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    LEGO Investment Bubble: Fact or Fiction?


    Definition of "Speculative Bubble":
    A spike in asset values within a particular industry, commodity, or asset class. A speculative bubble is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values. This drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest.

    The bubble is not completed until prices fall back down to normalized levels; this usually involves a period of steep decline in price during which most investors panic and sell out of their investments. (source: Investopedia.com)

    There is a phrase used around the various LEGO forums that puts fear into the hearts of even the most staunch LEGO investors and collectors...bubble. As in “speculative” or “investment” bubble. The remarkable run up of prices of some retired LEGO sets has some investors thinking back to the days of the Cabbage Patch Dolls, Beanies Babies and Baseball Cards, and not in a good way. In each one of those cases, a type of toy collectible hit new heights in value and popularity, only to crash and burn a few years later and leave its investors with huge inventories of useless and worthless collectible toys. Is history destined to repeat itself again with the LEGO collectible's market crashing like the Baseball Card collectible's market did several years ago? Will the value of these high-priced LEGO sets and minifigures, with years of gains behind them, be wiped out in a couple of months, or few years at the most? Some very similar and scary comparisons can be made between the explosion of LEGO set values and some of the other collectible's markets that crashed, especially the Baseball Card collectible's market.

    The Baseball Card collectible's market, unlike other flash-in-the-pan collectible's markets(Cabbage Patch dolls and Beanie Babies to name a few...), has been around a very long time(Baseball Cards have been around since the 1860s). Like LEGO sets, which have been around over 50 years themselves, Baseball Cards are an iconic collectible and childhood toy that are also collected heavily by adults. But are LEGO sets and their values bound to follow the same path that the Baseball Cards did, and if so, when will the “bubble” burst? Upon researching the topic of the collectible toy markets and the history of those markets, I found a very interesting article about the collectible Baseball Card market and its rise and fall. The article was written by Davis Jameison and was a brief synopsis of his book called Mint Condition: How Baseball Cards Became an American Obsession. I found the article to be quite interesting and eerily comparable in some ways to the current LEGO collectible's market. Let's take a look at the article and see if we can draw any useful comparisons to the modern day LEGO investing and collecting market:

     

    This piece was taken from Mint Condition© 2010 by Dave Jamieson and was posted in an article in www.SLATE.com (Mar 24, 2010)

    In 1989, the Upper Deck Co. would transform the industry with flashy, high-priced cards aimed at investment-minded collectors. As the sales of new sports cards swelled to more than $1 billion a year, children began to flee the hobby, turned off by the pricey packs and confounding number of sets. The baseball strike of 1994 ushered in an industrywide hangover that still hasn't ended. Revenues from new sports cards have fallen to around $200 million a year, roughly one-seventh of what they were at their peak. While vintage cards like the T206 Honus Wagner and the 1952 Topps Mickey Mantle have continued to soar in value, baseball card's boom times produced no such valuable merchandise. Those 1988 Donruss cards, once considered a savvy investment, can now be bought in bulk for around 1 cent apiece.

    For those disturbed by such unseemly tales, the hobby of card collecting had begun to resemble baseball itself: an American institution that appeared to have strayed from its noble and innocent beginnings. Never mind that baseball cards, much like the game, had always been big business and always been a revenue machine. There had been nothing particularly wholesome about using baseball cards to shill cigarettes to grown-ups and children alike 100 years earlier. As Lew Lipset, an outspoken baseball card auctioneer, wrote in an issue of his Old Judge Newsletter in 1990: "Try to make a living in this hobby and you'll learn about … deceit, unfair business practices, the lack of truth in advertising, price manipulation, collusion, restraint of trade, insider trading, patronage, extortion, payoffs and bribes, graft, plagiarism and, last but not least, hype."

    Precious few collectors seemed to ponder the possibility that baseball cards could depreciate. As the number of card shops in the United States ballooned to 10,000, dealers filled their storage rooms with unopened cases of 1988 Donruss as if they were Treasury bills or bearer bonds. Shops were regularly burglarized, their stocks of cards taken as loot. In early 1990, a card dealer was found bludgeoned to death behind the display case in his shop in San Luis Obispo, Calif., with $10,000 worth of cards missing. A few weeks later, Bob Engel, a respected National League umpire, was arrested for allegedly stealing more than 4,180 Score baseball cards, worth $143.98, from a Target store in Bakersfield, Calif., and attempting to steal another 50 packs from a Costco.

    Unfortunately for investors, each one of those cards was being printed in astronomical numbers. The card companies were shrewd enough never to disclose how many cards they were actually producing, but even conservative estimates put the number well into the billions. One trade magazine estimated the tally at 81 billion trading cards per year in the late '80s and early '90s, or more than 300 cards for every American annually.

    By the '80s, baseball card values were rising beyond the average hobbyist's means. As prices continued to climb, baseball cards were touted as a legitimate investment alternative to stocks, with the Wall Street Journal referring to them as sound "inflation hedges" and "nostalgia futures." Newspapers started running feature stories with headlines such as "Turning Cardboard Into Cash" (the Washington Post), "A Grand Slam Profit May Be in the Cards" (the New York Times), and "Cards Put Gold, Stocks to Shame as Investment" (the Orange County Register). A hobby bulletin called the Ball Street Journal, claiming entrée to a network of scouts and coaches, promised collectors "insider scouting information" that would help them invest in the cards of rising big-league prospects. Collectors bought bundles of rookie cards as a way to gamble legally on a player's future.

    What none of us understood at the time was that Beckett's guides were probably creating card prices just as much as they were reporting them. When Beckett sued a competitor over copyright infringement in 1979, claiming that the rival had stolen his data, the judge noted that because Beckett's guides were "regarded as the authority in the field, it is entirely possible that the prices in [his] publication not only reflect market prices, but in fact can determine market prices."

    American boys growing up in the 1980s approached Beckett Baseball Card Monthly with something like religious reverence. For many of us, it was the first magazine we bought and the only one we leafed through regularly. The magazine's circulation eventually reached about 1 million, with many of those issues no doubt destined for the book bags of young boys. We walked the school hallways in the '80s with our Becketts sandwiched between our textbooks, and we followed the price fluctuations of our favorite players with slavish devotion. Beckett's valuations served as the foundation for all card trades.

    Eventually, Beckett would launch a monthly magazine and employ a team of 10 full-time baseball card analysts who would travel to card shows and shops, examine auction data, and sift through major league box scores to determine card values. He also made collector-investors more condition-conscious by including in his magazines one of the first card-grading systems, providing definitions for what he considered "mint," "excellent," "very good," "good," "fair," and "poor" cards.

    In 1976, he launched a poll in the hobby newspapers, asking dealers and collectors how much particular cards had been selling for in recent months. Because collectors were inclined to juice the value of cards they had in hand, Beckett sought several hundred respondents so that egregiously high or low numbers would cancel one another out. The following year, he published a rudimentary price list whose valuations seem positively rock-bottom compared with today's: The 1952 Topps Mickey Mantle, now fetching hundreds of thousands of dollars in fine condition, was listed at $50. In 1979, Beckett and a partner, Dennis Eckes, released the Sport Americana Baseball Card Price Guide, which they started updating annually.

    This loophole in the hobby would soon be closed by a statistics professor from Bowling Green University named James Beckett III. Beckett had grown up on Topps cards in the 1950s, and after lapsing in high school and college, he got back into collecting while pursuing a Ph.D. in statistics. Like Young and Miller, Beckett started checking into motels around the country during the '70s. The more dealings he had, the more he could see that no one had any firm notion of the market value of baseball cards.

    One of Young's old colleagues, dealer Gar Millar of Wenonah, N.J., says the excitement was in wondering what would walk through the door: "You might find some beautiful collection that had unopened packs of cards. It was just thrilling." For the itinerant and well-informed hobbyist, it wasn't difficult to get a good deal from the non-collectors who showed up at the Holiday Inn, considering there were no price guides to govern transactions in those days. "You didn't know what anything was worth," explains Miller. 
    "We'd pick an area of the country... say, Ohio... and take about a 10- or 15-day road trip," recalls Kit Young, who today owns a massive mail-order business in San Diego. "You'd take eight or 10 grand for a four-city hit. We'd rent a car, go around the towns, and we'd have ads in the local papers saying, 'Old Baseball Cards Wanted. … We'll be at the Holiday Inn.' You'd get one crack at them, and you paid by cash.”

    By this time, the most aggressive card collectors had started crisscrossing the country in search of private hoards of cardboard that could be snatched up at bargain prices. Unlike school kids, these men were well-aware of baseball cards' status as a commodity... albeit an undervalued one...and many of these enthusiasts could credit their early transactions with turning them into wealthy men later in life.

    Around the mid-1970s, a small cabal of serious baseball card collectors grew wise to the fact that their cards had become valuable. Cards had almost always had prices attached to them, even when prolific collector and cataloger Jefferson Burdickbegan sending out his Card Collectors Bulletin in the 1930s. But cards that had been worth a few cents were now worth a few bucks, and some of the rarer specimens, such as the T206 Honus Wagner, were commanding hundreds and occasionally thousands of dollars apiece. The number of trade shows sprouting up in the East and the Midwest testified to a growing market.
    How come that Frank Thomas rookie card you stowed away in 1990 is now worth less than a Happy Meal? Chalk it up to the baseball card bubble of the late 1980s and early 1990s. In a new book, Mint Condition: How Baseball Cards Became an American Obsession, Dave Jamieson tells the story of how baseball cards evolved from a tobacco marketing gimmick in the 19th century into a massive, big-money industry of their own by the late 20th century. In this excerpt, Jamieson explains how baseball cards first became seen as promising investments, setting the stage for a decade of speculation and overproduction.
    By Dave Jamieson|Posted Wednesday, March 24, 2010, at 12:01 PM ET, www.SLATE.com

    The Great Baseball Card Bubble
    Before tech stocks and McMansions, there was cardboard...
     
     

    ...Very interesting article. I have read many forum posts over the years relating the Baseball Card bubble to the current LEGO situation. There are definitely some parallel points that should be acknowledged, yet there are some huge differences between both. Let's take a look at some of the similarities...

    • Both markets were originally designed for children and have had a large influx of adult investors get involved later in the lifespan of the collectible.
    • Both markets are iconic and have been in existence for 50+ years.
    • Both markets have thousands of different variations and new ones are released on a yearly basis.
    • Both markets have price guides that keep track of current prices and trends.
    • Both the LEGO new collectible and secondary market and the Baseball Card new collectible and secondary market remain two of the largest and active collectors' markets in the world today. If you take a look at the EBAY auction listings for instance, there are millions of EBAY auctions for Baseball Card items on any given day in the United States. LEGO auctions in the United States are in the hundreds of thousands on a daily basis, and probably equal to that in countries across Europe and the rest of the world. Both the LEGO and Baseball Card markets rank right up there with Stamp and Coin collecting markets, which are the largest collecting markets in the world.

    Those are the basic similarities I see between the LEGO and Baseball Card markets. They are quite substantial, yet the differences that follow outweigh the similarities in my opinion. Let's check them out...

    • While both markets have a wide range of age groups that participate in the collecting, the Baseball and Sports Memorabilia market, in general, is an adult driven business. The majority of LEGO collectors, fans, users or whatever you would like to call them...are children. By a vast majority in fact. Look at the most successful themes in the LEGO brand...Ninjago, Friends, City/Town. All are geared towards the younger crowd. While the Baseball card industry does sell a substantial amount of Baseball Cards to kids, the investing and larger portion of card sales is mainly by adults. LEGO sets are bought by all ages, but the majority of LEGO sets are still bought by children, even with the uptick in LEGO “investing” as of late. Kids don't invest. They collect LEGO sets and bricks to build bigger and better creations. Investing is the last thing on a kid's mind and it is this love of LEGO bricks that keeps the brand strong now and probably into the future as well.
    • LEGO sets are played with and sold worldwide, in hundreds of countries. Baseball Cards are mainly an American phenomenon(Japan and a few Latin American countries notwithstanding). This point cannot be underestimated in importance. The love and interest in LEGO bricks in European countries is huge and helps build a strong base for the LEGO brand around the world. As the old saying goes, “The more the merrier,” and in this case, the more people buying and collecting LEGO sets, the better the secondary LEGO market will be after a set is retired.
    • The LEGO Group does not release billions of sets every year like some of the Baseball Card companies did with cards and can at any time if they so choose. As a matter of fact, LEGO does a very good job of limiting sets(about 500 new releases a year) and keeping themes and ideas fresh. Lego retires sets on a frequent basis, while Baseball Card companies will release thousands of different cards yearly, with different versions for each player, watering down the market. Lego sets are just too expensive to produce and The LEGO Group doesn't want warehouses full of unsold inventory. Businesses as a whole today are much more aware of the dangers of excessive inventory and overproducing millions, or even billions, of sets(or cards with respect to the Baseball Card industry) is highly unlikely.
    • LEGO sets are historically expensive. I have been playing with and collecting LEGO bricks for 35+ years and they have always been pricey. But that is a good thing if you are a collector/investor from a resell standpoint. There are some serious fans that buy LEGO sets and are willing to pay top dollar for quality, MISB sets, new or retired. There is value to a LEGO set. They are one of the highest quality toys you can buy. Baseball cards can be worth pennies, even new. There might be expensive old and rare Baseball cards, but the vast majority will never be worth anything more than pocket change. Heck, LEGO bricks are made of ABS(acrylonitrile butadiene styrene), which is a petroleum derivative, so it has to cost more to produce LEGO bricks over some small pieces of paper. LOL.
    • LEGO was voted “Toy of the Century” by the Toy Retailers Association. Baseball cards are not a “toy.” Therein lies the main difference in my opinion. LEGO bricks are TOYS that can be collected. Baseball cards are pieces of cardboard that can be collected. Not to knock Baseball cards...I'm a huge NY Yankee fan and collected cards as a child, it's just that LEGO bricks have a special aura about them and are wanted and admired by all walks of life, by people from around the world. They are toys that can be used over and over and over again and enable its fans to explore their creative side. There is really no substitute for a toy such as LEGO. There are other lesser competitors, but the LEGO building brick is far superior and is loved more than ever. The LEGO Group has seen profits grow for 7 straight years, with no downturn in sight. Baseball cards on the other hand just don't have the broad support from children around the world like LEGO sets still do. Baseball Cards had their day in the sun, when Major League Baseball was the main sports draw in the nation, but that run is over. NFL Football has replaced MLB Baseball as the most popular sport in the United States and cards grew less important. It's adults that are keeping the Baseball Card business afloat, buying Mickey Mantle cards, not kids buying Derek Jeter cards. Technology has also put a dent in old hobbies like card collecting. Video games and smart phones are the new play toys for a lot of kids. But there is still a craving for people to utilize their imaginations and build something from LEGO bricks. The child LEGO collectors of today are the adult LEGO investors of tomorrow. It is this cycle that keeps The LEGO Group profitable, even in terrible economic times, and helps keep the values of LEGO sets at high levels.

    The reader can see why some people linked the LEGO collectible's market with the Baseball Card collectible market. These same people also worried that the LEGO market is heading towards an “investment bubble,” in the same manner as the Baseball Card collectible's market crashed several years back. While there might be some strong similarities between the two markets from a logistics point of view, from a product point of view, they are quite different animals. Baseball cards are just that, cardboard cards. There is no real “play” value to them. A collector's value, for sure, but a child won't do anything really creative with them...a house of cards, maybe? Well, we all know what children and adults can do with LEGO bricks and the “play” value of them. The play value is what makes LEGO sets valuable and keeps children buying LEGO sets. This inherent play value has also made LEGO the third largest toy manufacturer in the United States. The LEGO collectible's market is a minor piece of the entire LEGO sales pie. The majority of LEGO sets are bought by and for children, not by and for adult investors, like the Baseball Card market was and still is. Adult investors on the various LEGO forums like to believe they drive LEGO sales. They do not. Maybe a small percentage of the retired and rare sets on EBAY or Bricklink are influenced price wise by these investors, collectors and resellers, but the vast majority of new and recently retired LEGO sets prices will not be affected by speculation in the secondary LEGO market in my opinion. New LEGO set prices will continue to remain high(as they always have been), regardless of the secondary market and some minor speculation. Several thousand or even tens of thousands of amateur LEGO investors will not outweigh millions of children buying sets for non-investment reasons.

    The Baseball Card market imploded because the main buyer of Baseball Cards became adults looking to invest. The Baseball Card Manufacturers saw this shift in buyer types and proceeded to produce and sell billions of cards, flooding the market with worthless pieces of cardboard. Baseball Card sellers and collectors hoarded cases of cards, not realizing that the manufacturers were overproducing the product. POP...went the bubble. As I stated earlier, I really doubt that LEGO will ramp up set production so much that the market becomes flooded and worthless. They are better business operators than that. LEGO is very protective of its brand and does an excellent job with quality and keeping set values at a premium level. They retire sets on a regular basis and this keeps ideas and themes fresh and the secondary market ripe with new retired sets that might appreciate. If you notice, LEGO goes out of stock on various sets quite frequently on their Shop @ Home site and if they were the type of company to overproduce a product, you would never see that kind of message. They produce as needed. Some themes and sets are retired after one year due to poor sales or lack of fan interest, other themes and sets can go on for years if they are selling. LEGO adapts on the fly to the current market and trends, which is in my opinion, a very smart and successful business practice.

    Now I'm not going to lie to you, the whole idea of a LEGO “investment/speculation bubble” scares me to death. I am heavily invested in LEGO sets and any talk or rumors of one makes me wonder if it is time to sell. I invested heavily in Technology stocks(NASDAQ) years back and lost my proverbial “shirt.” It got me thinking about my own collection and the LEGO secondary market as a whole. Is there a bubble? I mean, LEGO sets have appeared to go through the roof. $2000+ for a 10179 Millennium Falcon? $1100 for a 10182 Cafe Corner or 10030 Imperial Star Destroyer? $700 for a couple of San Diego Comic Con Marvel minifigures? There has to be a “bubble”...right? Well...maybe. Let's take a look at the definition of a “speculative bubble” again:

    A spike in asset values within a particular industry, commodity, or asset class. A speculative bubble is usually caused by exaggerated expectations of future growth, price appreciation, or other events that could cause an increase in asset values. This drives trading volumes higher, and as more investors rally around the heightened expectation, buyers outnumber sellers, pushing prices beyond what an objective analysis of intrinsic value would suggest.

    The bubble is not completed until prices fall back down to normalized levels; this usually involves a period of steep decline in price during which most investors panic and sell out of their investments.

    The 10179 Millenium Falcon has “spiked” in value over the last year and a half. Same with the 10182 Cafe Corner. A ton of LEGO sets have exploded in value recently. It definitely has to be a bubble...right? Once again...maybe...or maybe not. In order to really tell if the LEGO collectible's market is in an investment bubble, we have to look at the broader view. In other words, we have to look at all LEGO sets and see if all or most of the sets are “spiking” in value in the past year or two. How do we do this? By using the mean CAGR, Compound Annual Growth Rate, for all qualified LEGO sets. In layman's terms, the CAGR can be thought of as the growth rate statistic that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period. It simplifies years of different growth percentages and gives you a single number that represents compounded growth percentage of an investment, in this case, a LEGO set. For our purposes in this discussion, when I say “qualified,” I am referring to the thousands of new and retired LEGO sets in our database that fit a certain criteria. We remove highly volatile sets like Collectible Minifigures and sets that do not have enough sales to make an accurate price guide for. We then take these thousands of sets in our database and calculate a mean, or average, CAGR value for the entire database. If we utilize the BrickPicker database and calculate the mean CAGR for July 2012 for all qualified LEGO sets, we found that the mean CAGR for those sets that qualified was approximately 10.6%. So, basically, the “average” LEGO set(which is based on thousands of LEGO sets in our database) increased in value(on an annual basis), from retail, 10.6% in July 2012. Of course, some sets appreciated better than 10.6% from retail and others less than 10.6%. Well, we know that the 10179 Millennium Falcon and 10182 Cafe Corner exploded in growth over the last several years, but is that indicative of the rest of the LEGO sets? The answer is no. The 10179 Millennium Falcon has a CAGR three times(33.4%) the LEGO CAGR norm(mean) and the 10182 Cafe Corner has a CAGR five times(50.57%) the LEGO CAGR norm(mean). They are exceptions to the rule. What about the rest of the LEGO sets? Is the CAGR “spiking” right now for most LEGO sets? Let's take a look...

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    We at BrickPicker.com have been collecting market research data from eBay's Terapeak program, which is their Market Research Division, for almost a full two years. I'm not an expert financial analyst or anything close to that, but I would think that a layman such as myself can see if the LEGO collector's market is in some sort of “bubble.” Data does not lie as they say. I mean, you should see some kind of large increase in value in the mean CAGR of the average LEGO set over the past two years at some time. See what I'm getting at? Has the average LEGO set CAGR increased dramatically over the past two years? The answer is NO. Without giving away too much of our valuable and expensive data, I can tell you that the average LEGO set CAGR(~10.6%) has actually dropped 0.1% from July 2011(~10.7%) to July 2012(~10.6%). I'll repeat...DROPPED 0.1%...or basically, for all intents and purposes, remained almost the same and/or the change was negligible. If we look at the data from 19 months ago(when we started collecting the Terapeak data), we will see that the average LEGO set CAGR went up 0.2%, from ~10.4%, with a small spike around December 2011, or Christmastime, of about 1.0%. After Christmas, the prices dropped to slightly below the average and then bounced back to around average a month or two later. Basically, with the exception of the Christmas holiday, the average growth of the average LEGO set, over the course of 19 months, remained flat...with only a paltry increase of ~0.2%. Even to a non-Certified Public Accountant/Financial Analyst like myself, I can tell you that ~0.2% growth in any investment over a 19-month period hardly qualifies as a “spike” in value of that investment.

    So what does this all mean? The main questions I asked myself when I started this article were:

    • Does the Baseball Card collector's market and its recent collapse in value have anything to do with the current status of the LEGO collector's market and future values?
    • Is there a LEGO “investment/speculative” bubble at this present moment?

    Well, in my opinion, the answer to the first question is no. Although there are some similarities between the two collectible markets and I can see why some people will compare the two, there are some huge differences that outweigh those similarities. First off, the Baseball/Sports Memorabilia collector's market is primarily an adult driven business. What was once a business geared towards children, it has been overtaken by an older clientele and companies that overproduce cards, thus rendering a good portion of those cards...worthless. LEGO sets and bricks on the other hand are geared towards children and primarily bought by children. Although there is an adult based collectible's market in the LEGO world, it is minor in comparison to the overall profit that LEGO makes from kids. It is possible that the LEGO secondary market(eBay and sites that sell mainly retired LEGO sets) could implode, yet the primary LEGO market(LEGO, Toys 'R Us and Amazon.com and other stores that sell mainly new sets) would not...because LEGO keeps prices stable and inventories at safe levels traditionally. It's just an educated guess, but I would say if the primary LEGO market remains strong, the secondary LEGO market will follow suit. On a final note relating to the Baseball Card bubble vs. the LEGO potential bubble, let me say, as both a Baseball Card fan and LEGO fan, that LEGO as a product and collectible is far superior in my opinion. At the end of the day, Baseball Cards do little to stir the imagination of children and adults and have limited playability. It is the playability and fun factor of LEGO bricks that may enable it to be voted “Toy of the NEXT Century,” and keep values strong and consistent.

    As for the second question, “Is there a LEGO “investment/speculative” bubble at this present moment?” I'd have to say, in my most humble and non-Financial Analyst's opinion, that the answer to that question is also...no. To be quite honest with you, we were quite surprised when we ran the Terapeak numbers of the past 20 months and found that LEGO prices in the secondary market were remarkably stable. The mean CAGR for the “average” LEGO set(that is based on thousand's of qualified LEGO sets) over the course of 19 months changed very little, if at all. CAGR and LEGO set prices work hand in hand. Higher LEGO set CAGR...higher LEGO set prices, and vice versa. Prices for LEGO sets showed a combined~1.0% increase around the Christmas Holiday in 2011over the “average” industry wide CAGR value of 10.6% and dropped in January and February of 2012, yet bounced back to stable levels around 10.0-10.75% for the remainder of the months observed. I am curious to see if there is another uptick in LEGO set prices in December 2012 and a similar drop off in January and February of 2013. Regardless, it makes sense that LEGO sets go up in price around Christmas and drop off after the holidays. Sellers get premium prices when the significant others of AFOLs are scrambling to buy some rare LEGO set for that special gift for Christmas. Demand drops and money is short after the holidays, so EBAY auctions in January and February are weak.

    So now the question is, ”I pay attention to LEGO set prices and they always look like they appreciate...I mean, look at the 10179 Millennium Falcon and 10182 Cafe Corner, they exploded in growth. There must be more sets appreciating like this. Why isn't the mean CAGR going up at a higher rate?” The truth is, there are plenty of LEGO sets exploding in growth. There are also plenty of LEGO sets that are NOT. LEGO investing and collecting is not as easy as some people think. People do lose money buying and selling LEGO sets. There are hundreds, if not thousands of LEGO sets that “depreciate” on a monthly basis and this makes a site like BrickPicker.com that much more valuable to the LEGO investor and collector. We give you, the investor, various data, tools and trends that enable a person to make educated buying choices. It's up to you to figure out which sets to buy and sell. Overall, LEGO sets are a solid and stable investment at this time in my opinion. With an average annual gain of around 10% for your typical LEGO set, you can make a profit if you choose the correct sets to buy and sell them when the timing is right. I lost money on my personal Brickfolio last month. I know why. I know what I did wrong and where the trends are heading. My investing strategy will have to adapt or I will continue to lose money. On a positive note, my investments have already appreciated thousands of dollars and tripled and quadrupled over the years, but it won't last forever. I will have to scan through the data and look for the next 10182 Cafe Corner. Other, newer sets will come along and appreciate better than some older ones that have peaked. Even some older sets find a second wind and become hot commodities at a later age.

    The bottom line is, there is no LEGO “investment/speculative bubble” at this time in my opinion. The data shows stable prices and a solid collectible market over the past 19 months and there is no reason, besides a global economic meltdown or some other calamity, that it shouldn't continue. What's even more interesting, is that in the face of one of the worst worldwide recessions in recent history, the secondary LEGO collector's market has remained constant. There are no industry-wide “spikes” in values. While there are some LEGO sets that have exploded in growth, there are others that have not and have balanced out the equation to yield around 10% annually for the average MISB LEGO set. Just like stocks, some go up, some go down...it's up to the individual investor to make the right choices if you want to make money. Good luck in your quest for the next 10182 Cafe Corner...and remember, if the LEGO collectible's market does implode, people do make money investing when there is a “Bear” market. Just my final 2 cents...

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    Fantastic article! I was a baseball card collector as a teenager at the worst possible time. Your article and statistics give us hope.

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    Great article. I lived through the baseball card bubble. I started collecting in 1983 and stopped in 1991. I am worried about Lego investments despite baseball cards being far inferior product. From 1983 to 1987, I seldom seen people buying 3+ of the same card (other than dealers for inventory reasons). Then with the emergence of Jefferies, Conseco, and McGwire, it became commonplace to see even kids with their parents buying duplicates (2+ sets and 25+ of same cards). In 1988, people really began thinking of cards as investments. This is when people who couldn't even name 10 players were "investments money in cards". They kept buying so the companies kept printing more cards each car. Bang. The supply finally exceeding demand (shady practices by Upper Deck didn't help things). This is a tad similar to the stock Internet balloon burst of the dot.com era. People were investing in anything web-related without having a clue. History is usually an excellent predictor of future behavior. If we allow too many greedy non-AFOLs to make money in Lego, I'm afraid the profits will eventually decline, demand will be less than supply, and those "investors" will leave Lego and we'll be left with the overabundance of inventory. Lego is a company like any other. If their Sales and Marketing depts sense more money can be made by producing more sets, they will. Long-term, their inventory control is key along with how many non-AFOLs jump into this with only profits in-mind.

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    A few items that I didn't mention in my comment above. 1. Since Lego is a global company, I believe this will help elude or at least, lengthen the period until a bubble pop. 2. In 1988, baseball cards packs were starting to be sold through the secondary market. With the exception of Topps, many cards were initially purchased already in the secondary market and not retail (e.g. mom & pop, KMart stores). Hence, people were already buying their first packs, sets, etc... with a markup. Again, this is a non-factor with Lego. 3. The sheer size & weight of many single Lego boxed sets (let alone duplicates) should steer away quite a few non-AFOL investors. 4. Lego needs to continue producing enough to avoid not finding specific sets in store. Think about trying to find your favorite action figures in the 1990s and always unable to locate them in the stores; those 1-2 per case figures were always pulled prior to bing placed on the racks. For these reasons and others, I feel comparing a possible Lego investment bubble to historic bubble bursts are difficult. I think it boils down to how many non-AFOLs are investing and Lego's manufacturing / distribution practices.

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    Interesting article. I am a young adult and I played with Star Wars Lego growing up and when I started noticing the incredible rise in value of certain sets, I became a serious collector (or investor) as well. I am a proud owner of a first edition MISB UCS Millenium Falcon (with certificate of authenticity) that I got on ebay for about $400 and is now apparently worth upwards of $2k. Of course I am excited every time I hear that the value has gone up but it is also a really great set that I know would be hard to sell. Either it will keep going up and one day I will be crazy not to sell or the bubble will burst and I will get to open and build the coolest Lego set ever made! When the Home One Mon Calamari Cruiser was released it was billed as a collector's exclusive and was limited to one retailer (Toys R Us I think). I came close to buying a bunch of copies as an investment. I'm not sure why I didn't (I guess aside from Ackbar, it wasn't really a very good set) but thankfully I didn't because it ended up being available for a really long time (I think it was only recently retired) and I think it usually sells for less than the MRSP in the collectors market. I liken this to the Baseball card producers ramping up production of exclusive cards. Except in this case, Lego Collectors didn't go for it and I think Lego has learned their lesson and is being more careful about not overproducing sets.

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    The way I always saw it was if they don't increase in value- I still have great toys to give to the kids. Much better than stocks or bonds, those aren't fun to play with at all.

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    There's a big error in this well written piece. You can't compare 2011-12 value CAGRs and conclude that there's no bubble. You should compare investor sales CAGRs if you can get the data. Growth could be flat if everyone is buying and holding. If newcomers are piling in and buying retail kits, then CAGRs will be flat (because retailers don't raise prices on current kits as demand increases). So the bubble may still be very much there. If you can compare investors' sales to retail price ratio CAGRs, that would be more indicative of a bubble or not.

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    Guest skfdlty

    Posted

    Nice article, Ed. Even a year later, most of the points that you brought up are still applicable to today. A bubble scares me to death, even though I don't have quite as much money siphoned into the LEGO market. As much as I hope that a bubble will never happen, I think that eventually something big is going to take place. 

    The "Golden Age" of LEGO investing is long gone, and I don't see any sets becoming a 10179 right now, but that can change. They will definitely be rarer though! After 100 years of LEGO bricks, there's only a few sets worth more than $1,500, most released prior to 2009. 

    I think you chose to compare sports cards to LEGO's well. You can't compare the LEGO market to the dead-and-gone Beanie Babies market, because they only lasted about 5 years, which is tiny in comparison.

     

    We've had several more threads and forum posts on related topics, especially on LEGO banning "resellers/investors". That could be a sign of LEGO sensing a bubble just about to pop, and TLG trying to lessen the impact of the drop. Maybe I am taking this too seriously, but it seems that soon, many, many LEGO investors will have to find their way to some other toy or investment.

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    Jaisonline has many valid points. Many people are getting into Lego solely to invest. I keep hearing of people with 6 figure portfolios buying up to 50 copies of one set. If there are more investors than actual buyers, then there will be a problem. I know the prices listed on this site give a guide to how much sets are "worth", but the set isn't technically worth anything until it is sold and the money is sitting in your account. It also takes time to wait for your set to sell, and there is competition from others trying to dump their sets for profit as well.

     

    Along these parallel lines, the value of stock in the stock market is also not "worth" anything until it is sold. No profits are realized until you sell your stock, but that is not a problem because you can trade stock almost instantaneously. With Lego, you cannot sell quickly unless you price below the market price (the price listed on brickpicker).

     

    According to the majority of the Lego community, it is adult AFOL who are responsible for the purchase of sets to build. So why don't they themselves just invest/stockpile up on sets? Why would they wait 2-3 years and THEN go buy an EOL set for 3x its price? It doesn't make sense to me. Most kids can't afford the price of a retired set, so who does that leave to buy the Lego sets that investors are trying to sell? Investors trying to sell to other investors who think they can resell it for more? Idk.

     

    I see too many sellers and a lack of buyers. Correct me if I'm wrong.

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    Great article. You left out one very important fact that supports your conclusions. Counterfeiting. Baseball cards are incredibly easy to counterfeit. A Lego set is harder and more expensive to counterfeit than a USA rare coin. I agree - no comparison and no bubble, yet. The biggest bubble indicator I'm looking for is main street media coverage of Lego investing. Until that happens I won't take bubble talk seriously. When you see Lego hoarding stories on "60 Minutes" and pictures of rooms filled with Lego boxes in "People Magazine", then it will be time to use caution.

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    Ed... I just got around to reading this gem. Nope. No bubble at all. Thanks for your time and careful research. I'm not sure what's happened with CAGR since it was written, but I'll take 10% (with chances at a higher rate with the right investments) to the bank all day long.

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