When talking to collectors, I often find myself giving them advice as to what makes a “good collector.” I thought it would be interesting to share some of my thoughts and observations in a series of blogs entitled “Smart Collecting 101.” These will run, from time to time, over the next few months.

One of the mistakes that many collectors make is allowing themselves to be “churned;” either by their dealer/adviser or by themselves. Churning is an expression that means too much buying and selling from an account (or in this case a collection) by a salesperson in order to generate profits for the company and commissions for the broker.

Many of the big marketing firms in the coin business (and some of the better known boutique retail firms) are notorious churners. They will sell a collector a coin and then, a few months later, encourage him to upgrade it.

What many new (and even old) collectors fail to realize is that there are hidden transaction costs involved in any numismatic transaction. Most collectors who deal with the larger marketing firms are paying at least 20% over cost and in many cases more. Now this isn’t meant to imply that a 20% or 30% markup is unfair; it’s not. But what the collector needs to understand is that the market has to rise at least 20-30% in a short period of time in order to break even on a transaction.

And this fails to take into account another hidden cost: selling. A firm that churns isn’t expecting to take back a coin at a price level in which they can break even. Typically, though, they will mask this in a cunning way.

Let’s say a dealer sells a coin for $10,000 and his cost is $8,500. And let’s say that the current wholesale value for the coin is still around $8,500. What a clever salesperson might do to churn a client is to tell him that his coin is now worth $12,000 or $2,000 over the collector’s cost. The salesperson has a coin in stock that represents an upgrade. It’s worth $15,000 on a wholesale basis. He charges $19,000. He knows he will lose money on the trade-in but he is selling the new coin for enough of a profit that he is still able to generate a healthy profit. There is nothing really “wrong” with this but what it means is that the collector now has a new $15,000 coin that he is way upside-down on as opposed to an old $10,000 coin that he is only slightly upside down.

Not all churning is the result of sleazy or even “aggressive” dealers. Much of it is self-imposed by collectors.

One of the pieces of advice I try to give to new collectors is that they should “but the right coin the first time.” What this means is that instead of impulsively rushing through a set of, say, Dahlonega quarter eagles an then upgrading their mistakes as they go along, they should take their time and buy the coin they will want in their set for the long term the first time.

Of course there are exceptions to this rule. You might have bought a great AU55 1854-D quarter eagle that has pretty natural color and surfaces as well as a great strike. But a few years later, a really superb MS61 becomes available; a coin with an even better strike, a nice pedigree and fantastic coloration. In this case, an upgrade might be a very smart move.

My feeling is that there are clearly times when an upgrade does make sense. Obviously, it is sensible if there is not much of an increase in price. As an example, if you bought a coin in your set for $2,000 and you are able to significantly improve it for $3,000, that’s a no-brainer. Or, you might have a coin that you paid $5,000 for a number of years ago that’s worth $9,000 today. An upgrade costs you $11,000; you can roll your profit into the new coin and downcost it to $7,000. (Yes, that’s how coin dealers think…)

Sometimes, new collectors start a set tentatively and are not ready to spend $10,000 or $20,000 per coin; say on the aforementioned Dahlonega quarter eagles. Their comfort level to begin with is $2,000 or $3,000. This is understandable but my advice in this situation is to not rush headlong into the set. I have seen many great collectors start with small steps and grow into buyers of serious Condition Census-level pieces after they become more sure of themselves and more comfortable with the dealer they are working with.

Even if you are not working on a specific set, you can still get caught-up in the World of Churn. I’ve talked to a number of collectors over the years who have had their entire “portfolio” changed around by their expert adviser a number of times. And some of the changes that they made were ill-advised to say the least. As an example, I recall talking to a man who had owned some fantastic coins like a Gem Proof Stella, a high grade High Relief and a sensational 1907 Wire Edge eagle. He had bought them at a low point in the coin market, held them for a few years and was in a great long-term position. The salesman at the firm he was working traded him out of these great coins not once but three times over the course of five years and had taken what would have been a small but superb group worth around $1 million and turned it into a bunch of mediocre, overgraded swill that would have been hard to liquidate at half that amount.

I think one of the best signs of a good, reputable dealer is the individual who tells you “no” from time to time. This is a dealer who is interested in a good long-term relationship but will tell you that a coin he has in stock that is a small upgrade over the one you currently own just isn’t worth spending a few thousand dollars on. Desperate dealers always say “yes.” Stable, dependable dealers sometimes say “no.”

In closing, I’d like to ask you, as a collector, for some suggestions about topics for future editions of Smart Collecting 101. What questions do you about collecting that you’d like answered? Feel free to email me at dwn@ont.com with your questions, comments, etc.

• Avoiding the Churn in Coin Collecting | Coin News