Discovering long-term price behavior. As most of you know, I record prices for every sale of North American railroad certificates I can find. It has been painfully obvious for several years that the prices for collectible railroad certificates have been collapsing. It has been equally obvious that a significant "disconnect" has developed between real price levels and the price levels collectors and dealers think exists.

That "disconnect" is severe.

I think we might blame that disconnect on several understandable factors.

• Poor communication
• Tiny certificate populations
• Plain, old-fashioned refusal to believe collections have lost value

In one respect, disconnection between attitudes and reality reflects the severe lack of communication between participants. Unlike the huge stamp, coin and paper money hobbies, our hobby lacks an efficient communication network. Those other hobbies have weekly and monthly publications that communicate prices. Those publications reach the vast majority of participants; our hobby has no frequent publications of any sort.

The nature of pricing is further complicated by the tiny population of collectible certificates. Collectibles with populations below 1,000 are considered extremely scarce in most hobbies. In our hobby, certificates are not considered particularly scarce until populations drop below 100.

Finally, there seems to be near-complete refusal to believe collectibles lose value. And yet, practically everyone (in the U.S.) has witnessed values of their real estate drop precipitously in the last few years. How can housing lose 20% to 50% of value in three or four years and collections maintain stable values? They can't!

The "market basket" approach to measuring price trends. The majority of our intermediate-rarity certificates appear for sale only once every year or two. That makes price prediction nearly impossible for individual certificates. It turns out that auction prices for scarce and rare certificates probably reflect the number of names on mailing lists more than true collector interest. I reasoned that if we could track a sufficiently large number of medium-scarce certificates over a sufficiently long time, we should be able to discern trends.

What certificates should go into the "market basket"? I set out to find a collection of certificates that:

• had been known in the hobby for at least ten years,
• had commonly sold for more than $25,
• had appeared for sale more than 20 times in 10 years,
• were in middle of the market (were neither too expensive nor too cheap)
• included a few high-, low- and medium-class autographs.

By doing numerous database searches, I initially compiled a list of 125 possible certificates for the "market basket." Almost two-thirds of the varieties in the initial selection failed one or more criteria: market longevity, sale frequency, sub-$25 prices or extreme exclusivity. Ultimately, the "market basket" of certificates shrunk to 43 varieties.

What certificates are included in the "market basket"? They are medium scarce certificates that tend to appear in formal live auctions. As the number of formal auctions has dropped, desirable certificates are appearing more and more frequently on eBay. In general, few "market basket" certificates routinely appear for sale more than two or three times per year. You may see images of all certificate varieties either as a collection of images and as individual listings. Both formats show the same information. Both pages offer links to allow you to see lists of all prices I currently have on file for all varieties.

Smoothing out "wacky" prices. It is extremely common to see a medium scarce certificate sell for $200 in one sale and $40 in the next. We can devise all sorts of reasons to explain radical price behavior. The simple, inescapable fact is that prices of certificates are highly "spikey." Price behavior often confounds our predictions. Fortunately, we can smooth out extreme and odd price swings by using moving averages.

A moving average is calculated by averaging a specific number of samples through time. With railroad certificates, it seems a 5-sample moving average removes the effects of up-and-down price behavior fairly efficiently. Testing proved that certificate prices are too variable for a 3- or 4-sample moving average. I would prefer to use a 10-sample moving average, but we simply do not have a sufficient number of sales.

Measuring the value of the "market basket." I calculate 5-sale moving averages for each of the 43 certificate varieties through time. Sales occur randomly, so moving average values closest to the end of each year are added together. The total of all moving averages for all varieties give an overall value of the market basket for the end of each year.

The total collection was worth approximately $6,234 at the end of 1999. Its value grew to $6,655 by the end of 2003. From that point forward, the market has experienced an unbroken decline.

As of this date (shown at the bottom of this page), prices have fallen 38% from the high point in 2003!

Analyzing the index. It is important to realize that the index does NOT and can NOT measure the entire breadth of the market. There is no price reporting system and I cannot possibly find all auctions and transactions that take place. There is no way to learn the sales prices that take place between dealers and collectors.

Acknowledging those limitations, I feel the index represents an acceptably consistent measurement across a fairly wide selection of certificates. The goal is not to establish a perfect index value; the goal is to spot trends.

It is apparent that the hobby has suffered dramatic price drops since 2003. Dealers tend to blame the decline on eBay. I concur. We could argue the reasons for low eBay prices all day, but agreement is unimportant. We cannot do anything about the price decline except try to understand it. The current price trend suggests several important conclusions.

1. 1) Serious price declines do not yet appear to be tapering off. We do not seem to be at the bottom of the market.
2. 2) The high prices of a decade ago are gone. Typical market behavior always proves price declines occur much, much quicker than price recoveries.
3. 3) Low auction sales percentages represent overly aggressive price estimates. Minimum bids for typical auction houses rarely represent current price reality. Again, there is a serious disconnect. As a consequence, auction sales percentages are terribly low. It was not uncommon to see auction sales percentages in the 70% to 80% range in the early 1990s. Sellers who want to sell similar percentages today will need to reexamine their pricing assumptions.
4. 4) Occasional high prices continue to occur, but do not yet represent a turnaround. I expect to see sporadic and unpredictable high prices, especially in European sales. However, I expect to continue to see those high prices offset by absurdly low prices in eBay auctions. Where is the real market? One would imagine somewhere in between, but the chart at the top of the page currently suggests lower rather than higher.
5. 5) This price index represents a market basket of 43 certificates from North American railroads. I do NOT imply a correlation to certificates in other specialties.