Stanley Gibbons talks alternative investments

In the heart of Midtown, New York , Christies' gavel dropped, signalling that the most expensive piece of art had just been sold at auction. After a tense 11 and a half minute bidding war, Picasso's Women of Algiers was chased up to a phenomenal $179.4 million, leaving previous records spinning in the dust.

Collectable investments are often viewed with romantic, rose-tinted glasses and news coverage of eye-watering auction sales like this is to blame. When was the last time you read about that stamp that rewarded its investor with a paltry 0.5% holding return? Thought not.

There are clearly pros and cons to investing in tangible assets. They are unregulated and can easily become a money trap, but they can add diversity to portfolios and earn investors big bucks. Fundamentally, however, investors should collect for love of the hobby, not financial gain.

In a bid to provide cautious investors with exposure to what can be described as an "opaque" market, Stanley Gibbons is listed on the stockmarket and is packaging a closed-ended fund together. For the more hands-on investor, it connects individuals with the stamp and coin market.

Heddle's Top tips for investors

• Make sure it fits with your investment strategy

• Ensure you can tie your money up for a minimum of five years. You could make money quicker, but the average portfolio is held for seven years at Stanley Gibbons

• Do your research and watch out for forgeries

• Of course, talk to someone at Stanley Gibbons as it has the Royal Warrant

I visited Stanley Gibbons offices on London's Strand to meet investment director Keith Heddle and find out more. In some aspects, the 159 year old company is a dinosaur, says Heddle, but it is a misconception that philately - the art of collecting stamps - is a dying hobby.

With around 60 million stamp collectors around the globe, each year around $600 million changes hands under the collectible umbrella on eBay, explains Heddle. Google Doodle even celebrated the infamous Penny Black's 175th birthday last week, so there is a following.

The global dynamics have been changing, however. The UK is still the largest market, closely followed by the US, but there is now a sizeable and growing footprint in Asia, with around 20 million buyers in China alone.

"Chairman Mao did us a phenomenal favour" says Heddle, describing how the late Chinese communist leader banned stamp collecting. The ban has been lifted, creating a demand influx, and now there are problems with collecting Indian stamps. They have been declared a national treasure so can’t be taken in or out of the region, which makes the market "red hot", says Heddle.

For the inexperienced investor, this remains a risky asset. So why do people do it? Collecting stamps allows an investor to buy into a slice of history, and exposes them to the communication revolution sparked by Queen Victoria, history's social media, Heddle explains.

"Some say you can't make money from stamps and on the whole that is true. Stamp collectors don’t go into building a collection to make money," says Heddle. "It is a labour of love, the very top stamps and coins are little works of art. As long as you have stamps that are rare, in the right condition, have a degree of liquidity and are authentic, you have the chance of making money over time."

Although the hobby isn't dying out, people don't use stamps like they used to, so Heddle is in the long process of reinventing the business, which includes an online auction site and the closed-ended fund launch. Heddle hopes this will improve market liquidity and promote Stanley Gibbons as a one-stop shop for high net worth individuals.

Rarely will stamps and coins get you rich quick - the sale last year of the British Guiana 1c Magenta - the "Mona Lisa of stamps" - for a record $9.5 million was a one-off - but simple supply and demand economics mean it can preserve wealth. The most a client of Stanley Gibbons has parted with is half a million.

England, William III Gold Five Guinea piece 1699, made of West African gold

Merging the slow, quiet growth of the underlying asset class with a listed company wasn't going to be easy. The group recently warned that it would miss earnings forecasts after failing to sell some of its inventory, which Heddle describes as one of the "wonderful ironies" of the business.

"Here is the classic problem of the City versus real life," he says. "Business takes time and we learn things along the way. The market will get a bit flaky about the Stanley Gibbons share price but when you are talking about the underlying asset class, it’s completely immune to what is going on in the market.

"We are listed and are open to the whims of the market, but underpinned by an asset class that is very stable, but a bit slow - an absolute tortoise rather than hare. If you impose an early finish line then maybe the tortoise won't win that particular year, but if you keep looking at the end game it probably will."

House broker Peel Hunt has downgraded earnings expectations for the year ended March 2015 to £7.5 million (12.9p EPS) from £11.2 million. In 2016, it expects £10 million (17p EPS). Getting its online marketplace up and running is costing a fair bit, but this should reduce the group's reliance on lumpy sales in the future. And analyst Charles Hall points out that the inventory is still to be sold, so will boost profitability in future periods. He reckons the stock will have £150 million retail value at year end.

At 263p, Stanley Gibbons shares trade on 20 times Hall's earnings forecast and 15.4 times 2016 earnings expectations. He expects EPS to go grow by 32% this financial year, recouping all of last year's decline and more.

Strip out an estimated £3 million of online investment, however, and Hall forecasts £13 million of profit and 22.1p of earnings in 2016. "A P/E of 15 times would give a share price of 330p or a market cap of £155 million, which is similar to the retail value of the stock."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.