"It is folly to expect men to do all that they may reasonably be expected to do"
Richard Whately
The statement carried in the story below that an investment in TAXI medallions have beaten every index one could think of is silly at worst and completely naïve at best. This quote was extracted from a story carried in US today Full story.
"It is an industry that has always gone up," says Andrew Murstein, president of Medallion Financial. "It has outperformed every index you can think of — the Dow, NASDAQ, gold, you name it."
Similar, but not exact claims were made in other articles, one of which was published on seeking alpha in an article titled Hailing TAXI Over Gold. A lot of hoopla was made about the gains of 1030% achieved over a period of 31 years.
On just the surface and in retrospect (because it’s highly unlikely that there are many investors who held onto these medallions for 30years) this looked like a great investment. If one digs a bit deeper one will likely come to the conclusion that while this is not a bad investment, it's not as great as it’s made out to be. Investing in the SPX for the same time period would have yielded 1188%, a far better yield than the 1030% associated with investing and holding a taxi medallion, without having to incur the huge initial cost of roughly 60K. This easily proves the statement above in regards to NYC medallions beating any index one could think completely wrong.
As the low and the high price were used to calculate the rate of returns for the NYC Taxi medallions; a similar approach was used with the SPX. To achieve this, we took the price on the 2nd of Jan in1980, which was 105 and the recent high set on the 7th of August at 1353, if we use the May high of 1361, the rate of return would be even higher. The big advantage here is one could have started out with a few thousands or even a few hundred dollars and continued to add to this investment over time. This is not something that could be achieved with the Taxi medallion as the cost of the medallions changed in the 10’s of thousands on a yearly basis. The original estimate of 1188% was achieved without adding additional funds, and so if additional money was added over the years the rate of return would be significantly higher due to the effect of compounding.
Now let’s look at the Dow. On the first trading day, the Dow of 1980, which was Jan 2nd, the Dow closed at 824. If we use the recent high of 12832, this equates to a gain of 1457%. Again far better than that of the NYC taxi medallion; to be fair we should actually use the high of 14015 set on Oct, 11, 2007; if these figures are used then the gain's surge to 1600%.
The NASDAQ closed at 148.17 on its first of trading in 1980 and its set a recent high of 2872 on the 7th of July. This would work out to a gain of 1840% for the same time period, once again trouncing the gains achieved by investing in NYC Taxi medallions. Now if we use the high of 4907 set in March 2000, the gains blast those of the NYC Taxi medallion. The total gain would have been over 3200% and this would have been achieved 10 years faster.
Another problem is that one is comparing apples to oranges and when you do this, the data can be twisted to suit any possible outcome one desires. One could easily randomly pick certain stocks that if one held onto them for a period of 10, 15, 20 years and or 30 years, would have resulted in gains in excess of 10,000% making those achieved with investing in NYC taxi medallions seem insignificant by comparison. We actually list a few examples further in the article only for comparison purposes.
Another assumption is that the average investor is going to hold onto a single investment for such a long period of time; over 30 years in this instance is flawed. The other flaw is the huge cost of entry; in this case, it would have cost one roughly 60K to purchase a medallion in 1980. 60K was a huge sum of money in 1980 and not easily accessible to the average investor.
Investing in the commodity oil could have yielded spectacular gains without the need of having to hold onto the investment for so long. The following example is for reference purposes only. If one purchased oil in 1999 when it was selling for roughly 10 dollars a barrel and got out in the $130- $140 ranges one would have walked away with 1200%-1300% in gains. An astute investor would not have had a hard time getting out at these prices because all of sudden oil became the rage of the day. Analysts started raising their targets to such lofty levels that it was all but obvious that the market was going to peak soon; when everyone is chasing something, it’s no longer investing, it's pure speculation. As an added bonus, one would have to hold onto this position for less than 10 years. If one got into oil stocks, the gains in many cases were in access of 10,000%.
Going forward oil has a better chance of outperforming NYC TAXI medallions because it comes down to supply and demand and even with a weak economy demand is expected to increase as more consumers in Asia and South America line up to buy their first car. China has already surpassed the US as the world largest car market. Thus, it’s only a matter of time before the high of $147 is taken out. Hence, the long term outlook for oil is potentially far brighter than that for NYC Taxi medallions.
The NYC taxi medallion market appears to be overheating, and the economy is slowing down; these two factors could put the brakes on price appreciation. The last medallion was sold for all time new record in the face of a slowing economy and stubbornly high unemployment; these factors certainly are not going to help support this market going forward. It has experienced corrections of over 10% twice, once during the oil crisis of the 70’s and once after Sept 11, 2011. In both instances, prices dropped over 10%. Thus if this market had to pull back 10-15% now the loss would be rather significant; the amounts would range from 67-100K. We mention this because there has never been a market no matter how bullish the trend that has not at some point experienced a rather strong correction. It is also virtually impossible to get in at the low and sell right at the top, which is indirectly what these articles seem to be suggesting.
We stated earlier in the article that we would list a few companies that yielded astounding gains in a far shorter time periods for comparison purposes.
For example, there were many internet stocks during the dot.com boom that surged several thousand percent above their IPO’s; in many instances, the gains were in excess of 10,000%. Instead of focusing on those stocks we will look at some relatively recent winners. If one had invested in AAPL in Dec 2000 when the stock was trading around $10, the total rate of return would be in excess of 3900%. If one had invested in NFLX when it debuted in May of 2002, the gains would be in excess of 3,400%. Alternatively, if one had invested around the same time in PCLN when it was trading for 7.68, the returns would be in excess of a mind boggling 6,600%. These stocks are mentioned only as means to illustrate that the gains achieved in holding the NYC taxi medallions for 31 years are not as spectacular as they are made out to be.
In fact, given the strong pipeline of products and fanatical following AAPL has, we wager AAPL would make for a far superior investment than a NYC taxi medallion going forward.
Conclusion
While the general point in the article is interesting. There are several flaws.
1) The extremely high entry cost of getting into the NYC Taxi medallion business
2) The assumption that one will hold an investment for such a long period of time; in this instance for over 30 years. In reality, very few investors would hold onto an investment for such a lengthy period of time.
3) The faulty assumption that investing in TAXI medallions yielded better rates of return than any other index out there. We compared the Dow, SPX and the NASDAQ to investing in the NYC taxi medallion and in each instance one would have easily done better had one invested in any one of these indices as opposed to investing in the NYC taxi medallions.
4) In such a weak economic environment, it is hard to envision medallion prices doubling from current levels, so going forward this investment might not be such a great idea. It would be far easier for AAPL or GOOG to double in value than for these medallions to double from their current prices.
Mayor Bloomberg's plan to license 30,000 liveries to pick up street hails outside Manhattan. If this comes to pass it would erode the value of NYC taxi medallions. Andrew Murstein, president of Medallion Financial Corp, predicts that prices of medallions could drop by 25% if Taxi’s lose the exclusive right to pick up street passengers. A 25% hit is not a joke, especially if one were to buy the medallion now. Based on the record price the last one sold at, which was 665,000, this would translate into a loss of $166,250. The plan has already been approved and is now just waiting for Governor Cuomo to sign it into law.
At this point in time, it would make more sense to invest in any of the above-mentioned indices for the long run instead of investing in NYC taxi medallions. All 3 indices yielded far superior gains and there is no reason to believe that the same gains could not be achieved over the next 30 years. If one decided to do some footwork and selected a bunch of high dividend stocks (for example, MCY, UMC, and NLY) like the ones mentioned in our recent article on seeking alpha 10 Dividend Plays That Trample 10-Year Treasury Yields, the rate of return would most likely be significantly higher.
"All men profess honesty as long as they can. To believe all men honest would be folly. To believe none so is something worse."
John Adams
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
