Don’t throw out that old Lego

MANY fancy things can be built with Lego sets nowadays, such as a diversifying economic portfolio that yields good returns.

Collecting Lego – yes, the plastic toys made of interlocking bricks that become cars and castles and robots – returned more than large stocks, bonds and gold in the three decades ending in 2015, says a study by Victoria Dobrynskaya, an assistant professor at Russia’s Higher School of Economics.

While the premise sounds goofy, it’s serious enough for the academy, especially in a world where intrepid investors will go practically anywhere for uncorrelated returns. You might not know this, but older Lego sets are often resold online for many times their original price. In one extreme case, a kit for Star Wars Darth Revan that retailed in 2014 for $3.99 went for $28.46 on eBay a year later – a 613% premium.

“My son likes playing with Lego and I have a lot of it at home. At one point I thought: maybe I have a ready-made investment portfolio?” Dobrynskaya said. “I know that Lego has nothing to do with multi-factor models I spend my time focusing on. It doesn’t mean the performance of Lego sets has absolutely nothing to do with factor investing. You’ll be surprised to know that it does.”

In a paper titled “Lego – The Toy of Smart Investors”, Dobrynskaya analysed 2 300 sets sold from 1987 to 2015 to measure their price-return over time. She found collections used for Hogwarts Castles and Jedi star fighters beat US large-cap stocks and bonds, yielding 11% a year. Smaller kits rose more than medium-sized ones.

“Lego sets don’t show a significant correlation to the financial crises and can be seen as an attractive investment with a diversification potential.”

Guess what? Not everyone loves the science. Trying to shoehorn Legos into model of factor returns strikes some people as a little silly and creates the potential for human judgment to distort findings. First among the hazards is the possibility that everything is explained by chance – a criticism that looms over many factor models.

“If you think about all the academics in the world, there are a lot of them, and all of them are looking for something interesting to say,” said Roberto Croce, managing director and senior portfolio manager at BNY Mellon. “Someone is going to find something that is correlated. Purely by randomness that’s going to happen. I’d take it with a grain of salt.”

To determine the average yearly Lego return, Dobrynskaya gathered the initial price of 2 000 toys released between 1981 and 2014 and their cost in the secondary market in 2015. She analysed price trends for links to risk factors like value, volatility and size in the models developed by theorists Eugene Fama and Kenneth French. While the first three weren’t significant, returns did loosely resemble those attributed to the size factor.

The data showed that sets with a relatively few pieces, up to 113, returned 22% per year, almost 16 percentage points more than the group with about 860 bricks in each. The relation wasn’t perfectly linear. Small sets yield the most, but those with 2 000 pieces do better than medium-sized ones. The large group contains less than 100 Lego sets compared with 1 600 in the small camp and can be potentially seen as an outlier, Dobrynskaya said.

“Smaller Lego sets could be more rare than larger sets produced en masse; it’s hard to know for sure.”

Lego sets that focus on Super Heroes, Batman and Indiana Jones are among the ones that do best over time. The Simpsons is the only Lego theme that has lost value, falling by 3.5% on average. Newer sets have higher returns than older ones, though this can be due to a growing popularity of investments in Lego, Dobrynskaya said. –