The Risks of Investing in Collectibles

Investors are worried about stocks and bonds as investments. Stocks are volatile and have a negative return after inflation for at least 12 years. Bonds have done well, but their interest rates are low. When rates rise, as they will, bond investors will lose money. That’s why many investors are looking at alternative investments, including collectibles. There’s a warning to investors considering collectibles. You need to know the market really well before investing, or have guidance from a trustworthy expert. Otherwise, you’ll be burned, as many collectible investors have been in the past.

A recent cautionary tale comes from the violin market. Yes, people buy violins as investments. Apparently one expert took advantage of that and the lack of knowledge about and transparency in the market. He became the world’s reknowned expert in violins as investments, and apparently did so through a fraudulent scam. The scam was a bit complicated in places. For example, he’d convince investors to lend him custody of the violins for various reasons, and then he’d convince banks to lend him money with the violins as collateral.

Not everyone is surprised at Machold’s reversal of fortune. Within the trade the image emerges of a charming and sophisticated wheeler-dealer with a largely self-styled reputation as an unchallenged expert in fine violins. ‘It wasn’t a question whether Machold was going to get into trouble with the authorities,’ one leading London dealer says. ‘The only question was when it would happen, and how many millions would be involved.’

Most established violin makers and dealers have always been perplexed by Machold’s image as a glamorous power dealer with an ostentatious playboy lifestyle. ‘He seemed to do business with incredibly powerful, wealthy people, not with the artists, orchestras and schools most of us deal with,’ says Simon Morris, a partner of the London dealer Charles Beare, regarded as the world’s leading authority on stringed instruments. As Morris points out, not even top-end violin dealing confers riches of the kind flaunted by Machold.