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The Top-Performing Alternative Investments: Rare Stamps

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The stamp market has held steady through recessions and wars, but can you really make 10 percent per year?

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When an 8-year-old is saving "cool" postage stamps beside his box of Legos, we call it a hobby. When an aficionado is writing out large checks, traveling to auctions in Switzerland, the UK, the US, and Germany, and taking out insurance payments on his precious pieces of paper, we call it philatelic investing. Those who are good at it say they can make more than 45% in annual returns regardless of what's going on in other markets because stamp collecting is considered an uncorrelated investment. Indeed, the most valuable stamps have retained their value and even gained some through recessions, depressions and wars.

How It Works: Active philatelists either buy their stamps privately (at an auction or via a private seller) or through a broker. They also attend events meant for socializing and research, like the prestigious MonacoPhil, an exhibition of the world's leading private collections held in Monte Carlo every other year.

For those not interested in active trading, there are a few funds designed for the rare stamp market, including products by Stanley Gibbons Investments (AIM: SGI), a leading brokerage that specializes in stamps and collectibles.

Who's Investing and Why They're So Good at It: The stereotypical philatelist is a wealthy man of a certain age, someone who latched on to stamps as a young kid or inherited a collection from a relative, and has spent years understanding the history of a subset of stamp types, e.g., French or Japanese colonial artifacts. But the market also includes some boldface names, like billionaire bond investor Bill Gross, tennis ace Maria Sharapove, Queen Elizabeth II and French President Nicolas Sarkozy. Other notable figures from history include Franklin Roosevelt, John Lennon and Simon Wiesenthal.

It's now estimated that the stamp market includes some 50 million collectors worldwide, with 18 million in China alone. As China's economy grows, stamp experts expect to see an increased demand for rare stamps, a change that would affect the market worldwide.

Success in this market requires absolute dedication, which comes naturally to serious collectors. Unless you hire a stamp adviser, the acquisition of stamps will demand hours of personal time and a scholarly understanding of your subject. This is not a quick-fix moneymaker.

What They're Making: According to Stanley Gibbons, the compound 10-year return of the firm's GB Rarities Index between its inception in 1998 and its 10-year anniversary in 2008 was 245.2%, which meant rare stamps out-performed gold, the UK housing market and returns on investment on the FTSE 100 through that period. The growth translated as an average annual compound return of 13.2% over the decade.

In general terms, stamp collectors say they can make 10% per year with compound interest. In a recent BBC radio interview, a collector named John Ward, described as a 57-year-old businessman, said, "If you collect rare stamps, they will always be rare and they will always be sought after... And that's been so for very many years and there's no reason to think it will stop."

Why They Really Do It: Last year French President Nicolas Sarkozy wrote a letter to the French Federation of Philately Associations describing his respect for those who have made history's finest stamps. He praised the "world of artists, engravers, page designers... because it shows real talent to illustrate sometimes abstract topics, to create an original work of art for each stamp, covering such a small area."

Most collectors and investors share Sarkozy's enthusiasm for the craft and symbolism of rare stamps. "The investment side isn't a collector's primary concern because he knows that the value of his stamps is going to rise over a reasonable time period," Richard Ashton, the London-based stamp expert for Sotheby's told Institutional Investor's Jonathan Kandell. Most collectors stay with the habit for a lifetime, Kandell adds. When a major sale comes up, it's usually because a collector wants to trade up "or because his heirs never caught the philatelic bug and instead choose to sell off their inheritance."

How to Get Started: Choose an area that interests you and keep your attention narrow. "As an investor, you should focus on keeping a small number of stamps in your portfolio. Four to five high-value stamps should be sufficient," says one expert in India, where stamp collecting is gaining popularity.

Experts recommend that newbies start with research. Check out websites by organizations like the American Philatelic Society to find tips for beginners.

Remember that maintaining your stamps is as important as buying the right ones. Rare stamps are handled with care; they are not to be touched and they must be kept away from heat, humidity and light. In fact, many collectors keep their stamps at a professional agency.

Amateurs Be Warned: Be skeptical of your sources and the claims they make. Now and then, stamps become darlings of the financial media, especially when the traditional stock market is volatile. But remember that brokerages have a bias toward seeing the market thrive and are most likely to promote the view that rare stamp collecting is a safe long-term investment. In fact, like all alternative investments, stamps are best used as a way to diversify your holdings and should not constitute a large segment of your overall portfolio.

Know too that it takes an expert eye to appraise a stamp's condition and true value. Chances are high that you can't trust yourself not to buy a dud.
No positions in stocks mentioned.

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