Collectible Stocks and Bonds from North American Railroads     by Terry Cox

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Auction bidding

I enjoy auctions. I like the process, the excitement, the deals, and the psychology.

Auctions have been around for centuries. Still, many people are unclear about the process. Some are intimidated by the speed of sales. Many people complain they cannot understand auctioneers' peculiar chatter. Some people leave auctions wondering how they failed to win items they really wanted. Others leave wondering why they overpaid so drastically.

There are different customs among auctions and auctioneers, so I will slant my discussion toward auctions that sell collectibles.

Understand participants' goals. First and foremost, understand that auctions are about money. Three groups of participants are always involved in every auction and all are interested in money.

  • Sellers want to sell their belongings for the most money possible.
  • Auctioneers want to earn the highest possible commission in the shortest period of time.
  • Buyers want to pay the least for the items they collect.

Auction myths. In conversations with collectors, I find a few common myths. Amateurs often think the balance of power is tilted against them as buyers. The truth is quite the opposite. No sales can ever take place until bidders buy. While bidders - theoretically! - can control their purchases, they often fall victim to their own emotions. Consequently, in typical auctions, it is the auctioneer's responsibility to keep emotions at a fever pitch.

What is you have an unbearable urge to scratch my ear? Are you afraid you're going to bid by accident? It is a very common myth and happen ON TV all the time. I've never seen it happen in real life. Realize that auctioneers have seen it all.

Many collectors believe they cannot possibly win if dealers are going to be bidding. Not true! Yes, dealers attend most large auctions. But think about their business model for a moment. They need to make profits from their purcahses. That means they need to buy as cheaply as possible. Also remember, they may not be able to sell some items for years. If dealers think they can might be able to sell a certificate for $300, they probably should not pay any more than about $130 considering profit and commission. Maybe a little more if they have standing want lists from strong, established buyers. Collectors can easily bid twice that much.

The importance of time. Time is extremely important to auctioneers. Large auction houses may have tens to hundreds of thousands of dollars invested in catalogs, salaries, site rental, security, insurance, travel, advance payments and refreshments before sales ever take place. Auctioneers (including eBay) may sell only 20% to 40% of their lots. Large houses need to offer 2,000 to 3,000 items in order to recover costs and hopefully gain profits.

Regardless of percentages of lots sold, every lot must pass under an auctioneers' gavel. That process takes time. Consequently, large auctions must sell lots at very fast paces. Many auctions of collectibles sell items at the rate of 100 to 150 lots per hour.

In other words, typical lots will be offered and sold within 25 to 35 seconds each! Buyers CANNOT sit on their hands if they want something!

Compare this pace with typical estate sales. In those kinds of settings, auctioneers may struggle for five minutes or more just to sell a single lot.

There is no fooling around at major collectibles auctions! Professional auctions of collectibles are nothing like typical estate sales! Paces are furious. Auctioneers do not have time to fight for every single dollar.

The pace of sale requires participants to stay alert. If bidders don't pay attention, they will find items sold without their participation. At estate and charitable auctions, bidders can often "drag their heels" and force auctioneers to lower starting bids. Such strategies rarely work in collectibles auctions.

"Auctioneers' chant." In typical sales, auctioneers use their voices to attract attention and keep participant's interest. Most develop a sing-song that intersperses nonsensical sounds with real words. This chant is also known as "bid calling," "auction cry" "cattle rattle," and other terms. Whatever their style, the basic idea is for auctioneers to state the current price and ask for bids at the next higher increment, all the while trying to keep bidders from "going to sleep."

If, for instance, the current bid is $100, a typical estate sale auctioneer will try for $200 before dropping down to $150 and try to ratchet bids up from there.

The patter may go something like, "One, gimme two, two, two. One gimme two." Maybe a short pause, and then, "One hundred. Gimme one fifty. Anybody? One fifty, fifty, fifty. Ja-wanna one fifty?"

This struggle can go on for a minute or two in estate sales. In those kinds of sales, it is not unusual to see auctioneers drop down to $125, maybe even $110 before getting a second bid, only to ultimately sell the item for $400!

Fast auction chants are customary at cattle and livestock auctions. Rapid-fire chants are also customary at automobile auctions and even race horse auctions where bids can climb into the millions.

You will not hear this kind of over-amped auction chatter in expensive art auctions at Christie's and Sotheby's. For from it. Everything is low-key and sedate. Prices are clearly stated and bids are requested politely. Similarly, you (generally) won't hear auction chatter in better coin, currency, and certificate auctions.

In auctions of stocks, bonds and coins, both auctioneers and bidders tend to be very experienced and everything takes place in plain, clear language. It is quite common for certificate auctions to go something like this.

"Catalog number 1216. Opening bid 300 dollars. 400? 400? 350? 300? 300? Anyone? 1215 not sold."

"Next up is Lot 1217. We have a book bid for $450. 500. 600. 700. 800. 800? 800 dollars? I have two bids at 700. 750? I have a bid of 750 dollars. 800 once. 800 twice. Sold for 750 dollars to bidder number... your card sir? ... 2335."

This example would have taken about 40 to 45 seconds and would have proceeded at roughly the same pace if we were dealing in thousands instead of hundreds of dollars. How did this item sell so fast?

As soon as the auctioneer said, the auctioneer told the participants that someone had submitted a mail bid for $450. He asked for a bid of $500 and four people held up their bidder cards. At "700," two cards dropped. At "800," all cards dropped. The auctioneer waved a couple of fingers at the audience and said, "I have two bids at 700." He then asked for a $750 bid and one participant raised his card. At that moment, the bid became $750. "800 once. 800 twice." The auctioneer asked for the winner's bidder's number, a clerk made a notation on a tally sheet and the item was declared sold.

Simple as that.

Sales can move so quickly because experienced participants know EXACTLY what they are willing to pay. Yes, the heart rates of even the most experienced buyers will increase. There is certainly adrenaline, but emotions are under control. Everyone in the gallery is assumed to be a professional.

The trick? Experienced bidders know their EXACT maximum bids. It is absolutely crucial to know your EXACT top-dollar price before ever raising your bidder's card in a live auction.

If rule #1 is:

  • know your maximum bid

then rule #2 is:

  • stick with that amount.

It doesn't matter what kind of auction you're attending. I don't care whether you're buying a milk can, a box of postcards, a piece of real estate or an 1804 silver dollar. If you do not know your EXACT maximum bid and stick with that value, you will be disappointed. You will either pay too much and regret it, or you will stop bidding too early and regret it.

Most participants in top-flight coin, currency, and stock and bond auctions carry "cheat sheets" on which they write lot numbers and their maximum bids. Others mark their catalogs. The pros usually write their dollar values in code. My wife and I use small notebooks.

It is crucial to record your maximum bids long before sales start. A day or two is ideal. This is when your mind is clear and you are unaffected by adrenaline.

The WORST possible time to establish a maximum bid is after a sale starts.

The earlier you set your maximum bid, the better. Once your lot comes up for sale, you can bid up to your maximum value and drop out without remorse. If you win your lot below your maximum, you know exactly how happy to be. You will not overspend. You will be able to live with yourself. You will know you did the best you could.

The final trick. Be sure to factor purchase costs into your maximum bid including commission, postage and taxes. Say you want to buy a certificate you think is worth no more than $800. If your commission rate is 15% and local sales taxes are 7%, then your absolute, top-dollar bid should not exceed $650.

(How did I calculate this? Divide $800 by the tax rate and then by the commission. $800/1.07 = $747.66. $747.66/1.15 = $650.14.)

Often, you can avoid local taxes by having your winnings shipped home. If shipping costs $32, then your maximum bid could increase to $668. Chances are, the bid increment in such a sale would be either $50 or $100, so you will need to settle for bidding either $750 or $800.

(Subtract the shipping cost and then divide by the commission. $800-$32 = $768. $768/1.15 = $667.83.)

Not knowing your maximum price WILL lead to dissatisfaction. If you don't know your exact maximum bid, the result can be upsetting and painful. It can be financially unhealthy. Bidding without an inflexible maximum price is what I call the "Greater Fool" approach.

In live auctions, "Greater Fool" reacts to someone else's opinion of value. Someone raises a bid, "Greater Fool" responds. Another person bids, "Greater Fool" responds. "Greater Fool" looks around the room, wondering who his competition is. He wonders, "How high will they go? He doesn't know where bidding will stop. He only knows that he wants to be the last bidder. "Greater Fool" never controls his destiny. By bidding the way he does, "Greater Fool" tells everyone in the room his strategy. The "Greater Fool" might win his desired lots but he always ends up paying too much.

Buyer's remorse. At one time or another, every bidder has played the role of the "Greater Fool", myself included. I thought I'd learned the lesson in the late 60s when I watched my dad get "auction fever" in an estate sale. He'd told me all the rules, but nonetheless overpaid for a box of tools he really didn't need. Even forty years later, I remember him moaning about his foolishness for hours. Of course, I've done the very same thing with books and engravings.

"Buyer's remorse" is painful and simple. If you don't know your maximum bid, you WILL suffer buyer's remorse, even if money is no great concern for you.

There is a flip side. For the lack of a better term, the unwillingness to establish a maximum bid can result in "non-buyer's remorse." This is when "Greater Fool" wants something, bids a couple times and then pulls out. "Greater Fool" has only one or two half-hearted competitors, so he wonders if they know something he doesn't. "Greater Fool" is unsure of value, gets cold feet and loses a desired lot to someone who knows how to play the game.

Being inherently cheap, I have succumbed to non-buyer's remorse too many times, usually because of inadequate research. "How could I have been so stupid? If I had only looked at my data, I would have gladly paid more!"

I repeat. Know your absolute maximum bid before bidding starts. Then stick to it. No matter how much you want something, don't raise your bid by even one dollar in the heat of bidding. If you pre-established values while you were thinking clearly, you can walk away knowing that YOU were not the greater fool.

Bidders cards. You must sign up with auction houses before you can bid. If not already known to the "house," plan on giving credit information and possibly references. In return, the house will give you a card (known as a "paddle" in some auctions ) with a bidder number. Whenever you win a lot, you will hold up your bidder's card so the auctioneer's accounting staff can record your winnings.

Read and fully understand "house" rules. Every auction house has different rules and customs. Never assume you know all the rules. Never assume rules have not changed.

Auctioneers control sales. Regardless of published rules, auctioneers retain the right to modify rules to fit existing situations. Do not argue with auctioneers; you won't win.

Bid increments. In order to promote fast sales, auctioneers establish logical bid increments and remind participants before sales start. They may say something like, "Between $500 and $1000, the acceptable bid increment is $100. Above $1000, bids advance by $200. Once bids reach $2500, we will advance in $500 increments." (See more discussion of typical bid increments.)

Cut bids. In some auctions, auctioneers occasionally allow bidders to offer amounts smaller than normal increments. In the example above, a participant might have offered $775 for the certificate that did not fetch the desired $800 bid. Experienced auctioneers will generally stop sales at that point to explain house policies on "cut bids." For instance, auctioneers may say that they will accept one and only one cut bid per item. If someone outbids the cut bid, then bids proceed at pre-established bid increments – no more exceptions!" Remember, auctioneers must keep coin, paper money and certificate auctions moving along as quickly as possible.

(For a reality check, think about the commission profit on a cut bid. If a cut bid would amount to $25 and the commission rate is 15%, then allowing a cut bid nets the auction house a mere $3.75. Simply put, it might not be worth an auctioneer's time to slow down an auction.)

Combined auction types. Essentially all major auctions combine mail bids, fax bids, phone bids and internet bids with live auctions. If you cannot attend, then you should feel safe in submitting remote bids. These days, most major houses combine online bidding with their other methods. You must sign up in advance if you plan on submitting online bids. Online bidding often incurs additional commission charges.

If you do not have a fast internet connection, you should probably avoid online bidding. In coin, paper money, and certificate auctions, prices change so quickly that slow systems may not be able to keep up.

Estimated prices. Some catalogs estimate sales prices in low/high price ranges. Read the catalog rules to see if published price ranges relate in any manner to minimum acceptable bids.

Minimum bids. In some live auctions, auctioneers announce minimum starting bids for each lot. While most auction houses clearly list their minimum acceptable bids somewhere in their catalogs, some do not.

U.S. auction houses frequently state that minimum acceptable bids are 60% of the lowest prices in predicted price ranges. If an item has an estimated price range of "$100 to $150," then you can bid as low as $60. Minimum acceptable bids in German auctions are usually the low prices in predicted price ranges.

Many auction houses do not state how they determine minimum acceptable bids, choosing instead to reserve the right to turn down any bids they think are not made "in good faith." If you insist on placing "low-ball" bids, and don't clarify minimum bid policies, the house may simply refuse all your bids. Place fair bids and you cannot go wrong.

Mail bids in competition with floor bids. Many collectors think they will be disadvantaged if they submit mail bids for auctions with live sessions. Not so. While it depends on the house, when lots attract equal floor and mail bids, mail bidders normally win. Some houses also split the difference if mail bids are substantially higher than floor bids. While the mail bid will win, the official hammer price may be only one increment higher than the floor bid. Examine house rules.

Reserve amounts. Sellers often ask auction houses to refuse to sell expensive items if they do not surpass certain amounts. In other words, sellers "reserve" items if they fail to sell at acceptable levels.

Reserve amounts are always kept secret. Experienced auction houses try to make sure that reserve amounts are reasonable, but sellers sometimes prevail with absurd requests. Do not be disappointed when your bid fails to exceed reserve amounts. Just like you can never know the motivations of your bidding competitors, you will never understand sellers' thoughts.

Phone bidding. If you are interested in bidding on expensive items and you cannot attend live auctions, you should consider phone bidding. Most large houses dedicate several people to phone bids. Make arrangements well in advance of the sale. During the auction, your auction house representative will call you a few minutes before your target lots come up for sale. Your representative will help you bid just as if you were there in person.

Commissions. Houses charge buyers' commissions based on the amount of each of your winning bids, not your total winnings. Typical commissions are currently about 15%, with only a few as low as 10%. 20% commissions are becoming more frequent. Stepped commissions are also common. In those cases, houses charge one rate for the first level of purchases and then a lower rate for purchases above that amount. Spink, for instance, charges 20% commission on the first $2000 and then 15% on amounts above $2000.

Taxes, packaging and postage. If you participate in person and take possession of items at the auction site, you must pay sales taxes or valued added taxes (VAT) relevant to that location. Depending on state and country regulations, you may be able to avoid certain taxes by having the auction company ship your winnings. In that case, you will need to balance your tax savings against postage and packaging costs and the difficulty of protecting your purchases during your travels. In either case, make sure you factor your total acquisition costs into your maximum bids.

Viewing lots. When you attend live auctions, make sure to view all lots you are interested in before sales start. Do not rely on catalog photos and descriptions alone. This advice is particularly important when interested in lots containing several items.

Applicable laws and jurisdictions. Every major auction house will specify which laws will prevail in the eventuality of disagreements. Generally, prevailing laws are those of the state or country where the auction takes place. While auction companies state this provision for their own protection, do not bid if you distrust an auction house.

Review your financial circumstances before bidding. I am really serious about this. While unlikely, it is always possible you may win all lots you bid on. This happens more often then you might think, so make sure you can pay for all your winnings before you bid.

Shill bidders. Inexperienced bidders often worry about people running up prices to increase commissions for auction houses. While shill bidding can happen, the risks are not terribly high. State laws are very specific and penalties are very severe, especially considering the limited amount of additional money that auction houses could win in commissions.

It is more likely that shill bidders represent sellers and are trying to force prices higher to benefit sellers and not auction houses. Professional participants are normally astute observers and rarely let shill bidding continue. Auctioneers will stop shill bidding in a heartbeat if they suspect one or more participants are attempting to manipulate prices.

What about eBay auctions? Glad you asked. In my experience, most collectors misunderstand the process. Click here for more explanation of the eBay automatic bidding system.


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Send an email message with corrections, questions or comments about this page. Last updated Oct 3, 2015.


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