Here we build on the idea of value investing through grade speculation from a previous article, Value Investing – Theory.  Inefficiencies in market pricing exist, but how does it evolve over a given amount of time?  Does fair market value indeed trend towards normalization?  In this article, we will determine whether or not this behavior occurs by examining the FMV for a single book, Giant-Size X-Men #1 (1974).

The ultimate goal is to further develop and validate a strategy of lower risk, but high return in the long term.

 

MARKET BEHAVIOR OVER TIME

For the purpose of observing FMV behavior over time, we will be using Giant-Size X-Men #1. This is due to the availability of sales data of the book that begins in early 2018.

What’s important in the following charts is observing the behavior of market value change for the grades relative to each other, rather than the magnitude of the sale value. On the left side: CGC grade vs FMV. On the right side: CGC census vs. FMV.

 

Based on the fair market value on 4/29/2018 for Giant-Size X-Men #1, it appears that:

  • 3.5 and 5 are overvalued.
  • 3.5 is $450, should be $412.5.
  • 5 is $525, should be $500

Fast forward a month to 5/30/2018:

From last FMV data set:

  • 3.5 falls to $425 as expected
  • 5.0 falls. Now slightly undervalued, but within normal.

New value in-efficiency:

  • 4.5 and 6.0 are undervalued
  • 4.5 is $475, should be $537.5.
  • 6 is $600, should be $650.

Moving forward to 6/28/2018:

From last FMV data set:

  • 4.5 rises to $550. Moves as expected.
  • 6 rises to $625. Moves as expected.
  • Overall, every value vs grade is within normal.

Onward to 8/8/2018:

New value in-efficiency:

  • 8 and 8.5 are undervalued.
  • 8 is $1100, should be $1266.67.
  • 8.5 is $1300, should be $1533.33.

10/8/2018:

From last FMV data set:

  • 8 and 8.5 remain undervalued relative to the other grades.
  • 8 is $1150, should be $1433.33.
  • 8.5 is $1400, should be $1716.66

New value in-efficiency:

  • 5.5 and 6.5 are slightly undervalued.
  • 5.5 is $750, should be $800.
  • 6.5 is $850, should be $925.

We jump a few months to 6/7/2019. The months in-between are missing due to unavailability of data. Data collection methods should improve moving forward.

From last FMV data set:

  • 5.5, 6.5, 8.0, and 8.5 all rise to expected value.

 

THE BOTTOM LINE

Overall, the behavior of FMV over time changes as expected. When inefficiencies in the pricing for a grade occur, they do indeed eventually move back towards normalization.

From an investment prospective, the grades that are slightly under-priced are probably not worth the risk.  A preferable investment opportunity identified by this strategy would have been something like 4.5 with a FMV of $475 on 5/30/2018.  This would have offered lucrative returns at the current $850 FMV and latest eBay auction price of $1,149.  Whether or not an investor chooses to act on an undervaluation, they can at least prevent over paying for an overvalued grade.

For Giant-Size X-Men #1 in particular, any overvaluation or undervaluation is corrected within a few months.  Between the faster paced price movement and tremendous upward pressure for this particular book, to get ahead of the FMV a higher risk profile might be needed.  Using the most current sales of Giant-Size X-Men #1, we can determine that the grades 5.5 and 7.0 offer a lower risk, higher reward scenario at around $1,100 and $1,650, respectively.

For a book with a slower volume of sales or market pressure, the stability for determining undervalued books should be more accurate.  This would allow for a more flexible amount of time to open a position at a particular grade and more favorable price before the FMV moves toward correction.  Looking forward, perhaps more books can be identified for analysis.

 

“I don’t really see a need to retire as long as I am having fun.” – Stan Lee