Let’s dive into the gospel according to Brickpicker members to see what these truisms are, and whether they hold water:
Commandment #1: Thou shalt buy what you like
This is probably the number one piece of advice given on this website, and I’m always floored by what bad advice this could potentially be. The logic seems sound: buy what you like so if the set goes belly up in the aftermarket, you can always build the set. From a financial perspective, executing this strategy is suicide for returns from your portfolio. As a simple example, let’s assume I had the following portfolio I wanted to liquidate today:
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Portfolio return if you decide to build 8070 is [($167 + $71) – $270] / $270 = -12%. Portfolio return if you decide to sell 8070 at a loss is [($60+$167+$71) - $270] / $270 = +10% From a financial perspective, opening the box and building the set will lead to a loss for this portfolio (assuming it’s not sold as a used set). The smaller collector-investor is especially susceptible since smaller portfolios can’t absorb the loss of entire sets. For people that invest in more than one of a set, this truism poses another issue – who wants to build and display more than one copy of the same set? Buy the sets you like and build them, but keep them separate from your investment portfolio. Also, limiting your portfolio to only certain themes you like not only limits portfolio diversity, but it can limit low risk sources of profit.
Barring a catastrophic economic collapse, your investment sets will always have some value and profit-driven investors will always try to squeeze as much profit out of each set to protect their portfolio’s return. This commandment is bogus. Invest in profit potential, not sets you would like to build.
Commandment #2: Thou shalt purchase trains
One of my first eye openers after joining BP was learning the popularity of Lego trains. Before Brickpicker, I never knew the depth of the theme: Lego trains appeared as early as 1966, and new sets have been routinely released ever since. As a kid, I always thought these trains were great toys (although I never had my own), but I only learned of their profit potential after tracking the explosive profit of the retired Maersk Train. After perusing the train forum, I was amazed at the confidence members had in recommending trains for future profit potential and decided to dig a little deeper into the performance of the secondary train market.
Are BP members correct about train returns? Here are all of the retired train sets released since 2002 excluding the recently retired yellow cargo train:
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The chart above should leave no question to the merits of this theme: Lego Trains must become at least a part of any serious Lego investor’s portfolio. Almost every train set retired before 2011 has provided incredible returns, and the recently retired sets are already showing nice returns. The only apparent exception, 4534 Lego Express, has a disappointing (yet still acceptable) 25% return, but that’s likely because 4535 Lego Express Deluxe is a better version of this set (with the same cars as 4534) that was released at the same time. This commandment belongs on a Kevlar tablet and should be screamed from the top of Mt. Sinai!
Commandment #3: Thou shalt not invest in City
For some reason, Brickpicker members tend to be bearish on the Lego City theme. While most believe the Modular and train sets will be winners, they don’t believe in much of the rest of the theme, citing frequent updates as the primary reason to stay away. In breaking down the City theme, I found four major subthemes: Police, Fire, Vehicles, and a category of rotating subthemes that have included marina, construction, farming, airport and most recently mining. For the most part, fig-sets, vehicles and buildings account for all the sets in each of these subthemes. Within the Police and Fire lines, I did find a few winners:
Police
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Fire
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Interestingly, these are the same sets investors have cautioned against investing in because of the frequent updates, yet returns from the sets are solid and fairly consistent across the board. The only outlier is 7208, but this set was just retired late last year and should be given more time to appreciate. While these sets will likely not spike in value immediately after retirement, police and fire stations appear to provide strong and steady gains while adding some diversity to your portfolio.
Even more enticing are sets from rotating subthemes such as farming, mining, airport and marina sets. Consider the performance of these sets:
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Those are some great numbers from sets retired a few short years ago. Keep your eyes open for larger, more striking sets in these rotating sub-theme lines as they have the potential to deliver some sizable returns. This commandment stinks – toss this tablet in the rock pile for pulverizing.
Commandment #4: Thou shalt buy Star Wars Lego sets
Commandment #4a: Thou shalt buy Ultimate Collector Series sets
Since its inception, the Star Wars Lego theme has drawn collectors, and they in turn have drawn investors to the theme. This commandment and its corollary seem like two variations of the same meme. Yet, after reading Ed’s Evaluation Corner article about the bottom 50 performing sets, I was shocked to learn there were some Star Wars sets among the worst losers. After digging a little deeper, I found the entire Star Wars theme sports a CAGR of 9%, just below the 11% theme average CAGR, and not as high as I would expect from the most discussed theme on Brickpicker. While everyone knows how incredible the Ultimate Collectors Series have performed, I began to wonder if the UCS subtheme wasn’t propping up the performance of the entire Star Wars theme. To determine this, I independently calculated the average annual growth rate of the Star Wars UCS subtheme and, unsurprisingly, it was an incredible 29%. For a theme that’s been around 13 years, that is phenomenal annual growth!
If the UCS subtheme sets were removed from the Star Wars theme, SW’s underwhelming 9% average CAGR would drop even further. The average Star Wars set isn’t performing strongly after retirement, and investors should consider limiting Star Wars purchases for other sets. While there will always be some general Star Wars sets that will return a profit (I expect 7965 to perform well post-EOL), the true stars are Ultimate Collector Series sets. Etch commandment #4a into the tablet, and get rid of commandment #4.
There is one small note of caution, however. The latest retired UCS set is 10215 Obi-Wan’s Jedi Starfighter, and early returns haven’t been strong. It’s the only UCS set with a negative CAGR and while it while likely grow, it will probably be the worst performing USC set moving forward.
Commandment #5 – Thou shalt not buy Chima
I went into depth in an Evaluation Corner article about the potential of the Chima line, so please read it for more specific information. To summarize, now is not the time to add Chima to your investment portfolio because retailers haven’t discounted Chima sets and the television series hasn’t begun in earnest. With the absolute earliest retirement date for the first wave of sets at the end of 2013, there will be plenty of time to purchase Chima sets. With good pre- or post-Christmas discounts, this theme will be ripe for investing if the television show takes off. This commandment remains valid for now, but could be flat-out wrong by Christmas if the TV show maintains its early ratings. Be prepared to invest.
Commandment #6: Thou shalt only purchase larger sets
The logic behind this truism is simple: you can gain more profit for less work by selling a few well performing larger sets rather than a large number of small sets. For the small collector-investor, this is especially true since hobby time is usually in shorter supply than work time or family time. The allure of netting big profits from larger sets is also strong - wouldn’t everyone rather hit the Powerball jackpot rather than win a prize from a scratch-off ticket?
However, there are reasons to consider including small sets in your portfolio. Purchasing a variety of asset classes (or themes in Lego investing) with a variety of set sizes helps to diversify portfolio risk. Also, a higher yielding, smaller set will provide higher rates of return due its smaller cost basis, and it will always be easier to sell for the same reason assuming equivalent demand to the larger set. If you’re worried about a bubble, smaller sets will be easier to liquidate in a bear market. The tribe has spoken: this commandment should be stricken from the tablet.
Commandment #7: Thou shalt measure “value” with price per piece
Let’s compare the piece count, MSRP and PPP of two actual Lego sets:
Set A: 1,344 pieces, $70 MSRP, $.05/piece
Set B: 1,300 pieces, $150 MSRP, $.12/piece
Which of the two sets is more valuable? While some would say Set A appears to provide the buyer with more value, the correct response from a seasoned investor would be that it’s impossible to answer the question with the information provided. Here is the post-retirement performance of these same sets:
Set A: -$23 loss, -5% CAGR
Set B: $635 profit, 14% CAGR
As the example illustrates, PPP is a completely meaningless measure of value. Demand drives value; very few consumers, if any, buy a Lego set because it sports a low price per piece.
I have a feeling there would be almost no Lego investor that would select 5525 Amusement Park, Set A, over 7191 Ultimate Collector Series X-Wing, Set B, to add to their investment portfolio. This commandment is erroneous and not worth the tablet it’s engraved on.
Commandment #8: Thou shalt invest in licensed themes instead of non-licensed themes
I have seen this truism sprinkled throughout the Discussion Forum, and was curious if it was actually true. It turns out that among themes with above average CAGR, 6 of 28, or 21%, are licensed, while, 15% of below average themes (8 of 55) are licensed. This 6% difference doesn’t provide a compelling case that licensed themes perform better, so I wouldn’t use it as a rule of thumb. A theme’s secondary market performance will be determined by its demand, not whether it’s licensed. Anyone that invested in Prince of Persia because it was a licensed theme took some real lumps. It’s also telling that 80% of themes with above average CAGR are non-licensed themes. Ninjago, Friends, and Power Miners are all very successful non-licensed themes that beat a majority of licensed themes. This commandment should not be utilized for making investment decisions. Drop that tablet.
Commandment #9: Thou shalt invest in Lord of the Rings I have noticed the exuberance of many BP members for the first release of the Lord of the Rings theme, and must admit I was excited for last year’s theme release. From an investment perspective, one would think the first wave of a theme based upon the most popular fantasy epic of all time should translate to high sales and high demand, but let’s try to support this opinion through assessing a similar theme’s prior performance. Harry Potter is also theme based upon a highly popular book series, and could be considered the flagship “wizarding” epic, akin to LOTR’s position in the fantasy genre. The first wave of the HP theme was released way back in 2001, and every set performed well post-EOL:
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While the table above illustrates the incredible returns from the first year of HP released sets, there is a significant difference between the two themes’ first wave of sets. At the time of Lego’s first HP release in 2001, the Potter craze was still relatively new, and Lego was able to capitalize on the freshness and fervor of Potter-mania. Not so with LOTR: this theme was released after all three movies had already been retired to DVD. While this may temper demand for the first wave of LOTR sets slightly, I still think the large base of LOTR fans will fuel great secondary market sales of all sets of LOTR’s first wave. Additionally, the second wave of LOTR sets includes two awesome, yet-to-be released sets: Pirate Ship Ambush (a ship) and Tower of Orthanc (a mega-build with serious playability and depth). These sets alone should increase the popularity of an already successful theme and ensure the first wave of sets perform well after retirement. Chisel this commandment in stone and put it behind glass!
Commandment #10: Thou shalt fear a bubble
Besides Lego’s 50% discount off a certain starship, the possibility of a looming Lego investment bubble is the most hotly debated topic on Brickpicker’s Discussion Forum. I don’t want to rehash whether there may or may not be a bubble, but I do want to discuss how to insulate yourself from the fears of one.
First, it should go without saying that Lego investors should always consider the RAMIFICATIONS of a bubble before succumbing to the allure of 10179-type profits and plowing a bunch of money into Lego sets. Every investor should ask themselves the following questions:
What is my appetite for risk? Am I prepared to lose money? Is this a hobby or is this a job? How much time do I want to spend investing? What is my timeline for making profits? Am I in this for quick money, or long term returns? The answer to these questions should tell you the type of investor you are, and shape your investing strategy. If you have a small appetite for risk, are enjoying Lego investing as a hobby with a small time commitment, and want to make quick profits, your portfolio selections will be much different than someone with a high appetite for risk that is willing to tie their money up for a few years. Those that are risk averse, or fear a bubble, should probably keep their portfolios small for a cycle or two until they’re comfortable with how the Lego secondary market performs, and how small should depend upon your disposable income. Regardless of investment type, the happiest investors always invest with a plan tailored to their specific risk tolerance, activity level and sales duration, and adjust their plan as they learn more about the market and about themselves as investors. In the end, that’s really the only commandment that belongs on the tablet.
As always, invest accordingly.
*Graphic image for title came from bricktestament.com
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