Investing: Stock Market vs. Classic Car vs. Modern Car

[zerfetzen]

I've had too much time on my hands, so I wrote the following as an article for myself, just to explore the topic.  For what it's worth, my '69 Charger is intended to be lifelong and I have it for love, with investment considerations being far in the background.  I've had a lot of people tell me classic cars as an investment is a bad idea lately.  I've also had a hard time finding good sources that lay things out the way I want, so I've done it myself.  Please tell me what you think.  The conclusion is in the 2nd post.  Thanks.

Investing: Stock Market vs. Classic Car vs. Modern Car

This article compares investing in the stock market and investing in a classic car by walking through four scenarios.  Let's assume that you have money to invest, and you can't decide whether to invest in the stock market or a classic car, and if you invest in a classic car, you can't decide whether or not to drive it daily.  Many variables are held constant in this article, and each investment scenario is considered.  Many variables (including inflation, change in the price of gas, change in MPG in the future, alternative fuels, etc.) have been excluded, and hopefully these exclusions, for the purpose of simplification, do not substantially change the results.  I am not an expert on investing, and have merely explored these issues.  Please let me know in the case of any mistake or omission that would substantially change the results.  The intention of this article is not to be a definitive work on the subject, but merely to discuss 4 scenarios: investing in the stock market (in general), investing in a classic car (in general), investing in a classic car and driving it daily, and investing in the stock market while driving a modern car.

The Stock Market
From 1926 to 1999, the average annual stock increase is 11.83% (http://www.finfacts.com/stockperf.htm).  Let's assume that this historical average is accurate for a long-term investment you begin right now.  Let's assume you invest $20,000 into a stock, and that you pull it after 20 years.  On average, the investment should yield $187,152.90 (which equals $20,000 x 1.1183^20).  Your profit before taxes is $167,152.90.

When you pull your stock investment, you must pay tax on your capital gains, your profit.  In 2008, if you make between $32,550 and $78,850, then your tax bracket is 25%.  This bracket is used here because in the 2000 census, the average annual household income was less than $50,000.  This means, come April 15th, you would owe Uncle Sam 25% of your $167,152 in profit.  You would owe Uncle Sam $41,788, which would leave you with $125,364 in profit.  Since you are not taxed on your initial investment of $20,000, you receive a total return of $145,364 after taxes.

Classic Car
Let's assume you invest $20,000 into a classic car.  I have not seen a credible source that claims an average annual percentage increase for such investments.  One online source cited 5-10% annual increase in classic car pries, while another claimed an average of 14%, beating the stock market.  I had a 1973 'Cuda with a 318 (yes, it was a 'Cuda not a Barracuda), and car value sources indicated an average of a 15% increase each of two years.  As with any investment, the amount of increase in the future will depend on supply and demand.  If you can buy low and sell high on a car that is rare and desirable, then profit is most likely (but never guaranteed...cars can be stolen, crashed, etc.).

For the sake of this article, let's assume an average annual increase identical to the long-term average of the stock market: 11.83%.  After 20 years, let's assume you decide to sell your classic car, and it sells for the exact amount it is worth in this scenario: $187,152.90 (which equals $20,000 x 1.1183^20).

Unlike the stock market, you will not have to pay capital gains tax on your profits, which saves you $41,788.  Your remaining profit is $167,152.90, minus other incurred expenses.

Of course, when you buy a classic car, other expenses are incurred, such as insurance, gasohol (since pure gasoline became obsolete at gas pumps in 2005), and maintenance.

The classic car is rarely driven, and so gasohol and maintenance are minimal.  If we assume $500 annually for full insurance (though garage-only classic car insurance is much cheaper), then during the 20 years of the investment, a $10,000 expense is incurred.  If we assume $50 monthly for gasohol, wax, oil changes, additives, or whatever maintenance, then a $12,000 expense is incurred.  After these expenses, the total profit is $145,152.90 for investing in a classic car, compared to $125,364 for investing in the stock market.

Daily Driven Classic Car
But what if the classic car is driven daily?  An obvious benefit of investing in a classic car, compared to the stock market, is that you can drive, and presumably enjoy, your classic car.  Let's assume the investment is driven daily.

The price of insurance will be held constant in this article as well, between these two scenarios with a classic car, remaining a $10,000 expense over 20 years.  But a daily driver will need more gasohol.  The price of gasohol will be a large factor in this.  Let's assume $5 per gallon, 15,000 miles per year, and 10 miles per gallon.  That's 1,500 gallons per year at $5 each, or $7,500 per year, yielding a $150,000 expense over 20 years.  Finally, let's assume $1,000 per year for maintenance (and parts upgrades, engine swaps, etc.), yielding a $20,000 expense for maintenance.  The total of these expenses is $180,000.  Considered in this way, the total profit is $-12,847.10.

Stock Market Investment and Daily Driven Modern Car
As bad as those numbers sound at the moment, it is an unfair comparison to the stock market investment scenario above without considering the expense of a modern daily driven vehicle for 20 years.  In addition to insurance, gasohol (or E85 or electricity), and maintenance, there are two other factors to include: depreciation and multiple car purchases.

While the classic car appreciated, the modern car depreciated.  The average annual depreciation is 20%.  Furthermore, the average American keeps their car for 7 years.  There must be more cars purchased as used rather than new, since a car is new only once.  Let's assume that the strategy for a daily driver, in the stock investment scenario, is that a car that is 3 years old is purchased every 7 years.  The average value of a new car is $25,000.  So the average value of a 3-year-old car is probably $16,000 ($25,000 x 0.8^2).  After holding onto this car for 7 years, it would be worth $3,355.44 ($16,000 x 0.8^7).  If this car is bought in the first year of the 20 years of stock market investment, a similar one is bought in the 8th year, and the 15th year.  The first car (year 1-7) incurs a $12,644.56 expense ($16,000 - $3,355.44).  The second car (year 8-14) incurs a $12,644.56 expense.  The third car (year 15-20) incurs a $11,805.70 expense, implying that in the 6th year of ownership, the 20th year of the stock market investment, this car is sold, just to give the benefit of the doubt.  The total expense incurred for car purchases and depreciation is $37,094.82.

Let's simplify the insurance premium for these 20 years, and assume that, on average, it cost $300 per year, or $6,000.  These modern cars may get 30 miles per gallon, for 15,000 miles per year, still at $5 per gallon.  That's 500 gallons per year at $5 each, or $2,500 per year, yielding a $50,000 expense over 20 years.

It may be claimed that modern cars require less maintenance, but they are also more expensive to repair.  Let's assume an average of $500 per year for maintenance (oil changes, balance and rotate tires, tune-ups, lubes, computer diagnostics, etc.), yielding a $10,000 expense for maintenance.  The stock market scenario gave a profit of $125,364 after taxes.  After considering car purchases and depreciation, the profit is $88,269.  After insurance, the profit is $82,269.  After gasohol, the profit is $32,269.

[zerfetzen]

Conclusion
In the scenarios above, including its assumptions, there is more profit in investing in a classic car than the stock market.  However, if the classic car is driven daily, also according to the assumptions above, then long-term profit is lower than investing in the stock market and driving a modern car that is purchased used.

However, there are two more things to consider.  First of all, rather than profit, it is also possible to consider the amount of money on hand at the end of 20 years for each scenario.  Investing in stocks alone returns $145,364.  Investing in a classic car returns $187,152.90.  Investing in the stock market, while driving a modern car, returns $149,558 ($145,364 + $4,194.30 (the value of the 3rd car after 6 years)).  Investing in a classic car, and driving it daily, returns $187,152.90.  At the end of 20 years, investing in a classic car puts more money in the pocket of the investor, than the stock market, whether it is driven daily or not.  However, if it is driven daily, then more expenses are incurred during the 20 years.

The second, and most important, thing to consider in this article is the variables and their consequences.  Please note that I gave the classic car 10 miles per gallon.  It is possible to get 20-25 miles per gallon with a small classic V-8 that is fuel injected.  Please note that I gave the modern car 30 miles per gallon, which is possible, and may exist in the next 20 years, but is certainly not the current norm, which I'm guessing is around 25.  The difference between the mileage of the cars in the scenarios causes a $100,000 penalty to the classic car, which may not exist at all, or should probably be much lower.  But the difference in profit was less than $50,000.  Changing this one variable, mileage, could cause the classic car to be the clear winner in all categories, including long-term profit with all expenses considered.  If this is a consideration for an investor who wants to drive a classic car every day with a small V-8, even with a matching numbers motor, why not store the intake and carburetor in the garage, and put a fuel injection system on it and give it an overdrive gear?

The case for the modern car is much worse when modern cars are purchased or leased brand new, rather than bought 3 years-old.  If each new car is kept for 7 years, and the average new car costs $25,000, then it is worth $5,242.88 when it is sold.  Now, rather than incurring an expense of $12,644.56 for each car, the expense is $19,757.12.  For 3 cars, this is nearly $59,000.  This alone would make driving a classic car with 10 MPG more profitable than a modern car with 30 MPG.

Many variables are involved, and many have not been included, such as inflation, the cost of registering a car, passing emissions, the change in insurance premium over time, etc.  Just the same, it is clearly reasonable that wisely purchasing and driving a classic car is a good investment, with a strong potential to be financially smarter than driving a modern car and investing in the stock market.

[last426]

I did not have time to read the whole article but did find it interesting that you did not include the cost of storing a classic car.  Whether the car is stored in your own garage or in a rented garage, there are fairly high costs involved.  Also, you stated that "unlike the stock market, you will not have to pay capital gains tax on your profits, which saves you $41,788."  That, to the best of my knowledge, is just not true.  Both of these would dramatically skew the cost/investment comparison.  Check out my gas/garage hog at www.marlia.com. Kim

[rich4406bbl]

Unless you plan on keeping the profit of selling the car in your mattress, you will have to deposit it in a bank which reports deposits of 10,000 and over to the IRS. If you make your deposits less than that at some point your total will eventuall be in the bank making interest which of course you will have to report. Since your interest income will be quite high it may raise a red flag if it is compared to you annual income. I'm no accountant but instead of it being subject to capital gains tax it would be considered additional income and added and taxed as such. The government is going to get its cut.

One other thing is the timeline. Depending on what classic car you have and from what period in time it occupies will also effect its rise and fall in value as the population that wants those cars slowly dies off.

[zerfetzen]

As you guys say, it would change things quite a bit if you have to pay taxes when selling a car.  Does anybody know where information is on this?  Like stocks, would it only be on the capital gains?  I would doubt they would tax you on your initial purchase, again.  Is there a special tax form for selling a classic car?  I'm pretty sure that doesn't go on the capital gains form.  Thanks for all input.

If you do have to pay tax on car profits as a private person, then it would cause the stock market scenario with a modern car and the daily driver classic car with EFI and overdrive to be comparable, or a clear winner for the stock market scenario in the case of, oh, say, a 440.

[Mike DC]

 
Bear in mind that the stock market of the last 25+ years has been an anomaly.  Markets are capable of going down and just STAYING down for decades.  We all read the history books and study the charts about the past, but our generation is no longer psychologically aware that it can really happen.   


   

I don't know what the values of classic American musclecars will do in the future but honestly I don't think they'll go a ton higher.  We're probably at the point of maximum generations competing for the same cars before the earliest ones start leaving the game. 

And the current values are nearing the price of reproducing the cars already.  (Yes, I know that repro cars won't destroy all the value of the vintage originals.  But it will level off the supply/demand discrepancy from ever getting much wider, and that's enough to stall the values of the vintage ones.)


 

[triple_green]

http://www.wwwebtax.com/income/hobby_income.htm

[zerfetzen]

Thanks for the tax link, that's right on the money, no pun intended.  I'll change my little article and think about things.  Thanks again.

[69_500]

It all depends on when you would have purchased this classic car, for the comparison to really ring true. The stock market has taken a huge upturn in the last 30 years (even with the last few years being bad), and the classic muscle car values have risen drastically over the past 30 years as well. Not sure which one has actually gone up more though.

Does anyone know what the DOW was at in 1981 in comparison to 2008?

For a price comparison lets use a 1969 HEMI Daytona 4 speed car, high dollar car even in the early 80's. However in 1981 you could have picked up a Black HEMI 4 speed Daytona for $7,500. Same car in todays market would be what? $500K? Which I think is a lot higher than any stock investment would have done over the same 27 years. However take into consideration that at the same time one could have picked up a 1969 Charger 500 AT car (440) for $1,200 in September of 1981. Same car was for sale 4 years ago for $30K. Drastic increase in price as well, but not as drastic as the HEMI Daytona.

[zerfetzen]

The 11.83% I cited for the average stock market increase included 1926 to 1999, so it captured the recent highs, but also the lows of the depression.  So it should be pretty representative.  Having fun playing with the numbers though:

'69 Hemi Daytona sold in '81 for $7,500 would have increased, on average, at ~16.83% to be worth $500,000 after 27 years.

'69 Charger 500 AT 440 for $1,200 in '81 would have increased, on average, at ~12.7% to be worth $30,000 after 27 years.

I'd say they both did very well, beating the stock market.

I think an interesting question is whether or not these cars will continue to rise in price.  It's definitely a good point that the generation that remembers them buys them, and may leave before a future generation becomes equally enraptured.  Then again, on the pro side, they're not making these any more, every year some disappear forever, and these will always be icons of the muscle car era, an era when you could build a car as you like, just before regulation such as catalytic converters, etc.  But nothing's hot forever.

[69_500]

Did some digging, and here are some more numbers to run.

Dow Jones Industrial average was at 897.5 on the same day that the 69 Charger 500 sold for $1,200 in 1981. Took me a little while to come up with that number. The Dow Jones Industrial average is at 11326.32 as of August 1, 2008.

So if you took that $1,200 in 1981 and invested it in the DOW you would have done very well as well.

[pettybird]

you're also picking ringers for your estimates.  dumb that down to a 318 '73 charger for the same $1200 and see where you're at, or a newer better '77 Volare Road Runner, or a dead mint $800 '72 Scamp.


Dad bought a pair of 'birds in '76 for $6000 total.  imagine if he'd instead held that money for 5 years to get to your 1981, and split that money evenly, investing in a couple little startups called "Apple" and "Microsoft." 

[zerfetzen]

You know, a '73 318 Charger would be a better example of classic car appreciation overall, but if someone bought that in '81 as an investment, I'd of just scratched my head and looked at them squirrely.   

[pettybird]

we've been laughed at regularly for keeping our birds...


investments allow you to reach a goal, so that you can get what you want later.  if you had the money now, or could come by it somehow, why would you invest rather than enjoy something you could pick up today?

[Mike DC]

   
I dunno.  Maybe I'm just too negative, but I honestly don't have a lot of faith in either the American stock market OR the vintage musclecars in the long-term.  I think the huge wave of profits have passed in both of them for the foreseeable future.  They're both probably a good way to hold onto money in the face of inflation, but I don't expect sustained yearly double-digit gains from either one in the long term view. 



Whenever anything becomes a sure thing to make everyone money who gets into it with even half a brain, and there are no losers of money in sight to balance any of it . . . I smell a bubble.  Productivity can lift all boats, but it rarely does it THAT much.  Pushing paper or trading commodities doesn't create wealth by itself, it only moves wealth around.  Either that wealth is coming from somewhere or it's an artificial bubble. 

[69_500]

you're also picking ringers for your estimates.  dumb that down to a 318 '73 charger for the same $1200 and see where you're at, or a newer better '77 Volare Road Runner, or a dead mint $800 '72 Scamp.


Dad bought a pair of 'birds in '76 for $6000 total.  imagine if he'd instead held that money for 5 years to get to your 1981, and split that money evenly, investing in a couple little startups called "Apple" and "Microsoft." 

I'll agree that I picked a pair of ringers, but they are also cars that I know exactly what they sold for in 1981 at within a span of 30 days from each other. I'm also not too much up on the pricing of the other cars from back in that time period, nor do I know where those cars are today to know what they would sell for today. I don't think that a 73 Charger would have been going for much more than about $450-700 in 1981 though, just a wild guess there.

[BigBlockSam]

i got lucky  . i took some of the profits that  i made on my ira  and bought  my superbee .  i just have to add it to the years end income , there's no penalty . shortly after that my ira took a dive. so i would have lost that money anyway . i got a good deal on my bee and can sell it for more then i bought it for . for once i made a decent decision with my investments. Rene

[gtx6970]

Keep in mind the muscle car market values  will not do in the next 20 years what it's done in the past 20 I assure you

if your looking for modern investments with a very good return, buy real estate ,,,,,,,,,, NOW

[BigBlockSam]

buy real estate ,,,,,,,,,, NOW 

not yet, it hasn't hit bottom yet . we're saving up for a new house. i figure in about a year and a half . 

[69_500]

Keep in mind the muscle car market values  will not do in the next 20 years what it's done in the past 20 I assure you

if your looking for modern investments with a very good return, buy real estate ,,,,,,,,,, NOW

Your right if your talking about the same muscle cars that people are going after right now. However I do think that you can make some money in the future on some of the mid 80's to mid 90's cars though in the future. IE the 92 Vipers surely will go up in value one day, and they can be had for a decent amount now, which is well less than their prices new. Eventually they too will be worth more than they were new, or at least I think so. Already see the prices of the 87 GLHS, and 91-91 spirit R/T's, and 92-93 Iroc R/T's going up.

[jeryst]

No way will the classic car market continue to post the returns that it has generated in the last 20 years, because there are too many factors against it. Demand for the cars is dieing off (literally), the speculators and investors that caused the bubble in the first place, are long gone, more cars coming on to the market each year, etc. Cars, unlike the stock market, have some type of price point. No one is going to pay $1 million for a Charger sometime in the future. Its just not going to happen. So its like comparing apples to oranges. Ask the people who paid $750k for Hemi-Cudas two years ago, and now cant get $300k out of them.

[Neal_J]

To me, your comparative analysis that includes stale stock market data makes any comparison incomplete and therefore pointless.  Perhaps you could update the analysis to reflect market results through June 30, 2008 to capture the joy of the current recession and that of 2000-2003 and then you'd have something that would be relevant.

Neal J., CPA

[zerfetzen]

Although you're right it would be better to include the last 8 years, I simply took the results from a link that considered 1926 to 2000, mainly because it was convenient.  But like I said, I never intended this as a definitive work, and I hardly think that 1926 to 2000 is completely irrelevant and totally pointless.  For example, let's say we only considered the most recent 20 years.  Is that really the best data to predict the next 20 years, or is it better to look at more history?  Me, I'm in favor of more history.

To me, your comparative analysis that includes stale stock market data makes any comparison incomplete and therefore pointless.  Perhaps you could update the analysis to reflect market results through June 30, 2008 to capture the joy of the current recession and that of 2000-2003 and then you'd have something that would be relevant.

Neal J., CPA

[Mike DC]

 
I'm not convinced that real estate is coming back up so much. 


It went down.  That's only a sign that it's coming back up if the down-value is the artificial anomaly.

   

[Neal_J]

I overspoke & apologize.  Your analysis is neither pointless nor worthless.  But it is very simplistic and ignores a couple of other key factors beyond taxes noted above: 

1) The compound CAGR of the stock market is more like 8% not 11% (that occurs when you simplify & ignore 2 recessions).

2) Comparing a 70+ year stock market trend to a 10-20 year car price trend is comparing apples vs. oranges.

3) Your analysis ignores the cost of parts & upgrades we innvevitably put into any old cars, thereby lowing the ROI on the old car.

4) As you note, car prices will fall once our generation begins to sell these cars of their youth.  Consider the price trends for Model Ts, Model As and cars of the1940-1950's. 

5) The analysis pivots on the collectability of the specific car purchased.  Here's what I mean: let's assume I foolishly bought new and never drove a Ford Pinto for $2,500 in 1971.  Right now, 37 years later, that fine motorcar would be worth approximately $2,500 - maybe $3,000 on a good day.  However, the same amount invested in the stock market in 1971 & would now be worth $39,625. 

At the end of the day, I suppose you could argue that both options are calculated risks.  Both have potential upside and downsides and there is no single answer for all cars.  As for me, I've got bets placed on both!  But my 401(k) is (largely) in the stock market.

Cheers!

Neal

[zerfetzen]

Hi Neal,
No harm, no foul.  I definitely agree the analysis is extremely simplistic, but, you have to start somewhere, and where better to get good feedback on the subject than here?  So I thought I'd try it out here and see what happens.  I appreciate all input.

For what it's worth, though, I looked up the CAGR calculation, and it looks like the only thing it takes into account is the beginning and ending values of a time-series, and then smooths it.  If that's so, that has to be a much worse way to look at it, because it ignores a lot of information, almost every point in the series.  I'm unfamiliar with CAGR, but I am familiar with statistical methods of forecasting, and somewhat as they apply to the market.  A popular method (among trillions, I know) is to convert the series to percentage differences (of course, I'd prefer daily rather than yearly, but that's another matter), and forecast forward based on shocks to the series, then integrate back to the series.  I don't know how into that sort of thing you are, so I hope it's not just babbling.  But like you say, things would be better if it had the 2000-2008 data.

There was a point where I noted and included upgrades (it's pretty long, so it's easy to overlook), etc., but didn't focus that much on it, because then we'd be talking about restoration or resto-mod, and investment, rather than merely investment, and potentially driving.

Other than that, I'm right there with you.

Does anybody know if there's any credible source out there for data where someone has studied the rise and fall of classic car prices?  I'm sure we'd all find that very, very interesting.

[bull]

I did not have time to read the whole article but did find it interesting that you did not include the cost of storing a classic car.  Whether the car is stored in your own garage or in a rented garage, there are fairly high costs involved.  Also, you stated that "unlike the stock market, you will not have to pay capital gains tax on your profits, which saves you $41,788."  That, to the best of my knowledge, is just not true.  Both of these would dramatically skew the cost/investment comparison.  Check out my gas/garage hog at www.marlia.com. Kim

If you have a classic car that's used as a daily driver the storage is not an issue because the car gets stored anyway, new or not. Same with insurance. Since any car has to be insured that shouldn't count against you regarding the investment potential. Whether using a classic as a daily driver is a good overall investment, I don't know, but you can bet it's a better investment than a new car when it comes to basic transportation. I'd say probably 95% or more of the new cars purchased are going to depreciate whereas a classic will most likely appreciate or remain static.

Also, a driver would be exempt from any hobby tax.

[zerfetzen]

Same with insurance. Since any car has to be insured that shouldn't count against you regarding the investment potential.

It's hardly substantial, but someone could say that their insurance premium goes down every year on a new car, and that long term, they're saving money in that respect compared to a car that holds its value.  Of course, you'll never hear me argue in that direction.

Also, a driver would be exempt from any hobby tax.

Now THAT is an interesting notion.  That would create a loophole for the owner.  If they've had the car fully insured a long time (not collector car insurance), then they might save money at the time of sale by claiming they drove it all over hell and back, rather than pay 25 or 28% tax on capital gains, even if claiming you drive it lowers the value a little.  25% is a lot.  That's a really interesting idea there Bull.