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The Momentum Of Baseball Cards

To paraphrase Walter Matthau on poker, it seems baseball card collecting combines all the worst aspects of capitalism (and investing) that have made our country so great.

Well, maybe not all of them. After all, no baseball card company, that I know of, ever fabricated the statistics of a player in order to make his card more valuable, as Enron and others have done and will do with their books.

But a new study finds that the market for baseball cards shows some of the same kinds of anomalies, or factors, as the stock market. Baseball cards that out- or under-perform in value tend to keep on rising or falling, a phenomenon called momentum. As well, newly issued baseball card sets and those of rookies, like Initial Public Offerings, tend to underperform the broad market for a sustained initial period.

All of this may not tell us much about investing, but a good place to start, as with poker or the stock market, is with the common denominators: humans, greed and fear.

(Here I must confess a conflict of interest. Contrary to the standard disclaimer on my columns, I do own some baseball cards, though to call them an investment would be laughable. I did have a substantial collection as a kid, and yes, my mom did, I suspect, though she denies it, throw them away.)

The study, by Joseph Engelberg of the University of California-San Diego and Linh Le and Jared Williams of the University of South Florida, examines the market for baseball cards as a kind of laboratory, one which crucially lacks some of the conditions of financial markets, such as agents acting as managers on behalf of principals.

"We show that the market for baseball cards exhibits anomalies that are analogous to those that have been documented in financial markets, namely momentum, price drift in the direction of past fundamental performance and IPO underperformance," the authors write in the study, released in June.

"Momentum profits are higher among active players than retired players, and among newer sets than older sets."

The study looked at about 38,000 cards issued from 1948 to 1996, measured by price data through a third-party valuation service for the 72 months to the end of 1996. As such it captures a specific period in the history of baseball cards, as a kind of bubble-like interest in collecting rose and peaked in the 1990s, punctuated by what Chicago-based author on the matter Dave Jamieson calls the "great crash of '94."

THE HUMAN FACTOR

We should probably be cautious about drawing any conclusions about baseball cards as an investment, per se, but the findings may well have some interesting implications for how markets work generally.

Using a momentum strategy in which the authors identify outperforming cards over a three-month period and then hold those cards for another three months, they generated a striking 5.6 percent monthly return. That compared to a monthly return of less than 1 percent for similar momentum strategies in stocks.

The momentum data generally aligns with earlier theories that momentum is caused by the gradual dissemination of information through the market. In fact, given the relative unsophistication of most baseball card consumers, you would expect to see a bigger momentum effect in cards and indeed you do. It accords less well with the theory, which I believe, that attributes momentum to self-interested trend-following by fund managers afraid of underperforming and being booted.

It may be, however, that the period measured was one in which greed predominated and unsophisticated investors naively piled into cards which were going up.

As for the phenomenon of IPO underperformance, the study found a similar pattern. Rookie cards have cumulative abnormal returns of -6.6 percentage points in the year following release, while entire sets of cards rack up similar returns of -5.7 percentage points.

This makes a certain amount of sense. Rookie cards in the 1990s had bubble-like characteristics, with much emphasis on the few greats like Ken Griffey Jr. That may have led to the entire group being overpriced. Card collectors in the 1990s were also making bad assumptions about supply and demand.

Unlike most financial assets, baseball cards have a huge flaw: it is cheap and almost frictionless for issuers to make more of them. Demand in the 1990s may well simply have led to supply.

After all, for all their allure, a baseball card is only cardboard with pictures, words and numbers printed on it.

More valuable, perhaps, as a way to learn about human nature than as an investment.

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Mint Condition:

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Comments welcome.

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