Travis Matheson has spent $15,000 on his Lego collection and is among the 10 per cent of customers who are adult fans. Photo: Simon O'Dwyer
Investors understand the value of stocks and bonds. But Lego bricks?
Those ubiquitous interlocking bricks, usually stuffed in closets, tucked under toy boxes and scattered across playrooms, aren't what most people think of as an investment.
But to some, like David Schooley, Lego bricks are serious money, and buying and selling them, just as some investors trade stocks, is becoming a way to turn a profit, brick by brick.
Schooley, a 49-year-old information technology professional in Memphis and father of six, is one of a growing niche of people who buy and hold Lego bricks not as toys but investments.
Just as stock investors have portfolios of all different sorts of stocks, Lego investors hold massive collections of Lego sets. Schooley has more than 3000 sets piled high in a climate-controlled storage facility. He bought most of them years ago, planning to sell them a year later for a profit. Doing this again and again generates a tidy 10 to 15 per cent annual profit, he says, topping even the 10 per cent long-term average return of stocks.
"You start to realise these are worth a lot of money," he says.
Investing in Lego bricks may sound ludicrous to those who see them just as kids' toys but savvy investors can reap rewards if they know how to buy the toys from stores, hold them and then sell them online.
It's not just a theory. Let's say two investors had $10,000 to invest at the end of 2011. One investor bought 174 shares of the Vanguard S&P 500 index exchange traded fund for $57.45 apiece, while the other bought 100 boxes of the Emerald Night Lego train set for $99.99 each. The Emerald Night is a 1085-piece Lego set that, when built, looks like a classic steam engine with a tender and a passenger car.
Fast forward to today. The stock investors would have done pretty well, with a 15 per cent gain, including dividends paid. But the Lego investor would be able to sell the Lego Emerald Night trains for $203 each, a 103 per cent profit. In other words, the Lego train would have outperformed the sharemarket by 587 per cent.
And that's not an anomaly. Lego bricks, have become lucrative investments due to a confluence of bullish factors. Driving the market is the strong underlying demand for Lego bricks and sets. The toys are craved by older people, who now have their own money to spend on the sets rather than waiting for a birthday gift.
Building toy sets are also a fast-growing corner of the toy business for young kids. Americans spent $US1.6 billion on building-set toys last year, up 23 per cent on 2010, according to the latest data available from industry tracker The NPD Group.
Building-set toys account for nearly 10 per cent of all toys sold. And while Lego does have some competition, the rivals are bit players, coming nowhere near Lego's dominance.
Meanwhile, there's a new cadre of Lego consumers growing up.
The Lego universe is reinforced not just by the hundreds of building sets on the shelves at major retailers, but by a multimedia push. There are several lines of Lego sets that are tied to popular movies and TV shows, including Star Wars, Harry Potter, Lord of the Rings, and soon, even the Teenage Mutant Ninja Turtles. There are sets that look like haunted houses, ninja battlegrounds and there's even a line designed for girls with pastel-coloured bricks and female figurines.
Such product tie-ins are just the start. Cartoon Network runs Lego-themed shows all day, with characters made out of Lego bricks, or so-called minifigs, or mini-figures. There's also a line of Lego-themed video games that allow players to traverse digital terrains made out of Lego bricks and tied to popular characters such as Batman and Harry Potter.
But what makes Lego bricks a potential bonanza for investors is how the Lego Group controls the supply of sets.
The company often produces sets, say a new Star Wars spaceship, for a year or two, and then will stop producing it. Once popular sets are "retired", consumers who want one have no other choice than to hit eBay or other online marketplaces to buy it, often for prices way above the original price.
Huge gains for Millennium Falcon
One example still considered a pinnacle success story of Lego investing is a set released in 2007 for $500, called the Ultimate Collector's Millennium Falcon.
The 5195-piece re-creation of Han Solo's battered noble star fighter from Star Wars now sells, new, for $2165, according to data collected by BrickPicker.com, a site dedicated to Lego investors. That's a staggering 34 per cent compound average annual gain over five years. "It keeps ticking up. I wonder where it will stop," says Ed Maciorowski, co-founder of BrickPicker.com, and a Lego investor himself.
Maciorowski says he has more than 3000 sets, with an estimated value of more than $100,000. He plans to sell them in a few years to pay for his son's college tuition. They are stuffed in his house, closets and in his office.
After seeing the value of a few of his sets skyrocket, Maciorowski approached his brother Jeff, a computer whiz, to design a website that would help Lego investors increase their returns. BrickPicker keeps a "portfolio" of all the sets owned by an investor and fetches market prices by seeing how the sets are selling on online marketplaces such as eBay and Amazon. "These things are gold," Jeff says.
To Ed Maciorowski, investing in Lego bricks is much more prudent that most mainstream investments, especially stocks, which he isn't fond of. He sold many of his stocks and other investments just before the tech bubble burst, and watched as other investors lost fortunes in paper wealth.
The tangibility and global appeal of Lego bricks makes them a worthwhile investment for him. "Even if the price of the set tanks, I still have the set."
BrickPicker, though, does borrow a page from traditional investing. The site presents Lego set prices much like an online broker would spotlight stocks by providing price charts that look much like stock price charts. There are more than 9000 Lego sets on the BrickPicker database, which is actually a bigger universe of stocks than most investors consider.
For some investors, the stakes are lower. Joshua Hanlon, 16, is a high school sophomore in Osceloa, Indiana. He has 50 sets, ranging in value from $10 to $400. He started investing a year ago, mainly after realising he could use profit from selling sets to buy more.
After making a tidy profit selling the Lego Emerald Night and a large Star Wars Republic Dropship set, Hanlon first saw the potential. Now his parents and siblings give him money to invest in Lego bricks too.
While investors report making money, there are perils. One of the biggest problems is storage.
Lego sets come in large boxes filled with hundreds of tiny bricks and an instruction manual. Lego investors need to keep the boxes in pristine condition to get top dollar.
Storage can be especially problematic if a set is large. The Lego Death Star set, which sells for $400, is an example. Investors keep accumulating the set, which comes in a 58-centimetre by 50-centimetre box. Investors are stockpiling the large boxes, thinking the set will be worth twice the $400 list price once production is discontinued. But the Lego Group keeps making it, even though it was introduced in 2008.
Water damage, theft and fire are also big risks, Ed Maciorowski says. Most investors must get special insurance that covers collectables, because the value of most Lego portfolios exceeds the limits offered on most home-owner policies.
There's also a risk that an investor won't buy the right sets. Some themes of Lego sets don't resonate with buyers, so the resale value can be below the price the investors paid. One theme, Atlantis, which featured underwater themes and vehicles, "didn't pan out", Maciorowski says. Neither did sets based on the an Egyptian theme, called Pharaoh's Quest, nor sets based on the movie Prince of Persia.
There's also the risk that the Lego market might fade if consumers lose interest in the plastic bricks, Maciorowski says. And there's a constant fear by investors, who are making money, that the run will end if the Lego Group produced more sets than the market can bear or if too many speculators buy sets and dump them at the same time in the future. Other collectible markets, such as baseball cards, have crashed due to oversupply, he says.
And commissions to sell the sets can be high, with Amazon and eBay taking 15 per cent of the selling price.
So far, the Lego Group doesn't appear to have much interest in controlling the buying and selling of sets by investors, Maciorowski says. The company is primarily focused on kids, and does produce some more advanced sets that appeal to collectors.
"We are very fortunate to have fans of all ages, all of whom have different passions and interests related to the Lego brand, but we don't closely follow after market activity," Michael McNally, brand relations director of Lego, says in an e-mailed response.
But as long as the money keeps rolling in, investors are willing to take the bet. "I'm looking to grow and go larger scale," Hanlon says. "I've never thought about investing in anything else."