1

PORTFOLIO DIVERSIFICATION BENEFITS OF INVESTING

IN STAMPS∗

Chris Veld

Corresponding author. Department of Accounting and Finance, University of

Stirling, Stirling FK9 4LA, United Kingdom. Tel: +44 1786 467309; Fax: +44

1786 467308; e-mail: c.h.veld@stir.ac.uk

Yulia V. Veld-Merkoulova

Department of Accounting and Finance, University of Stirling

First draft: January 18, 2007

∗
The authors thank Michael Hall of Stanley Gibbons for the data on the SG 100 index as well
providing additional information on the index. In addition, they thank Alan Goodacre for his
helpful comments and Vivien Alexander for her editing assistance. The usual disclaimer applies.

Electronic copy of this paper is available at: http://ssrn.com/abstract=968343

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PORTFOLIO DIVERSIFICATION BENEFITS OF INVESTING

IN STAMPS

Abstract

In November 2002 Stanley Gibbons, a large British stamp dealer, introduced the

SG 100, an index for stamp investments. This index is used to study whether there

are diversification benefits for British and American stock investors to invest in

stamps. The Capital Asset Pricing Model regression of the mean monthly stamp

index excess returns on the excess returns of stock indexes yields positive alphas

for both British and American investors. This means that adding stamps to stock

portfolios can improve the investment performance of both groups of investors.

Electronic copy of this paper is available at: http://ssrn.com/abstract=968343

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In recent years, investments in collectibles, such as wine and art, have received

increased attention. However, very little research has been done on investments in

stamps. This is remarkable, because there are more than 30 million stamp

collectors worldwide and there is an active trade in stamp collections which are

sometimes sold for very high prices.1 Probably the most important reason for the

lack of research on stamps as investments is that it is very difficult to come up

with a reliable index of stamp prices. There are millions of different stamps with

prices that range from a few pennies to a few million pounds. An additional

problem is that the prices of stamps are not only determined by their scarcity, but

also by their quality. The value of a rare stamp in an excellent condition is much

higher than that of the same stamp in a poor condition (see Taylor [1983]). In this

paper we try to fill the gap in the literature by studying investments in stamps.

We use the Stanley Gibbons 100 index that was introduced by British

stamp dealer Stanley Gibbons in November 2002. We study historical stamp

returns and we investigate whether it makes sense for investors to add stamps to a

stock portfolio. We find that for a British (UK) investor the returns on the stamp

index are lower than for stock indexes such as the FTSE 100 and the FTSE 350.

However, a regression of the excess returns on the stamp index on the excess

returns of the stock market indexes, yields a significantly positive alpha. This

1
See “FT Money: The stamp of approval”, Financial Times, October 2, 2004. According to
Huang [2001] many Chinese investors trade stamps as securities. Therefore, the stamp market in
China is known as “The Second Stock Market”.
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means that stamps offer diversification possibilities for stock investors. In

addition we study returns for American (US) investors. Since the index is

denominated in British Pounds, an American investor would have a joint

investment in stamps and in British Pounds. The unhedged returns for an

American investor are somewhat higher than the returns on stocks. This is driven

by both exchange rate effects and the fact that, in the period under consideration,

the American stock indexes performed worse than their British counterparts. The

regression of the excess returns on the stamp index again shows positive alphas

for American investors. It can therefore be concluded that stamps offer

diversification possibilities to both British and American investors. A

disadvantage of stamp investments, which is not captured in our regression

analysis, is that there are substantial transaction costs associated with buying and

selling stamps. Since most auctions charge a round-trip fee of around 20 percent

of the purchase price, investments in stamps only make sense if they are held for

longer time periods.

Previous literature on investments in collectibles

A number of previous papers have studied investments in stamps and other

collectibles, such as art and wine. Most studies on art investments agree that

purchases of art are not attractive for pure investment purposes. Baumol [1986]
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finds that returns on art investments are below the returns on long-term

government bonds. Renneboog and Van Houtte [2002] also find that, in a mean-

variance framework, art investments are inferior to equity investments. A question

that is probably even more interesting is whether it makes sense to add art to an

equity portfolio. In other words, does an investment in art lead to diversification

benefits? Goetzmann [1993] argues that this is not the case. For the period 1715-

1986, he finds a strong correlation between an art index and an index of the

London Stock Exchange. He interprets this as evidence that the demand for art

increases with the wealth of art collectors. Renneboog and Van Houtte [2002]

confirm the results of Goetzmann [1993]. They also find that art yields limited

diversification potential.

The findings on wine investments are mixed. An early study by Krasker

[1979] on storing wine concludes that wine is not a good investment because the

estimated return to investing in wine in the period 1973-1977 was not

significantly different from zero. Burton and Jacobsen [2001] conclude that over

the period between 1986 and 1996 wine would have only yielded a nominal return

of 8%. Therefore they conclude (page 349) that wine should not be saved, but

savored. However, Sanning, Shaffer, and Sharratt [2006] find that wine returns

are above those predicted by the Capital Asset Pricing Model. Furthermore, they

conclude that investment grade wines benefit from low exposure to market risk

factors. Therefore they offer a valuable dimension of portfolio diversification.

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Taylor [1983] uses transaction prices realized in auctions at the Robert A.

Siegel Auction Galleries, Inc. of New York for the period January 1963 to June

1977 in order to study the return on a portfolio of five frequently traded United

States stamps. He finds a mean return of 14.5% per year. In a regression in which

the excess returns on the stamp portfolio are regressed on the excess returns of a

stock market index, he finds that both the alpha and the beta are not significantly

different from zero. This would indicate that stamps do not offer significant

diversification possibilities for stock investors. These results change when prices

from the published Scott catalogue are used instead of auction prices. In that case,

alpha becomes positive, thereby indicating possibilities for diversification.

Cardell, Kling, and Petry [1995] study auction prices of 43 different American

stamps. They find an average nominal return of 7.60% over the period from 1947

to 1988. They also find that stamps are inversely related to systematic factors that

drive stock and bond returns. This leads to the conclusion that stamps are a good

hedge for stock investments.

The SG 100 index

The index for stamp investments that we use is the Stanley Gibbons 100 index.

This index is developed by Stanley Gibbons (SG), a large stamp dealer that is

based in the United Kingdom. This company is also responsible for the
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publication of a large number of different stamp catalogues. The index was

launched on October 25, 2002. It is based on actual prices for 100 of the world’s

most frequently traded stamps. These include items from the three major

collecting areas: (1) Great Britain; (2) the British Commonwealth; and (3)

“foreign” countries such as China, the United States, Japan and European

countries. The index is weighted towards the most frequently traded and higher

value stamps. Each October it is reassessed by Stanley Gibbons. The index is

published each month in the Gibbons Stamp Monthly, a philatelic magazine that is

published by Stanley Gibbons. Given that Stanley Gibbons is based in the United

Kingdom, in combination with the fact that British stamps are the most sought

after2, the basis for the index is the British Pound. In addition to the SG 100

index, Stanley Gibbons also publishes two other stamp indexes: the GB 30

Rarities Index, which includes scarce stamps of Great Britain, and the British

Commonwealth 30 Errors & Rarities Index, which includes scarce

Commonwealth stamps. The last two mentioned indexes are not suitable for our

purpose, since they are only updated annually. Besides that, they were only

launched in September 2004.

2
See e.g. “They’ve got it licked: a first-class collection”, The Independent, October 21, 2005.
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Methodology and data description

We use the SG 100 index to study whether stamp investments lead to

diversification benefits when added to equity investments. Since the index is

denominated in British Pounds we first look at the returns for a British investor.

We calculate returns on stamps and on two British stock indexes, the FTSE 100

and the FTSE 350. In addition, returns for American investors are studied. For

that purpose the returns on the three major American indexes: the S&P 500, the

Dow Jones Industrial and the Russell 3000 index, are compared with unhedged

returns on the SG 100 index.

The data on the SG 100 index are provided by Stanley Gibbons. The stock

returns are acquired from Datastream. In addition to stamp and stock returns we

also need risk-free returns for the British and American markets. The British risk-

free returns are measured as the 1-month UK Treasury Bill discount rates. The

American risk-free returns are measured as the 1-month US Treasury constant

maturities rate. These risk-free rates of return are also derived from Datastream.

The same source is used for the exchange rates between the US dollar and the

British Pound.

The next step is to run a Capital Asset Pricing Model regression of the

monthly stamp index excess returns on the excess returns of the stock market

indexes. The excess returns on the stamp and stock indexes are calculated as the
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difference between the index returns and the risk-free returns. The regression

equation has the following form:

(RSG100,t ─ RF,t) = α + β(RM,t ─ RF,t) + εt

In this regression RSG100 is the return on the Stanley Gibbons 100 index; RF is the

risk-free rate and RM is the return on the selected stock market index. If the alpha

(α) from the regression is positive, we can conclude that stamps offer

diversification possibilities.

Empirical results

Exhibit 1 includes return statistics for the SG 100 index and the British FTSE 100

and FTSE 350 indexes for the period from November 2002 to November 2006.

[Please insert Exhibit 1 here]

As can be seen from Exhibit 1, the nominal returns on the stamp index are lower

than the returns on the stock indexes. The average monthly return of the stamp

index is only 0.58%, while the average return on the FTSE 100 and FTSE 350

indexes are respectively 1.11% and 1.24%. The stamp returns are also less

volatile than the stock returns. The standard deviation of the monthly stamp

returns is only 0.77%. This can be compared to 2.94% and 2.98% for the FTSE

100 and FTSE 350 respectively.

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Exhibit 2 includes return statistics for the SG 100 index and the three

American stock market indexes for the period from November 2002 to November

2006.

[Please insert Exhibit 2 here]

As can be seen from this exhibit, the unhedged returns on the stamp index beat

those on the three American stock market indexes. This is different from the

British results. This difference is partly caused by exchange rate fluctuations,

since in the period of consideration the British Pound went up compared to the US

dollar. In addition, the American stock market indexes performed somewhat

worse than the British stock market indexes.

The most important question in our study is whether stamps offer

diversification possibilities. Exhibit 3 presents the regression results for the

Ordinary Least Squares (OLS) regression of the monthly excess stamp index

returns on the monthly excess returns on the FTSE 100 and FTSE 350.

[Please insert Exhibit 3 here]

The Ljung-Box first-order autocorrelation test shows that there is no significant

autocorrelation effect, since all the p-values are above 10%. Therefore we can use

OLS standard errors in order to compute the t-statistics. Both regressions show

that the beta is not significantly different from zero. This is consistent with our

expectations that the stamp market is largely uncorrelated with the stock market.

More importantly, alphas are significantly positive on the 10%-level. Depending

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on the stock index, the stamp index achieves monthly returns of 0.229% or

0.237% above those predicted by the Capital Asset Pricing Model. This means

that stamps offer diversification possibilities and investing in them can improve

the investment performance of the British investors. In other words, adding

stamps to an equity portfolio pushes up the efficient frontier. One disadvantage of

stamp investments is the short-selling restrictions on this market. However, it

does not present a problem in this case, since the alphas are positive. Therefore it

is not optimal for investors to take a short position in stamps anyhow.

The same regressions, but now for American investors, are repeated in

Exhibit 4.

[Please insert Exhibit 4 here]

The results for the American investors are somewhat stronger than those for

British investors. The alphas are all significantly positive at the 5%-level and

range from 0.835% to 0.850%. This means that there are also diversification

possibilities for American investors that invest in a British stamp portfolio. The

betas are not significantly different from zero.

Exhibit 5 shows how adding stamps to a broad portfolio of American

stocks, in this case represented by the Russell 3000 Index, changes the Capital

Market Line.

[Please insert Exhibit 5 here]

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The new Capital Market Line lies above the old Capital Market Line, showing

that investing in stamps can considerably reduce risk and improve returns of the

investment portfolio.

Summary and conclusions

This study shows that stamp investments offer diversification possibilities for

both British and American investors. However, as with other collectibles, buying

and selling of stamps requires a fairly large amount of transaction costs. Most

auctions charge a fee of around 20 percent divided between buyers and sellers. In

some cases, the entire fee is charged to the buyer; in others to the seller. The most

common way to charge the fee is to charge 10 percent to the buyer in the form of

a mark-up on the hammered-down amount and to charge 10 percent of the

proceeds to the seller. In addition to this variable fee, most auction houses also

charge a small fixed cost per lot to the buyer, the seller, or both. These transaction

costs have to be taken into account before the potential diversification benefits

can be judged. Given the smaller importance of transaction costs for long-term

investors, stamps are probably more suitable for this category of investors.
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REFERENCES

• Baumol, W.J. “Unnatural Value: Or Art Investment as Floating Crap

Game.” The American Economic Review 76 (1986), pp. 10-15.

• Burton, B.J., and J.P. Jacobsen. “The Rate of Return on Investment in

Wine.” Economic Inquiry 39 (2001), pp. 337-350.

• Cardell, N.S., J.L. Kling, and G. Petry. “Stamp Returns and Economic

Factors.” Southern Economic Journal 62 (1995), pp. 411-427.

• Goetzmann, W.N. “Accounting for Taste: Art and the Financial Markets

over Three Centuries.” The American Economic Review 83 (1993), pp.

1370-1376.

• Huang, S. “Asymmetric Participation in China’s Stamp Market: Hobbyists

and Investors.” Applied Economics 33 (2001), pp. 1039-1044.

• Krasker, W.S. “The Rate of Return to Storing Wines.” Journal of Political

Economy 61 (1979), pp. 1363-1367.

• Renneboog, L., and T. Van Houtte. “The Monetary Appreciation of

Paintings: From Realism to Magritte.” Cambridge Journal of Economics

26 (2002), pp. 331-357.

• Sanning, L.W., S. Shaffer, and J.M. Sharratt. “Alternative Investments:

The Case of Wine.” Working paper, University of Wyoming, (2006),

November.
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• Taylor, W.M. “The Estimation of Quality-Adjusted Rates of Return in

Stamp Auctions.” The Journal of Finance 38 (1983), pp. 1095-1110.

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Exhibit 1. Stock and stamp return statistics for British investors.

This exhibit presents monthly returns for the stamp index and two British stock indexes. In addition, the British risk-free rates are included,

as measured by the 1-month UK treasury bill discount rate.

Index Mean Median Standard deviation Minimum Maximum Number of

observations
Raw returns
Stanley Gibbons
100 Index 0.58 0.25 0.77 0.00 2.78 48
FTSE 100 index 1.11 1.65 2.94 -9.40 9.00 48
FTSE 350 index 1.24 1.47 2.98 -9.10 9.31 48
Risk-free rate 0.36 0.38 0.04 0.28 0.40 48
Excess returns
Stanley Gibbons
100 Index 0.22 -0.12 0.78 -0.40 2.50 48
FTSE 100 index 0.75 1.31 2.94 -9.73 8.71 48
FTSE 350 index 0.88 1.13 2.98 -9.42 9.01 48
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Exhibit 2. Stock and stamp return statistics for American investors.

This exhibit presents monthly returns for three American indexes. In addition, unhedged US dollar returns for the stamp index are included.

The risk-free rate is measured as the 1-month US Treasury constant maturities rate.

Index Mean Median Standard deviation Minimum Maximum Number of

observations
Raw returns
Stanley Gibbons
100 Index 1.10 1.24 2.62 -4.40 7.96 48
S&P 500 1.02 1.26 2.62 -5.87 8.24 48
Dow Jones
Industrial 0.89 1.04 2.71 -6.09 7.02 48
Russell 3000 0.97 1.21 2.74 -5.82 8.03
Risk-free rate 0.20 0.15 0.13 0.07 0.43 48
Excess returns
Stanley Gibbons
100 Index 0.90 1.05 2.64 -4.62 7.88 48
S&P 500 0.83 0.96 2.62 -5.98 8.14 48
Dow Jones
Industrial 0.69 0.74 2.71 -6.20 6.94 48
Russell 3000 0.78 1.13 2.74 -5.92 7.94 48
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Exhibit 3. Regression results for British investors.

This exhibit presents regression estimates for the OLS regression of monthly excess returns on Stanley Gibbons 100 Index on monthly

excess stock index returns. t-statistics are in parentheses. Q(1) denotes the Ljung-Box first-order autocorrelation test, with p-values in

parentheses. Asterisks indicate the 10 percent significance level.

Independent variable Alpha Beta R squared Number of Q(1)

observations

FTSE 100 excess 0.229* -0.014 0.003 48 2.252

returns (1.95) (-0.36) (0.13)

FTSE 350 excess 0.237* -0.020 0.006 48 2.168

returns (1.99) (-0.53) (0.14)
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Exhibit 4. Regression results for American investors.

This exhibit presents regression estimates for the OLS regression of monthly excess on Stanley Gibbons 100 Index on monthly excess stock

index returns. t-statistics are in parenthesis. Q(1) denotes the Ljung-Box first-order autocorrelation test, with p-values in parentheses.

Asterisks indicate significance levels: * - 10 percent, ** - 5 percent.

Independent variable Alpha Beta R squared Number of Q(1)

observations

S&P 500 index 0.835** 0.080 0.006 48 0.033

(2.07) (0.54) (0.86)

Dow Jones Industrial 0.850** 0.074 0.006 48 0.036

(2.15) (0.52) (0.85)

Russell 3000 index 0.843** 0.075 0.006 48 0.030

(2.11) (0.53) (0.86)
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Exhibit 5. The Capital Market Line with and without stamp investments.

1.4

1.2
Stanley Gibbons 100

Russell 3000 Index

Monthly return

0.8
New Capital Market Line

0.6

0.4
Old Capital Market Line

0.2

0
0 0.5 1 1.5 2 2.5 3 3.5
Monthly standard deviation