Last year when I left my job, my fiancee, and my apartment in Chicago and moved onto a 30-year-old sailboat, I asked myself: if I were to sell everything I owned on Craigslist or eBay, how much could I make to put towards the boat? The same question posed to my stock portfolio was easy to answer, but if I decided to liquidate all of my holdings, financial and physical, how would I value my vast collection of random stuff?
The stock market has always felt to me like drinking wine or watching a polo match. While nearly anyone these days can open an account on Robinhood and buy stocks, it carries an air of superiority—like everyone is staring at you for being a newcomer. But if the success of eBay or even the show “Pawn Stars” is any indication, people are excited to transact in physical things. Living in a world with only a stock market has started to increasingly feel like a world where only people who loved math class in high school can make money trading commodities, which we know is a small group of people.
With stock markets for anything, your expertise in sports or cars or fashion or music might be a competitive advantage in finding opportunities for market arbitrage. It is populist in the way Uber can make any car a taxi, or Airbnb can make any house a hotel; we already own these things, now let’s put them to work as assets.
From Jan. 3, 2017 until June 2, 2017 I worked as a data journalist for a Detroit-based company called StockX, internally telling stories with their data and data from the web. During this time, especially in my first month as a contractor, when I had not signed a non-disclosure agreement, I got to peer inside a bold ideology for how we value the physical things we own. Even as a full time data journalist, my role was one of ombudsman. Numbers tell stories devoid of passion, and every marketplace must be built on trust and transparency.
Much of what StockX is doing has not made it into the mainstream. That is not to say that they haven’t had articles in all the major publications (they have), but those articles have focused on the commodity they have traded since launching—sneakers—rather than the bigger strategic play they are envisioning. In February, StockX, which is co-founded by Dan Gilbert (owner of the Cleveland Cavaliers and chairman of Quicken Loans), announced a $6 million funding round backed by Eminem, Mark Wahlberg, Ted Leonsis, Steve Case, Tim Armstrong, and SV Angel. That eclectic group of investors and owners is a tease at the expansiveness and inclusiveness of a true “stock market of things.”
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The way things are sold now on eBay or Craigslist is via a marketplace for individual items. Making stock markets means moving away from custom pricing for individual iterations of a thing (the pair of Air Jordan Retro Space Jams in my closet) and towards a universal price for all iterations of a thing (all pairs of Air Jordan Retro Space Jams in existence).
Currency might be the example of where this is easiest: All currency notes are identical and conveniently have their value printed on them. On the other end of this spectrum are things like real estate. With real estate, it is almost impossible to have an exchange because every different piece of property is unique. Real estate also does not transact as often as other assets because it is stationary, people and businesses live on it, and it is affected by its surroundings. Rare art and other one-of-a-kind items are similar—they are called “priceless” precisely because they are very hard to price.
Somewhere in between the extremely transparent, high volume, and highly commoditized markets for stocks, bonds, currency, and other commodities, and the non-transparent, low volume, unique market of real estate and one-of-a-kind items lies the market for pretty much everything else. So why have stock markets only appeared at the extreme and nowhere in the middle?
Another way to ask this question is the way Josh Luber, the CEO of StockX, asked it in his TED Talk in 2015: Are sneakers more like drugs or stocks? Since sneakers are the first physical good sold on StockX, they are a good illustration of the limitations created by a physical good in creating a marketplace. So let’s compare.
Like me, you may first be tempted to list liquidity as nudging sneakers away from Nike stock and towards cocaine: They are hard to quickly convert to cash. However, this is a symptom of there not being a marketplace for sneakers rather than of sneakers themselves. Instead, we need to look at the market-making differences inherent in the goods, not how the world has correctly or incorrectly built markets for them.
A stock’s amorphous, non-physical nature is also not a good differentiator. Gold, currency, and plenty of other physical goods have markets, and things like gift cards or digital items (like World of Warcraft items) are great candidates for StockX. Liquidity, and bit v. atom, are thus mere attributes, not causes, when it comes to how stock markets function today.
The similarities between stocks and “sneakers”
When you own a stock and when you own a sneaker, you own an actual thing, physical or not. I’m not talking about options contracts or trading in things that might exist at some later date. And both stocks and sneakers also trade on a secondary market. Unless you buy a stock during an Initial Public Offering (IPO), you’re buying a stock somebody else has owned. Both also have intrinsic value, though the sneaker actually has an advantage here. What I mean is that if Nike goes bankrupt, my Air Jordans are still valuable even if my Nike stock is worthless. Both also have sufficient volume to merit a marketplace—there are over one billion shares of Nike trading and there are hundreds of millions of sneakers.
And the differences…
The most glaring is standardization. In fact, that is the definition of a commodity: “A basic good used in commerce that is interchangeable with other commodities of the same type.” On the New York Stock Exchange, all Nike shares within their share class are identical. One is not more worn than another or in size 8.5 instead of size 11. The other big difference is authenticity: Fake shares aren’t a thing. Would you buy shares in Nike from someone on Craigslist?
The StockX answer to fakes so far has been simple, but also has limits: All traded goods pass through StockX HQ and are authenticated. Standardization is more interesting. For sneakers, StockX only allows new unworn sneakers (referred to as deadstock) to be traded. But products like watches and handbags, which StockX began trading in May, such a restriction would too severely limit the scale of the marketplace.
And this seems to be the problem. Follow along: Nike wants to make money so they issue an offering (shares or a sneaker release), people buy the new stock from Nike (on the Stock Exchange or in a Nike store), and then the paths diverge. For stocks, once sold, they continue to trade with transparent pricing in a frictionless market. Individual sneakers, by contrast, move into the obscured possession of their owners where their individual condition state changes: A sneakerhead puts a pair on a shelf without opening them, but someone else puts theirs on and goes jogging in the mud. So, it would seem, product condition drives the secondary market for sneakers and all other “things.”
Interestingly, though, condition doesn’t seem to matter the way we think it does.
In looking at data on tens of thousand of handbag transactions, as well as listing prices across dozens of online handbag retailers, condition seems to have no correlation to price below a shakily defined “Like New” tier. A Louis Vuitton handbag, for example, will on average resell for 51% of its original retail value, regardless of whether it is called “Good,” “Excellent,” “Barely Used,” “Fair,” or whatever other term its owner uses. This is unfortunate for buyers because it makes it very hard to know what a fair price is. If I tell you that a Louis Vuitton Monogram Canvas Neverfull Bag in “Like New” condition is $695 and another version of the same bag but with a stain and signs of heavy use labelled “Fair” is $680, do you conclude that the new bag is a great deal or that the worn bag is overpriced?
The graph above captures this dilemma, but even it doesn’t look as bad as the market reality: The graph has been normalized to percent change from a bag’s average resale value to allow us to include a wide variety of bags with different absolute prices (e.g. a $1,500 Louis Vuitton Alma and a $5,200 Chanel Maxi). If there were zero correlation between price and condition, the dots would go from top to bottom for all four conditions.
Instead we do see that “Fair” bags generally sell for below the average resale price and “Excellent” bags sell for more than the average. But there is way more price overlap than a sophisticated, transparent marketplace would tolerate.
So which index do you trust: condition or price? One of them has to be wrong—a “Great” bag should not sell for the same price as a “Fair” bag, which you can see happens frequently when a bag is selling between 90-100% of its average resale value. If price is wrong, then people who buy “Good” and “Fair” bags are getting overcharged. If condition is wrong, then many “Good” and “Great” bags above the average price are being unfairly mislabeled as worse than they actually are. As a buyer, there is no way to know, especially without thousands of prices to look at or data like what you see above.
Thus the StockX innovation that allows the marketplace to extend beyond sneakers: one quality standard for non-new items. In May, StockX did just that by adding watches and handbags to its marketplace. When you visit the StockX website to buy a Rolex Submariner, you will not see multiple listings of different Submariners at different prices in different conditions. You will see a generic photo of an “Excellent” condition Rolex Submariner and a promise that if you buy a Rolex Submariner on StockX, it will meet the “Excellent” threshold of quality. You will not see the specific watch you buy—it will be at the seller’s home somewhere and that seller will be confident their Rolex meets the quality standard before they include it in the pool of Rolex Submariner “shares.” Then, when a trade happens, StockX will verify that the seller’s condition statement checks out.
Stocks, bonds, currency, and other commodities may be the only marketplaces where the secondhand market for goods is completely uniform. We all know that when you “drive it off the lot,” “it” loses value because, suddenly, it is no longer completely standardized in its quality.
But creating a narrow quality standardization window might be a way to facilitate exchange—that the difference between 99% and 90% “like new” doesn’t really matter. It’s one step closer to a world where I could put all of the things in my apartment into a “portfolio” and monitor that portfolio’s value as the value of its composite goods ebbs and flows—as long as my things aren’t too worn.
Well, sort of…
StockX has looked at hundreds of products categories and rates them based on their desirability from a business standpoint as well as whether a stock market can be easily created. With wine, for example, different state laws about the shipping of alcohol make it a regulatory mess. As does the fact that about 95% of wine sales are of wine that is less than $10. With cars, there is too much customization and shipping cars is prohibitively expensive for authentication. But most of all, the quality approach StockX takes with handbags does not always work.
To illustrate a breakdown of the “normalization of quality” theory introduced above for handbags, we can look at comic books. Seemingly, comic books meet all the criteria for a stock market: There are millions of them, a thriving secondary market, non-uniqueness within an iteration of a good (all Air Jordan Retro Space Jams are the same), and they are easy to move.
The comic book world even has its own quality rating system that is codified from 10 GM (Gem Mint) down to a 0.5 PR (Poor), unlike the arbitrary nature of handbag condition. But herein lies a problem: non-standardization of ratings criteria. For example, a comic book with a 4.0 or VG (Very Good) rating could mean the comic book has its cover detached at just one staple or that it has “a moderate accumulation of water damage or staining.” Would you buy a 4.0 comic book without seeing the specific reason for the rating? Probably not. The answer with comic books could be to create a new rating system, or to exclude items with certain reasons for a given rating, like water damage. StockX doesn’t have an answer yet.
So far, the existing market mechanism looks to be working: Sneaker trades on StockX are growing fast. StockX blew past their internal goal for transaction growth in the first quarter of 2017, nearly tripling it. But “non-deadstock” products are new territory for the “stock market of things.” Will the normalization of quality theory about all watches and handbags—that the top percentile of condition states are of identical value—play out? The data supports it, but the real test will be if humans do.
But suppose for a moment it all works. If every household in America could have a living portfolio for their things, how would that change society? As an individual or a family unit, it is pretty much impossible to raise funding without equity. Individuals don’t have any sort of bankable reputation outside of family and friends. A company called Upstart offers personal loans with interest rates based on indices like where you went to college and your GPA, but that is about as far as reputation gets you in a formalized setting. Reputation or brand, for better or worse, are not factors the way they are for large companies raising funds. At the heart of creating a “stock market of things” is creating trust. Most people, today, couldn’t take out a loan based on the value of their Rolex, baseball cards, and Beanie Babies, but if the value of those items were stable and transparent, maybe, one day, anyone could.
Alas, it all comes too late for me and my post-breakup predicament. I put the boat on a credit card.
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