Thursday, December 30, 2021

Everything is Awesome (for Lego Collectors)!

LEGO, sometimes referred to as the Apple of Toys, is one of the most popular toys in the world. Some fun facts: the plural of LEGO is LEGO and the name is derived from the Danish word leg godt, meaning "play well." The 83 years old company also happens to be the world's largest producer of rubber wheelsmaking more tires per year than Bridgestone, Michelin, Goodyear, etc.! 

Well, now there's another reason to be interested in LEGO (if that was even necessary). They apparently make pretty good investments, too! That's the finding of a study by Victoria Dobrynskaya and Julia Kishilova: LEGO - The Toy of Smart Investors. LEGO are collected by thousands of adults and has a thriving secondary market. The authors tracked the returns of 2,322 sets over 18 years and found that they had an average return of 18.5% p.a., with a standard deviation of 35%. The authors then constructed a LEGO price index from a hedonic regression of coefficients. The LEGO index outperformed large stocks, bonds, gold, and alternative investments in the sample period 1987–2015, yielding an average return of at least 11% (though LEGO underperformed the CRSP index consisting of all stocks in the NYSE, AMEX and NASDAQ exchanges by about 100 bps p.a.). 

Source: Dobrynskaya and Kishilova (2018).

They also found that LEGO returns were not significantly exposed to market, value, momentum, and volatility risk factors. Only the Fama–French size factor demonstrated significance, suggesting that LEGO investments perform similarly to small stocks. The LEGO return index had a correlation of just 13% with the S&P 500 and exhibited a positive skew (0.7). The uncorrelated nature of the LEGO market is reflected in its strong performance through the "dotcom" bubble and Global Financial Crisis.

The main reason for such high returns on the secondary market is diminishing supply over time. LEGO releases new sets each year and retires existing ones periodically. This sets ups interesting pricing dynamics. In the study sample, the returns on individual sets varied from −53.61% to 613.28% p.a. (with the average return of 18.5% p.a., as noted earlier). Very large sets, those with 1200+ pieces, and small sets, those with <340 pieces tended to perform better. Returns also varied dramatically by theme. Out of 44 themes identified by the authors, the 5 best performing were: Ideas, seasonal, superheroes, Minecraft and Friends (averaging 50% returns p.a.); the 5 worst were: Simpsons, Prince of Persia, factory, TNMNT, and space (averaging 2% returns p.a.).

         Source: Dobrynskaya and Kishilova (2018).          
                    
   
                                                                                        Source: Dobrynskaya and Kishilova (2018).

So, from now on always buy two sets of LEGO. One for the kids (or grownups) to play with and one for the investment! Who knows that new set could be the new Lego Millennium Falcon which retailed for $500 in 2007, and today sells for $9,000 on eBay.

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