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Tuesday 9 April 2019

The Mathematics of Rarity Pricing.

This is a post for those who are better at mathematics than I am. I am just going to set out the basic idea which explains rarity pricing.

Suppose that country A (now dead) issued 100 stamps. Ninety nine of these are very common (millions of them) and can be bought for one peso each in any currency. But one is very, very rare - only a few dozen are believed to exist.

Suppose there are 1000 collectors of this dead country. Most are prepared to budget 1000 pesos to form a collection and they are very happy to find that they can achieve 99% completion for just 99 pesos. A few are prepared to budget more than 1000 pesos. All would like to have the 100th stamp which will complete the collection and most will bid in auction when one of these rare stamps appears. The sale price will be determined by those with bigger budgets and of one thing you can be sure: it will exceed 901 pesos which is how much most collectors are prepared to budget to complete a collection of country A.

Now turn to country B (also dead) which also issued 100 stamps. Of these 50 are very common (millions of them) and can be bought for one peso each in any currency. But fifty are very, very rare - only a few dozen of each are believed to exist.

There are also 1000 collectors for this dead country and most are prepared to budget 1000 pesos and a few prepared to budget more.

Now everyone can achieve 50% completion for 50 pesos, leaving a minimum of 950 pesos in their budgets. But what should they do when one of the rare stamps appears at auction? How much of their remaining budget should they allocate to one stamp when they know that there are 49 more just as scarce and still to be bought? It is more than likely that they will bid low because a different rare stamp might appear next week. Probably they will bid more than the baseline average of 19 pesos which they would be able to pay for the missing 50 stamps and still stay within budget (19 x 50 = 950). However, there are also the guys with the bigger budgets. But they will have to make a similar calculation:  what is my budget for the remaining 50 stamps and how much of it would I risk on just one rare stamp now knowing a different one will come up next week. 

What is probable is that they will risk less than the 901 pesos which provided a clear rarity baseline figure for country A collectors.

In other words, if someone aims to collect a series in which there are rare stamps to be found, the greater the number of rarities in the series the lower the price which each, on average, will command - just because collectors are trying to stay within a budget, however notional and flexible it may be. The absolute rarity (in terms of numbers) of the stamp is not the critical issue; nor is it entirely a question of how popular a collecting area is.

So it is that rarities of Russian Civil War philately - from Armenia and Ukraine, for example, sell for small sums. There are just so many rarities and you can’t have them all if you spend all your money on one!

Sunday 7 April 2019

Could You Make a Living from Stamp Dealing?

Could you make a living from stamp dealing? 

I will start by supposing that you are modest and that a “living” is as little as £25000 per year, before tax. That’s 30 000 euro or 32 500 USD. To achieve that you will probably need to achieve sales (turnover) of the order of £100 000 (120000 euro, 130000 USD). I arrive at that figure by assuming that you achieve a 100% gross mark-up on sales, so that you get back £100000 on stock which cost you £50000. But there are costs to running a business. There are the costs of acquiring stock - travelling to auctions, visiting the homes of dead collectors, etc. There are the costs of selling it - taking tables at fairs, running a shop (forget it!), advertising, paying commissions on sales on ebay or at auction, travel and hotel costs, postage and stationery - I include postage and packing costs within the gross turnover. There are the more or less fixed overhead costs of websites, telephones, office space, an accountant to sort out VAT and digital tax returns, insurance if you are so inclined. In my experience, it will be impossible to get all those costs below about a quarter of turnover, so £25000 - which then leaves the £25000 pre-tax profit I set as the lower threshold.

So if your working year extends to 50 weeks, you have to sell, on average, £2000 worth of material each week, every week. If you work a 40 hour work, then you need to be selling £400 every day, £50 every hour of your working week. How is that possible? Leave aside for the moment working 60 hours each week…. working 40 hours, you are earning for your time and effort the grand sum of £12.50 per hour, before tax. It's easy to reduce that hourly rate, harder to increase it.

In the UK there are dealers who travel around the country attending small stamp fairs. Table costs are often low (£25 - £100) but so is turnover - £500 might be acceptable to someone with a small stock and the cheapest table; a bigger table and £1000 would be rather better but still implies two fairs each week, every week - and an awful lot of travelling and bad food.

An online shop would need to show a very big range online to turn over £2000 each week, which is why most online shops offer more expensive material to cut down the number of transactions needed to achieve the sales target.

Buying in bulk and breaking down for resale at auction is another possibility but requires enough capital to contemplate large purchases and confidence that they can be profitably broken down, one way or another.

And so on. I think you will get the picture; it’s not going to be easy to make a living from stamp dealing even if your “living” is as little as £25000. 

I am lucky that I started up as a full-time stamp dealer when I already had a pension from past employment. When I got to 65 and added to that a state pension, I took the opportunity to reduce the scale of my business. In the UK, there is a very high registration threshold for VAT - currently with turnover under £85000, your business is exempt from VAT; you neither claim it back or pay it. So I scaled back to under the threshold (which, remarkably, has gone up every year since I scaled back). 

It does mean that I cannot make a “living” from what I now do, but I don’t have to. But I still work long hours to achieve the turnover I aim at.

The stimulus to writing this Blog post was the fact that the UK tax year has just ended - it runs from April to March, not January to December - and I have just assembled my draft calculations to pass to the accountant who does the fine tuning which tells me in due course how much net profit I have made and how much tax I will have to pay on it. I already know that it wouldn't be enough to live on.