A RARE SEMINAR ON COLLECTIBLES A panel of experts discuss the intricacies of buying and selling these most tangible inflation hedges.
By STEPHEN MADDEN REPORTER ASSOCIATE Edward C. Baig

(FORTUNE Magazine) – LEERY of collectibles? Caution makes sense when considering them, but a couple of factors have lately made them more alluring. When the bottom dropped out of the bull market last year, shell-shocked shareholders looked to diversify their investments. Collectible items -- works of art, classic automobiles, wine, and antique rugs, among others -- seemed relatively safe repositories. At least they have never lost 22.6% of their value in 6 1/2 hours of trading. In addition, one of the leading economic worries these days is worsening inflation, and historically collectibles have proved an outstanding hedge against rising prices. They merit a 5% chunk of many investors' portfolios. Plenty of pitfalls confront the buyer. Markets may be thin, as they are for specialized items like baseball cards and such Americana as campaign buttons. That can make them hard to sell in a pinch, and it can cause prices to leap and plunge whimsically. Collectibles pay no interest and in fact may cost considerable sums for insurance, storage, and maintenance. Recently Fortune assembled a panel of experts (see box) to talk about what collecting is like, how the markets operate, what to look for -- and what to look out for. During several hours of lively discussion, here's what they had to say:

! What's the overall tone of the collectibles market these days? What's driving prices up or down? Jeffrey Deitch: We're seeing the enormous amount of private wealth that exists in the world today, just the astonishing amount of money that many people have. They're using it to buy things like works of art. They're diversifying their wealth. It's part of the Europeanization of American culture. People are increasingly into living on a more civilized basis, and there is more education and consciousness about the finer things in life. I spoke with many major collectors in October of 1987, and it turned out that quite a few of them had insignificant amounts of money in stocks. The art market is still driven by collectors. That's the sign of a good, strong market because people aren't speculating, which often puts the market in peril. Lee Howard Beshar: That's true. What Huey Long said about sharing the wealth has really taken place. There was also an interesting attitude on the part of people who did lose money in the crash. People said, ''Boy, if only I had bought that painting or rug in June instead of putting more money in the market. I made a big mistake. Now if I see a painting I want, I'm just going for it.'' And they are. My sales used to be tied to the stock market -- if it was up, so were our sales, and if it was down, our sales were too. Not anymore. I've had a great six months of sales, and I certainly didn't expect it. David Brownell: The stock market crash was the best thing that ever happened to car collecting. Prices are way up in just one year. One month to the day after the crash, a car sold at auction in London for the highest price ever recorded ((a Bugatti Royale, for some $9.5 million)). David Redden: And it was only a few weeks after the crash that we sold van Gogh's Irises for $53.9 million.

Is this increased activity an international phenomenon? Redden: Yes. Because of exchange rates, it's very attractive for foreign buyers to come to the U.S., and yet the American buying public is also very strong, so you have lots of competition, which has driven up prices. Beshar: They come here to buy, and we go there. People used to ask me what a rug was worth, and I'd have to ask if they meant in Hamburg, London, or Teheran. I don't ask that now. The market is worldwide because of communications and the spreading of wealth. Practically everybody is in the market for rugs, although I haven't seen many Japanese buyers. ! Brownell: I have seen them in cars. They are really big on Ferraris and classic Italian motorcycles. But car collectors feel that once a car goes to Japan it will never be seen here again. That's not the case with Europe, because cars are traded back and forth between the U.S. and Europe all the time. The Japanese hold on to their stuff. Redden: Because they are savvy now. In a sense, like all new collectors, the Japanese are not held back by old-fashioned conceptions of value. They're quite prepared to spend a lot of money. Also, in terms of their own currency, values have not gone up dramatically, even though some of their activity has raised prices. Deitch: The Japanese like to buy the whole romance of a period, not just an object. At first we saw a lot of Japanese interest in the School of Paris, because with artists like Modigliani and Utrillo you get not just the painting but also all the romance of bohemian life in Paris. That's a great fantasy. In the future I think you'll see a lot more Japanese interest in art with a similar romance attached to it, like pop art. The Japanese are now very active in all sectors of the modern art market. But unlike Americans, the Japanese at first tended to go for the standard item -- the Renoir that's like 50 other Renoirs, where you could predict what the value would be. Now they're more adventurous, more sophisticated. There used to be pieces that were for the Japanese market and pieces for Western markets. That's not the case anymore. They're buying Egon Schiele, early Lyonel Feininger. I think the most important fuel for the art market over the next decade will probably be 50 prefectorial, corporate, private, and municipal museums in Japan. A lot of the people behind some of these institutions are very ambitious to put together great collections that will rival those of American museums. William Sokolin: Similarly, in the wine business, the Japanese are buying every case of Chateau Petrus they can. It's the most expensive wine in the world. A case of the 1970 vintage goes for $5,400. And that changes our buying habits. We didn't expect anyone to continue supporting the prices when they reached $10,000 per case, which is what the 1954 vintage goes for -- but they did. And they're drinking it.

What determines the price of collectibles today? Redden: Every few years a new wave of collectors come along who have never been in the market before. These are the people who set the new values, because they come to it fresh, like the Japanese. And it's good, because they have fresh perceptions. If a collector of French impressionist paintings passed up a van Gogh in 1955 for $70,000, how could he bring himself to pay $50 million for it now, even if he could afford to? Deitch: The most aggressive players set the value. I can look at a painting and say that it should cost $5 million, but if we put it up for auction there will be a few people who believe in it more than others, and they'll bid it up to $7 million. Beshar: That's true in rugs, but for a different reason. Antique rugs -- I deal with those made in the 18th and 19th centuries -- are a shrinking market because every year maybe 5% of the rugs that can be collected disappear. They are bought by museums or destroyed by moths or water. As a result, there is more money chasing fewer items. At a recent auction I was willing to bid $25,000 to $30,000 for a rug that eventually went for $154,000. Two German dealers bidding for it took it to $120,000, and then collectors took it the rest of the way.

Are there added costs, even if an investor spends thousands on an item? Brownell: It can easily cost $100,000 to restore a Ferrari, so you won't want to drive it down the street. It has a hand-formed aluminum body, and if someone leans against the fender it punches in. Just because it needs restoration doesn't mean it has a cheap sticker price, either. In July a 1936 Mercedes-Benz 500K Roadster, one of the most stunning automobiles ever built, was sold at auction for $2.75 million, and it needed everything. Rats had eaten through the upholstery. It belonged to an English butcher and had been sitting in a shed, unused, for more than 30 years. But it was all there, absolutely original. Originality means a lot with these great cars, because so many of them have been messed with over the years. And you can spend a lot of money on restoration, because it's like an exploratory operation -- you don't know what you'll find. Sooner or later you'll have to restore any car. It's a mechanical object that wears down. After all, it's a used car, right? But the work, as long as it's done well, enhances the car's value. Redden: The collector who sold the van Gogh Irises felt he had something that was really too valuable to own. You have to maintain art and manuscripts properly. They require a lot of care and attention, like proper insurance, humidity control, and security. Sokolin: You can restore wines too. In 1967 I paid $700 for a double magnum of 1865 Chateau Lafite. In 1981 I took the bottle back to the chateau to have new corks and a little more wine put in. When we sold it at auction a few months later it went for $20,000 per double magnum, and today it's at $80,000. But you have to be careful. In 1960, when Petrus was $80 to $100 a case, people were more likely to take it home, put it in the garage, and leave it with the gas fumes. You have to watch it, because wine is perishable. On the other hand, I opened an 1870 Lafite to drink with some friends, and when I told Baron Rothschild about it, he said, ''My dear man, you drank it too young.'' He was probably correct.

What are the hottest items today? Beshar: In rugs, they are five-sided Turkoman camel trappings with an ivory background. They go on the side of a camel during a wedding procession, and they were made in central Asia. A little one can go for around $45,000 to $50,000. Deitch: Old masters are making an appearance. Several famous businessmen are getting a lot of publicity for collecting them as well as early-19th-century paintings. It's an area that for a long time was dominated by institutions and now sees more private collectors. Also, one of the booming areas of the art market is the post-post- impressionis ts such as Jean Labasque and Henri Le Sidaner, artists with the impressionist look. Prices have been rising very quickly. For example, these paintings have gone from under $50,000 to $150,000 in less than two years. But it's a riskier part of the market, because although an institution or collector will always rush in to buy a work by Gauguin at an attractive price, there may come a time in a couple of years when the market slows down and there will be no takers for a Labasque. You have to be careful. In the past six years, the people who tried to be clever and find an undervalued area actually didn't do as well as the people who went right for the mainstream. Nothing has performed better than the most famous, most recognized impressionists and modern artists, like van Gogh, Renoir, Gauguin. Brownell: There are three hot areas in car collecting today: muscle cars, classic sports cars, and anything with fins from the Fifties. The muscle cars are things like Pontiac GTOs, Plymouth Road Runners, and other intermediate- size cars with the whopping V-8 engines. The classics are old Jaguar XKs, MGs, & exotic Ferraris, and Maseratis. And the slightly tasteless, exuberant, overstated cars typified by the 1959 Cadillac are pretty active right now. Sokolin: In wine it's certain vintage California cabernet sauvignons, but not chardonnays, which aren't wines to collect because generally speaking white wines don't have the length of life that reds do. Also French wines like good vintages of Latour, which has had an average annual appreciation of more than 20% in the past 15 years. Some newer California wines are doing well, like Jordan, which is only 16 years old and appreciates around 22% a year. Stags' Leap has had an average appreciation as high as 30% and is expected to go higher in the next few years. Experts all over the world agree that almost all the wine made from grapes grown in 1985 -- everywhere -- was extraordinary. I've been in the business 30 years, and it's the first ''worldwide vintage'' I've seen. Redden: The really hot items are the things that are absolutely extraordinary. If you can say that a certain object is the best of its kind in the world, its potential is enormous. That goes across the board. In printed materials, very important presidential manuscripts have been hot for a long time because they attract so many private investors. Books that are illustrated with colored engravings are also extremely strong.

What's likely to be hot in five years? Beshar: If we knew that we'd be in Palm Beach, not chatting with you. Deitch: In art it should be the areas that have been less affected by currency fluctuations. Americans have had a tough time keeping up with the prices of impressionism and modern art as the dollar has become weaker than the European and Japanese currencies. But with modern American contemporary art, for items like the New York School and pop artists, the markets are dominated by Americans. There's a consensus now that these are the most important artists of their time, so there is a good chance there will be a significant growth in the values there.

What's not hot and why? Brownell: Ordinary production cars from World War I to about 1930, because there really isn't anything to distinguish one from the other. If they weren't much to begin with, they won't be much now. Deitch: You can make an exact parallel with works of art that aren't distinguished or rare. There are endless amounts of mid-19th-century decorative paintings. You'll never run out of them, at least in our lifetime. ^ They're not hot now and probably won't be for a very long time. Redden: Neither will authors who aren't read much now. Someone like Booth Tarkington is not as popular as he was in America 50 years ago, and consequently his books aren't so valuable. I collect Jacobean oak furniture, which was very popular in the late 19th century. It's not very popular now, and my wife says justly so since it's extremely uncomfortable and doesn't look right in modern apartments.

What caveats would you offer an investor looking to get into collectibles? Deitch: It's important to know to what extent you plan to be an investor or a collector, or both. If someone informs himself sufficiently that he can understand the market well and be a player, most likely he is going to become a collector. But there is a limit to which the art market can become a financial market, because at heart it is really an intellectual activity. It's not just a market. Also, although the art market gets a lot of publicity, it's really quite small. A limited number of people have the motivation, interest, and resources to get into it in a big way. It's also a social network, and there's a lot of pleasure being involved with it. Keeping in touch with those people -- because people are the market -- is what keeps you on top. Besides, it's not enough to buy a piece and then retreat, to add a piece to your collection and say, ''I got what I want.'' A real collector has a burning in his gut and can't stop. Redden: Sotheby's doesn't really encourage the concept of investing in art, but I must say I do think the idea of stable and increasing values is a tremendous crutch to collectors, particularly when they're trying to justify their habits -- especially to spouses.

Sokolin: You have to like what you're investing in too. If you don't like wine, don't bother looking at it as an investment. You have to like the idea of wine, its history, taste, look, bouquet. And then, if it happens to lose its value -- well, you can always drink it.

BOX: FORTUNE'S PANEL OF EXPERTS

-- Lee Howard Beshar, president of A. Beshar & Co., a New York antique rug gallery. -- David Brownell, editor of Hemmings Motor News, a monthly for collectors of classic cars. -- Jeffrey Deitch, New York art adviser and specialist in art finance. -- David Redden, director of Sotheby's auction house in New York. -- William Sokolin, owner of D. Sokolin Wine Merchants in New York and author / of Liquid Assets, a guide to investing in wine.

BOX: INNOVATIVE WAYS TO BUY

Although many investors don't know it, you can buy collectibles in several ways besides just writing a check for the whole thing. Stephen R. Field, head of the tax department at the New York law firm Summit Rovins & Feldesman, joined Fortune's panel of experts to discuss several methods of financing.

Field: The collector often has his own financing, like a line of credit at a bank, or he may be able to get a loan of up to 50% of the recognized auction value from a bank like Citibank, which has a professional art market department. Redden: The amounts needed to buy major works of art have gone up so astronomically that Sotheby's has started its own financing company. It lends up to 50% against major works of art that people have in their collections. We also finance purchases for people who may not have all the cash they need. Field: A collector can join investment pools or partnership vehicles. Ten to 15 investors put $100,000 to $200,000 each into a partnership managed by a corporate general partner and controlled by a dealer or merchant of distinction. The general partner typically gets 1% to 5% of the profits and losses at first, with the rest going to the limited partners. After the investors recoup their cash, the allocation changes so the general partner might get up to 15% or 20%.

Beshar: I do that. I have a partnership with some friends. We bought rugs and I took them on consignment at my gallery. When they're sold, my company gets its normal 25% commission. The rest goes to the partnership. I get 10% off the top as managing partner. I was able to show the other partners how the return for them on a long-term capital gains basis was greater than they could expect in the stock market.