Collectible Stocks and Bonds from North American Railroads     by Terry Cox

A guidebook and catalog of prices
(I neither buy nor sell stocks and bonds)

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Railroad Certificate Price Index

Current index = $3,386 (as of December 31, 2016)

Discovering long-term price behavior. As most of you know, I record prices for every sale of North American railroad certificates I can find. By 2004, I had been collecting prices for well over ten years. At that time I noticed prices for many certificates were softening. I decided I needed a method of measurement to determine whether my feelings were correct or imaginary. Obviously, I needed some method of measuring the overall market, not just single items.

I realized I needed to create some sort of market index. The question was, what to include in the index?

Getting a grip on certificate pricing is complicated by the tiny populations of collectible certificates. In many other hobbies, collectibles with populations below 1,000 are considered extremely scarce. In our hobby, certificates are not considered particularly scarce until populations drop below 50. Maybe fewer.

Highly-rare items appear for sale very infrequently and usually only in live auctions. Prices realized from those auctions may not represent widespread demand so much as the ability of auction houses to promote sales. For instance, one auction house might outsell another equally-qualified organization simply because its mailing list contains more names. Similarly, a house that delivers its catalogs three weeks in advance of sales usually outsells one with a shorter lead times. The number of variables that affect prices of rarities is very large.

After much thought, I decided it would not be realistic to measure highly common items either. Oftentimes, dealers can sell super-common items only by dropping prices to wholesale levels and lower. It is entirely possible that some dealers could give away common items and net a profit merely by freeing up valuable storage space. The potential pitfalls of measuring common certificates seemed fraught with as many problems as rarities.

It ultimately made sense to look at medium scarce items, the kinds of items that intermediate and advanced collectors are always seeking to purchase. Taking the lead from typical stock market indexes, I tried to find a "market basket" of collectible certificates that met certain criteria. I reasoned that if we could track a sufficiently large number of medium-scarce certificates, a "market basket of certificates", over a sufficiently long time, we should be able to discern trends in the collectors' market, either up or down.

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,
  • seemed to be collected by a sufficiently large number of collectors,
  • had commonly sold for more than $25,
  • appeared for sale two or more times per year,
  • were in middle of the market (i.e., were neither too expensive nor too cheap)
  • included a few collectible autographs.

I conducted numerous searches of my database and initially compiled a list of 125 possible certificates for the "market basket." Almost two-thirds of the varieties in my initial selection failed one or more of the criteria listed above. Ultimately, my "market basket" of certificates shrunk to 43 primary varieties.

What certificates are included in my "market basket" index? They are medium scarce certificates that tend to appear in formal live auctions. Unfortunately, as the number of formal auctions has dropped, many of those certificates are now appearing more and more frequently on eBay.

You may see images of all certificate varieties either as a collection of images and as individual listings. Both formats show the same information.

How to smooth out the effect of "wacky" prices. It is extremely common to see medium-scarce certificates sell for $200 in one sale and $40 in the next. Ranges of $25 to $250 are common. Radical price behavior is the rule, not the exception.

This means that certificate prices are "spiky." If we plotted every sale of a "market basket" certificate, we would be unable to detect trends; there would bee too many up and down jags. One of the ways to smooth spiky data is to display average of prices through time instead of single prices. So, if we had a collection 100 prices, we could average pairs of two prices through time and display those averages on a chart. That is called a "two-sample moving average."

It stands to reason that the more sales we average, the smoother our price chart becomes. Oddly high and weirdly low prices become less and less noticeable as we add more and more samples to a moving average. In the case of collectible stock and bond prices, a 10-sample moving average would be nice, but we do not have a sufficient number of sales for such an average. After experimentation, it appears a 5-sample moving average removes the effects of extreme price behavior fairly efficiently.

(It would be wonderful if we knew more about dealer sales, but those transactions are hidden from view.)

Five-sample moving averages show trends very clearly, but they have a downside. They are "lagging" indicators. They do not show the value of the last sale, but the average value of the last five sales. In other words, it takes several sales at higher prices to show a reversal of declining prices. In our case, where sales are few and far between, the chart of 5-sample moving averages will always trail the current market by six months to a year!

Measuring the value of the "market basket." I calculate 5-sale moving averages for each of the 43 certificate varieties. The total of all 43 moving averages give an overall value of the market basket two times a year.

The total collection of the "market basket" of certificates was worth approximately $6,234 at the end of 1999. Its value grew to $6,913 by the end of 2003. From that point forward, the market has experienced an unbroken decline until the end of 2011. (Actually, the market probably paused its drop early in 2011, but remember that this price index is a lagging indicator and the chart didn't show a reversal until several later sales had taken place.)

Since 2011, the decline has continued with expected "stair step" pauses along the way. The value of the market basket was $3,386 at the end of 2016.

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 market-wide price reporting system; dealer sales are hidden and few collectors report their purchase prices. Moreover, it is impossible for a single person to record all auctions and transactions that take place.

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

It is apparent that the hobby suffered dramatic price drops after 2003. Dealers tend to blame the decline on eBay. I FULLY CONCUR. We could argue the reasons for low eBay prices ad nauseam, but agreement is unimportant. We cannot do anything about the price decline except try to understand it. This latest price chart suggests several important conclusions.

  • 1) Prices seemed tantalizingly stable in 2013 and 2014, but then dropped further all through 2015 and 2016.
  • 2) The high prices of 2003 are gone and will not return until the hobby can attract measurably more participants. Price behavior across all markets clearly proves prices decline much, much quicker than they recover. Therefore, even if the market turns tomorrow, it will require a very long period for recovery. It is clear that no market can reverse a decline until a substantial number of new buyers appear.
  • 3) While I applaud high-quality, full-color auction catalogs, I am afraid they are pushing commission rates devastatingly high. The percentages of items sold in live auctions were greatly higher in the 1990s, normally ranging from 50% to over 90% in some sales. That was a time when catalogs were minimally illustrated and all were printed in black and white. At that time, commissions ranged from only 10% to 12%. Today, commission rates to auction buyers are now about 18% in the U.S. and exceed 21% in Germany. It is obvious that commission rates reflect enormous production costs required to produce full-color, glossy catalogs. Unfortunately, it is equally obvious that color catalogs are not convincing collectors to bid anywhere near the rates they once did. Today, some auctions sell only 15% of the (railroad-related) lots offered. I do not suggest we blame all of the market collapse on high commissions, but they do play a role. While there is limited overlap between the items sold on eBay and in live auctions, dealers need to understand that buyers on eBay incur NO commissions whatsoever.
  • 4) More and more eBay sales are switching from auction formats to fixed-price formats and I am recording fewer and fewer sales almost every month. In large part, I think buyers are avoiding auctions in favor of instant gratification. Fixed-price offerings are a great opprtunity for sales provided they are priced correctly. Unfortnately, the problem with fixed-price offerings is that amateur sellers often start out by offering certificates at prices significantly above the market (prices higher than average). Having tracked prices for so long, I can testify that amateur sellers take a VERY long time to lower prices to the point where their items will sell. Unfortunately, when buyers on the sidelines see the same unsold items week after week, month after month, they must conclude that even eBay prices are too high! This is a very bad sign for established professional dealers who are competing not only against other professional but against thousands of amateurs.
  • 5) The sad truth is, we need MORE collectors. The first step is to get people excited about the hobby. I would really, really REALLY like to see increased membership in the IBSS. Any ideas? Share them with me and I will pass them on. PLEASE.
  • 6) This price index represents a market basket of 43 medium-scarce certificates from North American railroads. I do NOT imply a correlation to certificates from any other specialties.
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(Last updated February 5, 2017.)


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