemble major and historic collections, time (and timing) is key.

Consider the May 2016 offering of the Mickley-Appleton-Woodward-Brand-Eliasberg-Pogue 1822 half eagle $5 gold coin.

Despite a reported mintage of 17,796 pieces, just three examples of the issue are known to today’s numismatic community and two of them reside in the Smithsonian Institution’s National Numismatic Collection – the most recent one impounded having once been part of the extraordinary coin collection of pharmaceutical magnate Josiah K. Lilly.

Leaving behind the sense of betrayal that many collectors feel when notable coins from notable collections are forever taken off the market by acts of public giving, the fact that only one collector can own an 1822 half eagle illustrates how significant time and timing factor into the set construction of the hobby’s most significant collections.

The fact that none of the high-end buyers participating in the Pogue IV sale could meet the Pogue family’s reserve and buy the coin emphasizes how exponentially more powerful a player the Rational Collector would be if he or she existed. Because had he or she or his or her agents been there, the only collectible 1822 half eagle $5 gold coin would most certainly have been theirs.

And the 1822 half eagle is just one of a handful of stoppers in the federal series. Others include the undocumented 1870-S issues, the only legal-to-own 1933 $20 double eagle, and the 1873-CC No Arrows dime.

For collectors looking to put together a complete set of U.S. coins, having access to these great rarities is far from a given. First, each coin’s current owner would have to be willing to part with it. Second, the buyer’s window of activity will have to coincide with the seller’s window of selling.

The Pogue family bought their 1822 half eagle more than 30 years ago. How many great collections came and went during that period that never had a shot at containing the coin? Do you think the underbidder from three decades ago regrets not ponying up more than the Pogue’s winning $687,500 bid ($1.7 million in today’s dollars)?

The Rational Collector doesn’t operate like the rest of us – he or she has the luxury of time. The RC can approach the construction of the Grand Set methodically, picking up the best coin from each issue as they appear for sale. Partly this is due to the bottomless war chest our monstrous model collector possesses. And partly it’s due to the RC’s impossibly perfect knowledge of coins and the market. But mostly, since they don’t need to rush to complete the journey, they don’t have to compromise.

Cycles come and go in the hobby, and the RC has seen more than a few. Mistakes made during one cycle are never repeated in the next. Auction results and pedigrees are remembered, even if they’re lost to the hobby-at-large. Relationships with pre-eminent dealers, auction houses and elite collectors are maintained and propelled through the generations. Like a numismatic Nosferatu, the Rational Collector has spent a long time lurking about, collecting coins and information.

And when it comes to information, they’re not just interested in stats and values but all manner of psychological and social information. This is how the RC is always in the right place at the right time.

Does Mark Zuckerberg collect coins? The Rational Collector’s pervasiveness is positively Facebookian.

But another consideration to be had is this: no matter how volatile coin values and prices may be in the short term, most people assume that coin values go up in the long term. So how does one invest in coins when you have all the time in the world? Could it be done without literal immortality? What would such behavior look like? Would anyone else even notice?

Would our Rational Collector feel the need to hide in a figurative coffin full of dirt, buying and selling only in the shadows?

At any rate, unlimited time seems like one way around the dilemma of imperfect knowledge.

Unlimited Money

Imagine if some mysterious benefactor showed up in your life and told you that the next coin you bought was on him; that you could buy whatever coin you might possibly want and wouldn’t have to pay for it. Assuming you weren’t too proud, which coin would it be? Would you splurge on something beyond your means but keep it reasonable? Or would you take full advantage of your newfound friendship and go big?

Would you fill that 1909-S V.D.B. hole that’s haunted your penny board since you started collecting? Snatch up an 1856 Flying Eagle cent or an 1895 Proof Morgan? How about a 1916-D Mercury dime? Or would you wait until something really rare came on the market–the aforementioned Pogue 1822 $5, for instance?

Over the last few months we’ve been laying out the basic traits of our friend, the numismonstrous Rational Collector (“RC” for short). The RC is unbound by the same realities the workaday collector faces; he or she has impossibly perfect information about the market, all the time in the world for that information to pay off, and pockets so deep even James Cameron couldn’t get to the bottom of them.

Each of those factors dramatically changes the landscape of collecting. By knowing which coins to buy, he or she avoids costly mistakes–whether or not the market understands that. By having unlimited time, he or she can wait patiently until the “perfect” coin comes onto the market. But by having unlimited money, the Rational Collector can get every coin he or she wants, regardless of price, regardless of market value… and regardless of whether he or she has perfect information and unlimited time or not.

Under these circumstances, the great rarities are granted a sense of Grand Set equilibrium – each coin is required equally. The finest 1969 quarter–which, we’d imagine, is still quite ugly–is equal to the finest 1796 quarter. The best 1972-P Type 2 Ike dollar is no more important than the finest known 1893-S Morgan. And so on, and so forth.

We assume that such an approach to collecting would lead to incredible outcomes in the coin market. Take moderns, for example. Because they are almost never rare (among other reasons), “modern” coins are treated with a general disdain by the rare coin market as a whole. But might we not see a mad dash towards the discovery and creation of finest-knowns anyway, if people can name their own price… and get it?

Would the RC be like a modern-day Mansa Musa? Musa was a king of Mali and is the all-time richest single individual in Earth history. When he made a pilgrimage to Mecca in 1324, his entourage carried (and spent) so much gold that he single-handedly sank the gold market for years to come. Italian merchants in Cairo at the time returned home with so much gold for their wares that it kickstarted both the modern financial institutions we know and love today and a little something we call the Renaissance.

But we’re just talking about the American coin market here. There’s no guarantee that the top-pop coins of today would withstand the rigor of such a devoted buyer. How many tens of thousands of new modern coins might find their way into slabs in order to satisfy such a market force? What would happen to the coins that didn’t make the cut?

Also, what psychological effect would such a buyer have on the market? During the King Farouk sale, John Jay Pittman famously stood up to some of the day’s wealthy dealers and browbeat them into not buying everything, suggesting that it would be a bad move on their part if they alienated him and other collectors. In our scenario, nobody would be able to compel the Rational Collector to forgo the purchase of any coin the Grand Set requires.

And so the best coins one could possibly own would become part of the Grand Set – a set whose formation disrupts the hopes and dreams of other collectors while saturating immature segments of the market with unwanted inventory.

On a trip to the National Numismatic Collection in Washington, DC last year, we were struck by the “cavalier” way in which some of our country’s greatest numismatic treasures were displayed. The exhibit itself is worthy, elegantly designed and executed. It’s just that even with the large safe door at the entrance, nowhere inside the space does one get a sense of the “value” of the objects found within. A simple pull of the drawer reveals not one but three 1804 dollars. A 1933 double eagle greets visitors with little or no hint of its immense value. The exotic gold coins of the Lilly Collection fill a wall in a handsome array. What are they worth? Are they rare? Little explanation is provided. Everything inside being “priceless” renders the real value of any one piece meaningless.

It’s an odd feeling, made even stranger by the irony of the exhibit’s name: “The Value of Money”.

We imagine the Rational Collector’s Grand Set would have the same effect, only the market action wouldn’t be confined to the safety of a museum (whether the Grand Set itself were destined for a public space or not).

And it would happen quickly. Think the Hunt Brothers in the age of high-frequency trading.