'Lego: The Toy of Smart Investors' by Victoria Dobrynskaya and Julia Kishilova in (2022) 59 Research in International Business and Finance comments
We study financial returns on alternative collectible investment assets, such as toys, using LEGO sets as an example. Such iconic toys with diminishing over time supply and high collectible values appear to yield high returns on the secondary market. We find that LEGO investments outperform large stocks, bonds, gold, and alternative investments, yielding an average return of at least 11% (8% in real terms) in the sample period 1987–2015. LEGO returns are not exposed to market, value, momentum, and volatility risk factors but have an almost unit exposure to the size factor. A positive multifactor alpha of 4%–5%, a Sharpe ratio of 0.4, a positive return skewness, and low exposure to standard risk factors make the LEGO toy and other similar collectibles an attractive alternative investment with good diversification potential.
Increasing globalization and networks between various asset markets limits the opportunities for diversification. Therefore, investors resort to alternative nonfinancial assets to reduce their risks and increase potential returns. A Barclays (2012) survey showed that the average high net-worth individual holds about 10% wealth as collectible assets, such as artworks, antiques, jewelry, fine wines, rare automobiles, and other luxury items partially to diversify their portfolios and hedge their financial investments. Investment funds that deal with collectible wines, artworks, precious metals, and stones improve the accessibility of such assets to retail investors. Studies have focused on such typical alternative investments, which have been popular for decades.
However, there is a wide array of collectibles, including toys (e.g., LEGO sets, Barbie dolls, superhero figures, car or train models, Beanie Babies, and Silvanian families), which have been neglected in academic literature mainly because of the lack of comprehensive and systematic data. Anecdotal evidence suggests that collectible toys generate high (in some cases, tremendous) returns on the secondary market, because of their limited supply and rarity. Such toys are produced by companies in limited editions. Once they become retired and disappear from the shelves of stores, they can only be bought on the secondary market. Over time, items are increasingly fewer in supply, whereas collectors’ desire increases with rarity, and so do the prices.
We study secondary market returns on collectible toys using LEGO sets as an example. LEGO is the most popular toy around the globe, and although it may seem odd to invest in a toy, a huge secondary market for LEGO sets with tens of thousands of transactions per day has developed in the 2000s (Maciorowski and Maciorowski, 2015). LEGO investments are popular because this alternative asset does not belong to the luxury segment and is therefore affordable to any retail investor. LEGO Group (LEGO henceforth), a Danish company, which was established in Billund in 1932 as a small wooden toy producer, is the current largest toy producer in the world. Fortune magazine named LEGO “the toy of the century” in 2000. According to a massive survey of more than 3,000 adults in 2010, LEGO was named “the most popular toy of all times” (Robertson and Breen, 2013). With Coca-Cola and Disney, LEGO occupies a top position in the Young & Rubicam rating of the world’s most popular brands. The LEGO factory in Billund produces 2.2 million bricks every hour, and the number of LEGO bricks produced each year is five times as high as the current world population (Robertson and Breen, 2013). Every child in every country knows and plays LEGO.
Apparently, LEGO is not just a kids’ toy. Thousands of adults around the world collect LEGO sets. LEGO bricks are used to build large-scale objects and real art masterpieces (e.g., the world famous exhibition “The Art of the Brick” by Nathan Sawaya). Even a full-scale house was built of 3.2 million LEGO bricks by a British television presenter and journalist James May.
LEGO sets and rare minifigures also serve as popular alternative investments. There is a huge secondary market for new and used sets (e.g., eBay), where, globally, tens of thousands of sets are traded daily (Maciorowski and Maciorowski, 2015). The returns on some retired sets reached outrageous numbers (up to 600% p.a.), which received much attention from the financial press. For example, the Telegraph reported a 12% average return on LEGO sets since the turn of the millennium compared with 4.1% on FTSE 100 and 9.6% on gold (the Telegraph, December 24, 2015). The article also named five most expensive sets with the current values above £1,500 and five most profitable sets with returns above 1,000% over 8–10 years since their release dates.
We study LEGO not only because of its popularity but also because a systematic database of LEGO secondary market prices was available. We study historical returns on a large sample of 2,322 LEGO sets from all most popular themes to understand the attractiveness of this market to investors. We find that different sets perform unequally with average returns ranging from −50% to 600% p.a. The cross-sectional distribution of set average returns has a mean of 18.5%, standard deviation of 35%, and skewness of +9. Small and huge sets are more profitable than medium-sized sets. Small sets often contain unique parts or minifigures, whereas huge sets are released in limited editions and are popular among adult collectors. Different LEGO themes are not equally attractive either. Typically, seasonal, architectural, and movie-based themes deliver higher returns. The cross-sectional analysis suggests that not all LEGO sets are potentially attractive. Rarity is the main feature, which makes a toy a profitable alternative investment, similar to other collectibles (Koford and Tschoegl, 1998; Cameron and Sonnabend, 2020).
The LEGO price index, constructed from hedonic regression coefficients, has an average return of 11% p.a. (8% in real terms) over 1987–2015. Discounted purchases of LEGO sets on the primary market make the returns even higher. Thus, LEGO investments outperform large stocks, bonds, gold, and other typical “hobby investments,” such as wine or stamps. The LEGO returns are not significantly exposed to market, value, momentum, and volatility risk factors. We only identify a unit exposure to the Fama–French size factor, suggesting that LEGO investments perform similarly to small stocks. The positive multifactor alpha of 4%–5%, a Sharpe ratio of 0.4, positive return skewness, and low exposure to standard risk factors make the LEGO toy an attractive alternative investment with a good diversification potential. Moreover, because sales of LEGO were constantly increasing in the 1990s and 2000s despite the global financial crises, we can expect “safe-haven” properties from LEGO investments. Indeed, the LEGO secondary market delivered positive average returns in the crisis years 2002 and 2008, when the CRSP index plunged.
The main reason for such high returns on the secondary market is diminishing over time supply. Thus, LEGO and other collectible toys can be compared with fine wines. Once a bottle of wine is opened, the supply of this unique wine declines. Once a LEGO box is opened, the supply of this particular set falls. Eventually, old LEGO sets become rarer, collectors hunt for them, and their prices inevitably rise.
The high return on LEGO secondary market is also attributed to the underpricing of collectible sets on the primary market. We explore the evolution of secondary market prices during the first six years after sets are released by the company and we find the following tendency. The secondary market prices are lower than the official prices while the sets are still available in stores, and the prices tend to increase after 2–3 years of the release when the sets disappear from the primary market. The prices continue to rise gradually thereafter. Hence, investment in collectible toys only pays off in the long run, when these toys become really rare.
The rest of the paper is organized as follows. Section 2 explains how LEGO (and similar collectible toys) differ from ordinary kids’ toys and why they can be considered as alternative investments. Section 3 reviews literature on typical “hobby investments.” Section 4 describes an illustrative model of the secondary market price behavior over time. Sections 5 and 6 describe the data, the data sources, and descriptive statistics. In Section 7, we build LEGO price indices and analyze their characteristics and risk exposure. In Section 8, we explore the dynamics of LEGO returns in the first several years after set release. Section 9 focuses on related transaction costs. Section 10 concludes. The online appendix briefly presents the history of the LEGO Group and describes how LEGO became “the toy of the century.”
