Investing in LEGO: how long until I break even, make profit?

[robuko]

I dunno guys (and gals). Business school taught me that you should make at least 3X your investment

Wow, what business school was that? The Return on Equity for listed Chinese companies is around 10-15%, and that is roughly the same as global levels. There are very very few non-speculative businesses that can make a 3x type of return.

[Andy D]

Well, I've been doing this on a small scale for a few months now. I don't really want to go into investing full time, but my local stores often have sets that have gone EOL a year or two ago. So far, I've gotten 8214 Lamborghini Gallardo Polizia, Ferrari Victory, 4837 Hagrid's Hut, 4841 Hogwarts Express, etc. all at a minimum of 10% off retail price. Some of them I sell online for decent profit, some I open and some I keep in storage to open at a later date. It allows me to buy a set or two for future investment and for myself.

I only buy the stuff I like, because I know that even if I don't sell it, I can still use it to build a great set and then integrate parts into mc MOCing collection.

Good idea... Only buy sets that you would like. Never pay full price... Only buy from a reputable dealer (to make sure you have complete sets).

Andy D

[Hey Joe]

Wow, what business school was that? The Return on Equity for listed Chinese companies is around 10-15%, and that is roughly the same as global levels. There are very very few non-speculative businesses that can make a 3x type of return.

It was just a normal university in the midwestern US, but it was a long time ago. I clearly remember that that's what he said.

EDIT - Sorry, like I said; it was a long time ago so maybe I'm not articulating my thoughts very well. Living in China isn't exactly great for my English either!

Anyway, I believe what the professor meant was that if you spend $1 on something (stock, advertising, etc.) you should try to get at least a 3X return on your investment, before your cost of business is factored in. That sounds about right to me, but I'm not a businessman. So when people talk about a set doubling in price, it doesn't sound like a really great return on your investment when you factor in your costs, time, etc. Does that make sense?

Thanks, Joe

Edited June 4, 2013 by Hey Joe

[Phoxtane]

I want to try this out sometime, but in my case the issue would be the start-up cost, and how long it would take me to see a return on my investment.

[Zzz]

Private households have less and less money to spend on unnecessary things like toys, people start spending less on their hobbies, all effect to the current economical situation and a slight fear - or better - carefulness about a real crisis. Meanwhile, there are more Lego sets coming out every year and they become more expensive. Even if the amount that people spend on Lego stays the same every year, it will spread among more and bigger sets. People start getting more picky, they've to choose, also on Ebay or Bricklink. But the amount spend on hobbies is decreasing in the moment.

Now let me take LSW as an example. We all know it's highly popular and it's the theme were all the money-makers gather around. Opening sets at release to sell individual minifigs on Ebay, sets being sold for several thousand dollars etc. - here everything comes together about making money with a toy. The demand is there, so is the offer. I checked just the other day out of curiosity - if I bought all available LSW sets on s@h right now, I would spend 4500€. The offer is getting much bigger and more expensive than before these days, and most people don't have this amount to spend on a toy, especially in these times. Still, Lego is shoveling more and bigger sets into the market, which might - perhaps - lead to something like a market saturation. The fact, that most sets are re-designs of older sets is another point that cannot completely be left out. How many X-Wings does one need? And many other toys went through this entirely natural process, the interest in the product just faded due to everyone in the market being satisfied already. Nothing goes up forever, everything drops once in a while. No hype lives forever, no trend is eternal. I am not predicting the end of the world, but just want to say that private households only have amount X to spend on Lego. Keep in mind how this amount is changing (due to economy) and on what products this will be spent on (due to higher diversity and bigger sets from Lego).

In short - just because you can re-sell older sets in the moment for a higher price, will this forever be like this?

[MikroMan]

I also think that reselling older sets for astronomical prices won't go on forever, but the main thing is, that the sets I've bought are still valuable to me as a source of parts and if sealed it's doubtful that they'll fall under the MSRP price.

[Alternator]

I tend to agree with what Zzz wrote above.

My gut instinct is that there will be decreasing space to make the kinds of gains on sets that have been seen so far, here are the reasons why I think this could be (so all just "speculative" opinion):

• Diminishing Dark Age population
  By this I mean that less people will be coming out of protracted Dark Ages in the future, this is because going back in the day Lego did not have a progression past teens for Lego (they did not cater to an AFOL market)... Now they do, so that kid that starts with Lego isn't going to be as likely to drop off for as long as had been seen in past (imo). That is important because I think that represents a good chunk of the people that would be looking at getting a set after its run has finished
  
• Increased access to information
  People can easily see what sets have come in past and also get a peek into what sets will come in the future along with prices for all - they're going to easily be able to see what kind of mark up a set has on it vs its RRP - this could make it harder to push for those massive prices
  
• Following on, some of the sets that have experienced the high markup were those Modulars - why? because people didn't really realise at the time they would become this great range, now people know and so they're looking out for this kind of stuff
  
• The cat seems to be out of the bag
  This doesn't mean to not do it, but it isn't a secret that some Lego sets have sold for large amounts after they're dc'd, what this means is that other people will be competing for those big $ sales.
  
• TLG seem to be pumping out a lot of nice sets
  This could work both ways, for example, so many collectible sets could make it difficult for people to get all the ones they want during production, and so they may look for them in the after market at a later date (probably realising the extreme markups)
  But it can also mean that the purchaser is already spoiled for choice from current sets to direct their money to, so is it value for money for such a person to buy a set that has had a very high markup placed on it? (would you buy a set at twice rrp?)
  
• TLG could very well take the wind out of any given set by either re-releasing it or updating it with a new version
  

I realise that all sounds quite pessimistic, and really it is, because I think we've all seen that set or other such item that we could have bought and sold for more later, but thought nah its peaked... But it is speculation, or effectively a gamble, the trick will be to make it as educated a gamble as possible.

If you just wanted to dip your toes, then you probably have an idea on a set that you would like to try, or perhaps you get access to a great discount (B-Wing, *grumble grumble*), but that could take time to see the outcome, in some ways that keeps the risk to you in check and doesn't put a strain on storage etc. And really that would be where my advice sits - then it is more of a hobby and takes a bit of sting out of buying Lego rather than neutralising the cost.

But otherwise if you wanted to plonk down larger sums of money then generally that would warrent more research, and BrickPicker seems to be a good place for sale stats, so you can see what is actually happening in the market (so not just what a set is listed at, but what it has sold at... remembering it may not sell at that again, it just depends on remaining customers or perhaps even other speculators)

Really try and understand the market and people you're likely to sell to.

You can also get advice from others in the same line of business, but remember you are effectively in competition with them so be very mindful ~ “if you don’t know who the sucker at the table is – it’s probably you.”, it is like getting investment advice, I don't know how regulated it is - normally disclosure of interests is required - in this case you already know they have a financial stake in that market!

Disclaimer: I'm not a business guy nor have I sold any Lego sets (I have bought a few after market sets, so most of what I've commented is based on my view as a buyer).

Good luck

[Alcarin]

I also think that reselling older sets for astronomical prices won't go on forever, but the main thing is, that the sets I've bought are still valuable to me as a source of parts and if sealed it's doubtful that they'll fall under the MSRP price.

thing is SOON. ( I astimate by Xmas) underdogs will beat those majority ocnsiders good investment.

Like not Helm's Deep but Mines of Moria type of underdog.

So the flag sets will no longer do perfectly (cos everyone buys those) but 2nd or 3rd set will do better since everyone skips them ;)

[MikroMan]

I can agree on that, just about any soccer mom is stockpiling Helm's Deep, Vampyre Castles and things like that... There's a lot of sets that are underestimated.

[robuko]

Anyway, I believe what the professor meant was that if you spend $1 on something (stock, advertising, etc.) you should try to get at least a 3X return on your investment, before your cost of business is factored in.

I analyse businesses full time and this level of return expectation is unrealistic even for high-value added industries. I think you are referring to a high gross margin but only pharmaceuticals come close to this level, and they spend 10-15 years on R&D first, which can't be ignored. Apple makes a 40% operating margin, for example.

What we are discussing here is basically hoarding inventory in the hope of speculative gains, and the value add is limited to the provision of warehouse space, inventory financing, and pick & pack. There are no barriers to entry and the value add is very low, especially in the USA where real estate and finance are very cheap. In a fully competitive and rational market, which is becoming more the case, I would expect returns of something like 5% a year from this type of activity.

The key question for me in this asset class is - are all the 40 year olds with UCS Falcons still going to want them when they are 50? Is it just junk when you are 60? 70? Who will be the marginal buyer?

good luck

[Alcarin]

I analyse businesses full time and this level of return expectation is unrealistic even for high-value added industries. I think you are referring to a high gross margin but only pharmaceuticals come close to this level, and they spend 10-15 years on R&D first, which can't be ignored. Apple makes a 40% operating margin, for example.

What we are discussing here is basically hoarding inventory in the hope of speculative gains, and the value add is limited to the provision of warehouse space, inventory financing, and pick & pack. There are no barriers to entry and the value add is very low, especially in the USA where real estate and finance are very cheap. In a fully competitive and rational market, which is becoming more the case, I would expect returns of something like 5% a year from this type of activity.

The key question for me in this asset class is - are all the 40 year olds with UCS Falcons still going to want them when they are 50? Is it just junk when you are 60? 70? Who will be the marginal buyer?

good luck

I think average ANNUAL growth of LEGO sets is around 10% :)

I think LEGO investing might go stale with too little profits to be worthwhile except to partially cover our FAN inventory.

[ShaydDeGrai]

I've never sold any Lego (given it away, sure) but I do use the excuse with my wife that (unlike my collection of single malts) my collection _is_ a form of investment (and has a rider on our house insurance) and if she outlives me, she should either find it a good home or get a fair price.

That said, I know people who use bricklink storefronts to help subsidize their hobby, but it is very much a _hobby_ and a _subsidy_, not a profitable business. The mantra is "sell off the excess of what you already have to enable you to buy something else you want more," not "I will invest in the commodity that is Lego, buy low, sell high, like gold - but with more ABS"

I do believe that one _could_ make a business out of the latter mindset, but you really need to treat it as a business at that point. Whether a given set appreciates or not, eventually you need to deal with issues of storage, overhead, working capital, risk of diminishing returns and, perhaps most importantly, the drain on your free time (time that could be spent playing with your collection rather than managing your investment).

With that caveat in place, if you still want to explore the Lego Commodities market, I can offer some advice that has worked well for me in trading in other collectables (trading cards, matchbox cars, comics, etc.) as well as passing on a few pointers a fellow with a bricklink store shared with me when I asked him if it was worth the effort to have a storefront:

1) Never trade in anything you don't understand. If you don't follow baseball, don't deal in baseball cards. If you're a Marvel fan, don't assume you understand DC Comics. If love Lego Trains, don't assume that means you understand people who love Bionicle. The collectables market is fickle and die hard fans (i.e. the only people crazy enough to pay over-market for used/discontinued products) can spot an under-informed profiteer a mile away.

2) Never "invest" in something you wouldn't want for yourself. This flows from rule number one, how can you expect something to become popular if it doesn't appeal to you today while people are actively trying to get you to like it? If you are a member of the intended audience for a product (today) AND that product is screaming "Buy Me" when you first see it, chances are good there will be people out there, like you, who will want it tomorrow.

3) Never buy any collectable solely because you think it will be a good investment. This is really just a generalization of rules 1 & 2 for those who weren't paying attention. Historical statistics can only give you probabilities, not a guarantee of profits. There are risks wherever you put your money. While there are certainly profits to be made in the collectables market, there are also so many confounding variables (inflation, taxes, storage costs, shipping, deprecation, supply, demand, global recession, etc.) that come into play between buying an item and ultimately selling it again that one man's anecdotal profit from selling a UCS Millenium Falcon may have no bearing on the price you'll ultimately accept for your Ewok Village five years after it's retired.

4) Buy in threes. If you've isolated an item that passed tests 1, 2, and 3, then buy three of them: 1 to keep, 2 to sell. Ideally, you'd like to sell the second copy to cover the cost of all three and then sell the third for pure profit, but unless you're planning really long term, the chances of the sale price of a Lego kit tripling its original MSRP are pretty slim. More realistically, you want to sell the copies at close to double what you paid for them such that the kits have paid for themselves and returned a profit proportional to the original asking price of the kit. You could buy more than three of something to further amortize the cost of your "to keep" copy over the sale items, but this involves both a larger investment in money and space up front and runs the risk of suppressing the price if you try to sell off too many copies at (roughly) the same time.

5) Buy low. Your chances of reaching a doubling point on the resale improve if your initial costs are less, likewise the break-even point is a lot closer. All other expenses aside, if you bought three copies of a $100 kit then sold off two of them you'd need to get $150 each for the other two get get your "to keep" copy "free". If you get the same three kits during a 20% off sale at Amazon, the price only has to appreciate to $120 (20% over MSRP) to break even.

6) Pure profit is usually a good return. That is to say, if you can get something for free, that someone else will pay for, take their money. In the Lego world this usually translates to promotional poly-bags. Unlike "investments" where you need to pass the laws above, if you got a free mini sopworth camel (or ten, because you had them ring up your purchases separately) and don't want them, get what you can for them. It may not sound like much getting $5 here or $10 there, but when you got it (free) in exchange for money you were going to spend anyway, it's pure profit.

7) Track your investments and know when to cut your losses. Not everything appreciates. The best time to get rid of items that are unlikely to improve is right after you've turned a profit on something else. Inventory maturing in your closest can be as much of a liability as it is an investment. If something is taking up space but unlikely to reach it's break-even point, you may be better off liquidating it. If its worth less now than when you bought it, take the loss and use it as a tax shelter against profits from items that have done better.

8) Never invest more than you are willing to lose - kinda says it all right there.

I'll close with a small non-Lego Collectables tale. Back in the 1980's a certain Sci-Fi convention organization used to include an auction event where movie scripts, toys and other collectables were sold. I recall watching as a "rare" Mr Spock whisky decanter sold for several hundred dollars. Everyone applauded - sure it was pricey, but it was Star Trek, an iconic character and a whisky decanter - that's a whole collectable market of its own. It _must_ have been a good investment.

The next year, the convention and the auction came back, another Mr Spock decanter was up for bid, again it was advertised as rare and they even cited how much a "similar one" had commanded the previous year. Again it sold for hundreds of dollars.

Apparently this had also happened at the convention's other stops (Washington, New York, Atlanta, etc.) selling _one_ decanter in each city, citing its rarity and historic pricing. Some people did some digging and discovered that the auction organizers had a whole shipping container full of them that they'd been trying to get rid of for years. News spread quickly throughout fandom despite the fact that Al Gore hadn't "invented the Internet" yet.

The next year, the "Boston" Mr Spock decanter sold for $10 or so. The year after one was raffled off as a door prize.

Now 30 years later, I see someone is selling one of these decanters on eBay, the current bid is $25. I hope the seller isn't the same guy who spent several hundred bucks to "win" the bid back in 1982.

Collectables trading (even with a "safe bet" like Lego or Star Trek) can be a tricky place to play - tread carefully.

Edited June 7, 2013 by ShaydDeGrai

[TheLegoDr]

ShaydDeGrai, I always enjoy reading your experiences and thoughts. They are always informative and well thought-out. To ride on your coat-tails, I will agree with everything you stated. However, I don't believe I would have been able to put them into so many words since I haven't formally thought about much of this before.

I only recently started buying "extra" LEGO sets with the possibility of selling them in the future. I have not purchased anything with the direct thought to sell it later for profit. But as far as investing anything, I will reinforce the thought that not everything appreciates, and will add not everything appreciates continuously. Something may balloon up and you think you have yourself a great investment, then wait to sell and it plummets. I think the risk is what keeps me away. But I have only purchased sets I would otherwise have purchased anyway, so if I decide to sell it for a profit , but if I decide to part it out, it's still a win for me.

I think a large part of investing in LEGO is the market getting flooded. A lot of people are investing now because of those few sets skyrocketing in value/price. Not every discontinued set will reach those levels, or even hit that high above MSRP. Not everyone realizes this. This includes the B-wing at 50% off. I don't see that rising in value much above normal MSRP. If LEGO had a hard time moving it at $200, and it sold out at $100, I don't see buyers trying to re-sell it at $200 having much luck. But I've seen stranger things.

[Degger]

I think there are a lot of better things to invest in than Lego. Gold for example

or solar energy industry. Lego is meant to play with. It even translates as such.

Have you never heard of dinky toys my friend? They were made to be played with and now clued-up collectors who started collecting when these were 'just toys' are now reaping massive rewards. I think that's the reason people are getting into Lego. These are the toys that hopefully in 20-30 years time the kids of today will be all grown up with lots of desposable income and want to start collecting themselves. Just as todays middle aged men want to reclaim their childhood buying dinkys. Of course we won't know if that'll happen for another 20-30 years. Big risk.

I don't think Lego is made to do profit. What is wrong with you people ?

Just enjoy and play. Maybe the question is, why do you need to keep buying sets ? Maybe you have enough to MOC and have fun. Just buy a few ones from time to time.

Have you never heard of dinky toys my friend? They were made to be played with and now clued-up collectors who started collecting when these were 'just toys' are now reaping massive rewards. I think that's the reason people are getting into Lego. These are the toys that hopefully in 20-30 years time the kids of today will be all grown up with lots of desposable income and want to start collecting themselves. Just as todays middle aged men want to reclaim their childhood buying dinkys. Of course we won't know if that'll happen for another 20-30 years. Big risk.

Have you never heard of dinky toys my friend? They were made to be played with and now clued-up collectors who started collecting when these were 'just toys' are now reaping massive rewards. I think that's the reason people are getting into Lego. These are the toys that hopefully in 20-30 years time the kids of today will be all grown up with lots of desposable income and want to start collecting themselves. Just as todays middle aged men want to reclaim their childhood buying dinkys. Of course we won't know if that'll happen for another 20-30 years. Big risk.

Have you never heard of dinky toys my friend? They were made to be played with and now clued-up collectors who started collecting when these were 'just toys' are now reaping massive rewards. I think that's the reason people are getting into Lego. These are the toys that hopefully in 20-30 years time the kids of today will be all grown up with lots of desposable income and want to start collecting themselves. Just as todays middle aged men want to reclaim their childhood buying dinkys. Of course we won't know if that'll happen for another 20-30 years. Big risk.

Have you never heard of dinky toys my friend? They were made to be played with and now clued-up collectors who started collecting when these were 'just toys' are now reaping massive rewards. I think that's the reason people are getting into Lego. These are the toys that hopefully in 20-30 years time the kids of today will be all grown up with lots of desposable income and want to start collecting themselves. Just as todays middle aged men want to reclaim their childhood buying dinkys. Of course we won't know if that'll happen for another 20-30 years. Big risk.

Have you never heard of dinky toys my friend? They were made to be played with and now clued-up collectors who started collecting when these were 'just toys' are now reaping massive rewards. I think that's the reason people are getting into Lego. These are the toys that hopefully in 20-30 years time the kids of today will be all grown up with lots of desposable income and want to start collecting themselves. Just as todays middle aged men want to reclaim their childhood buying dinkys. Of course we won't know if that'll happen for another 20-30 years. Big risk.

I don't think Lego is made to do profit. What is wrong with you people ?

Just enjoy and play. Maybe the question is, why do you need to keep buying sets ? Maybe you have enough to MOC and have fun. Just buy a few ones from time to time.

I don't think Lego is made to do profit. What is wrong with you people ?

Just enjoy and play. Maybe the question is, why do you need to keep buying sets ? Maybe you have enough to MOC and have fun. Just buy a few ones from time to time.

Is gold 'made to do profit?' It's a precious commodity. And so is Lego!

[nerdsforprez]

Please read the forum rules and guidelines. You are responding to posts nearly three years old. Lets think about this for a minute......