When people discuss collectible alternative assets, you might hear the term “catalyst” used in relation to an item’s value. But what is a catalyst? And how can collectors and investors position themselves to prepare for one?
A catalyst is an event or occurrence that has the potential to cause significant changes in an asset’s value. Catalysts can be positive or negative, meaning a catalyst can cause an asset’s value to go up, or it can cause the value to go down. Catalysts are typically expected to drive short-term, rapid changes in value. Longer-term forces that contribute to changes in value over the course of years would generally not be attributed to catalysts.
Each collectible asset class can benefit or suffer from catalysts, these key events that drive their value.
In fine art, for example, an artist’s works can experience an increase in value when it’s announced that they'll be exhibited in a museum, when they’ve secured representation from a top dealer, or, sadly, when they pass away.
In modern sports cards, a player’s cards may become more expensive when they become likely to win a championship, win an award, or break a record. Cards of players who have retired may see positive changes in value due to a Hall of Fame induction or a widely-watched documentary, or values may be adversely affected by that player getting in legal trouble or facing other reputational damage.
A rare book or a comic book might see changes in value when that material is set to be adapted into a major movie, as the story is reintroduced to old fans and introduced to new ones.
A catalyst in fine watches might be the news that a watchmaker is discontinuing production of a certain model. Such was the case for the Patek Philippe 5711, for example.
A sneaker catalyst might be a collaboration between a brand and a popular collaborator on a previously less desired model. That event can draw attention to other sneakers of the same model, thereby increasing their value. Conversely, sneakers can also have negative catalysts. One very common example is news of a restock or re-release, which will often lead to declining value for existing pairs of that model.
Identifying a potential catalyst is only half the battle. The timing with which one acts to account for the catalyst will make or break performance. For example, you’ll notice above that, in sports cards, we suggested a player’s cards become more expensive when they become *likely* to win a championship - not when they actually win it. By the time it becomes clear that a catalyst will happen, in most markets, that news will have already been priced in.
What does it mean that the news is "priced in"? Well, market participants will have speculated or anticipated that a catalyst could unfold, and as a result, they will have bought that asset (if they expect a positive outcome), driving the price up, or they will have sold that asset (expecting a negative outcome), driving the price down. This activity will continue as the outcome becomes more probable. So, if you were only to buy an asset right before or right after the catalyst occurs, you would likely miss most or all of the upside.
The key, then, is to both identify and act on a potential catalyst before it becomes popular and well-known. That ensures you buy before the market for an asset has done most of the rising it will do, or that you sell before the market for an asset has done most of the falling it will do. You might recognize that this means more risk. In acting early, you’re perhaps operating with less clarity on the probability that the event will occur. But the closer to the event, and the more clarity there is and the higher probability there is, the less opportunity there is to profit.
If you’re taking that risk, you’re going to want to be sure that if and when the catalyst occurs, it will indeed have a significant impact on value. For example, you might identify that a comic book will be released as a movie seemingly before the market does. However, if that movie turns out to be a flop or if it simply doesn’t make a broad cultural impact with a big audience, then the change in value to the upside is likely to be muted. You don’t want a catalyst to be so niche or so intricate that nobody ever reacts to it and values don’t move. To be most successful, you’re looking for major impact and easy digestion. Striking that balance between having an edge and ensuring that its an edge others will validate is challenging, but studying historical results can be instrumentally helpful in understanding what has worked previously and when.
So, keep an eye out for potential catalysts, act on them with caution, and be mindful of your timing!
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