Newsletter #16, May, 2004

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Investing in vintage instruments vs. the stock market

I am frequently asked, "How much will my guitar be worth in 10 years?" Some customers think I can tell them with a high degree of certainty how much their guitar will be worth 20 years from now. Not long ago one customer asked me after an appraisal how much his Les Paul Custom would be worth in 50 years. When I pointed out that 50 years from now if I were still alive I would be 108 years old and he would be of similar age, rather than retreating from his position he stated that he really wanted to know how much it would be worth when it was handed down to his grandchildren. No rational investor would expect his stockbroker to be able with any reliability to tell him how much Google, eBay or stock will be worth 5 years from now or even if the companies will still be in business 10 years from now, but guitar owners seem to be of a different mindset. Many of them feel that guitars should appreciate in value at a predictable annual rate. While I am unable to offer any assurance that guitars must automatically appreciate, I can at least say that in my own 41 years of personal experience collecting and dealing guitars I have seen periods in which they went up at a very significant pace and other times in which the fretted instrument market in general plateaued and prices remained relatively steady. I have seen certain models go down in value after a fad ended, but I have yet to see the market as a whole plunge. This is unlike the stock market, which can have wild gyrations both down and up. In my experience, the guitar market has had periods of growth and periods of plateau. While I have never seen a market index calculated to show growth investment potential of fretted instruments versus a stock portfolio, I am inclined to think that if one put an equal amount of money into a broad spectrum portfolio of fretted instruments and stocks in 1970 and kept both until today, the fretted instruments would probably be worth fully as much if not more than the stocks. It should be noted that there are far fewer people, of course, investing in fretted instruments than in the stock market. If more people were to invest in fretted instruments it would tend to drive up prices, but the fact remains that while there are trillions of dollars of stocks on the market and there is a virtually limitless supply of stocks that can be issued, fretted instruments of fine quality are in limited supply such that regardless of how high prices may be driven, there simply are not enough guitars, banjos, and mandolins in existence to support a market even remotely approaching the size of the stock market.

When I started collecting and dealing, the folk music boom of 1959-63 was nearing its end. During this time prices of vintage acoustic fretted instruments were rising rapidly. During the 1950s these instruments were in extremely low demand and prices were absurdly cheap. When the folk boom hit, market values of guitars, banjos and mandolins rose at a very strong rate, but it should be noted that when going from almost nothing to a little bit, each dollar is a large percentage increase. The period 1964-69 was the era of Beatles and Rolling Stone- type rock and roll which took the USA by storm. Although the folk boom ended abruptly after the Beatles hit, demand for acoustic instruments remained relatively steady and prices continued to rise, although at a somewhat slower annual rate than during the folk boom. Vintage electric guitar prices took off like a rocket. Again, however, it should be noted that when going from virtually nothing to something, each dollar accounted for a larger percentage increase than it would today. The period from 1970 through '75 was the great folk-rock era typified by groups such as Crosby, Stills, Nash and Young. For the first time the acoustic market and the electric markets merged. Prior to 1970 there were collectors of acoustic instruments and collectors of electric instruments, but the markets were essentially separate. From 1970 onward rock and roll money was injected into the acoustic market. Many acoustic collectors found that they were being outbid by rockers. From 1970 through '75 vintage fretted instrument prices escalated at 20-25% per year. For the first time, some of these instruments started to sell for $5,000 or more. Prior to this time collectors did not need to be especially wealthy. With perseverance during the 1950s or '60s it was possible to assemble a magnificent collection without putting out a great deal of cash, but during the folk-rock era it became clear that serious collectors would need cash as well as knowledge and perseverance.

While the bulk of my customers were American from 1970, when I opened my shop, through 1975, as early as my first year in business the shop was visited by Japanese and European tourists who were very much interested in American instruments. By 1974 I was doing sufficient business in Japan to warrant a trip to meet customers and expand business there. It was a revelation to me to find that at that time there were at least three bluegrass clubs in Tokyo, several Japanese bluegrass magazines and very sophisticated guitar shops with a fine selection of both acoustic and electric American vintage instruments. During the '70s we did a nearly equal volume of business in western Europe and Japan. While the Japanese and Europeans did not simply take over the market, they were a very significant portion of our business.

The folk-rock boom ended abruptly in 1976. The majority of our customers were of Baby Boomers who by that time were approaching 25 years of age. The typical male player or collector at that age was occupied by wife, children, house, car and upward mobility in his job. When he came home from work and after spending time with his family, he was often too tired to play. and if he did. it made noise which woke up the children and upset the wife. My customers were dropping out of the scene. Generation X didn't seem to be nearly so interested in guitars as the Baby Boomers had been. Vintage guitar prices seemed to stagnate rather than go up as they had before. While the American market seemed to cool down, Japanese and European buyers continued to purchase instruments. Although many of these buyers were of the same age as my American customers, the supply of vintage American fretted instruments in Europe and Japan was far less than in the USA. Our foreign customers were hungry for fine quality guitars, banjos and mandolins and the Japanese and European economies were growing more rapidly than the USA economy at that time. By 1979 as much as 40% of my business volume was export which was divided nearly equally between Japan and western Europe.

The early 1980s were a very rough time for the vintage guitar market. During Ronald Reagan's administration when Paul Volcker was the chairman of the Federal Reserve interest rates went over 20% prime and the economy was plunged into a deep recession worldwide. As a consequence of high USA interest rates, the dollar exchange rate escalated to the point where our foreign customers were no longer able to buy American instruments in great quantities. While vintage instrument prices did not plunge, they stagnated and did not keep pace with the rapidly rising inflation in the economy at large. Compounding the difficulty in the fretted instrument market was the fact that the music scene was in the doldrums. Unlike the period of the folk boom of 1959-63, the rock boom of 1964-69, or the folk-rock of 1970-75, the period from 1976 through the early 1980s seemed at best listless. Funk and punk and pop and disco and New Wave and other movements came and went but none seemed to have great staying power or depth. When Eddie Van Halen and heavy metal rockers appeared on the scene in the early 1980s, this new group of players did virtually nothing to help the vintage market. They played a new style of music and wanted a new generation of guitars which were quite different from the vintage models. These players wanted Floyd Rose or Kahler tremolos capable of dive bomb effects and they wanted a new radical look in their guitars as well as wiring options which were simply not available on vintage instruments. From a vintage instrument dealer's point of view at that time it seemed to be the so-called "perfect storm" of events converging against us. The economy stank, interest rates were high, and the dollar exchange rate was too high for foreign customers. The Baby Boomers had dropped out of the scene and Generation X wanted a new type instrument very different from anything available vintage and which was in fact the antithesis of a fine vintage guitar. I certainly didn't want to sell unadulterated vintage Fender or Gibson electrics to people who would hot rod them with Floyd Rose tremolos or new-fangled electronic systems. This was without a doubt a most difficult period in the history of Gruhn Guitars and many other vintage dealers.

Fortunately for us, starting in 1984 Baby Boomers reentered the market when they had their mid-life crisis as they approached 40 years of age. They bought little red sports cars, tennis and racquetball equipment, guitars and other toys. These people grew up wanting vintage instruments, but now at middle age they finally had both the leisure time and the money to be able to afford and enjoy them. The market for fine quality guitars, banjos and mandolins took off like a rocket and continued to escalate at a rapid rate through 1992, at which time many boomers had a second life crisis as they reached their late 40s and saw their 50th year approaching. Their new crisis was a realization that they had not been putting money aside for retirement, which precipitated a frenzy of investment in stocks, bonds and real estate. At about this same time our government actively started promoting IRA accounts, 401k's, and other such investments. Trillions of dollars poured into the stock market resulting in rapidly escalating stock values. When it became increasingly easier to make money in paper investments, some of the cash that had been pouring into the fretted instrument market was diverted. In early 1993 I noted a distinct drop in demand for high-end vintage guitars such that prices plateaued. Whereas a guitar portfolio would have appreciated more rapidly than stocks or bonds from 1970-75 and would probably have done at least as well or better than the stocks from 1976-80, from 1981-84 stocks would have done better than guitars as an investment. From mid 1984 through 1992 a good portfolio of fretted instruments would almost certainly have done better than the same amount invested in a broad spectrum of stocks, but from 1993-99, while many fretted instruments did relatively well, it would have been easier to make a sizable profit in the stock market. It has been my observation over the years that when it is extremely easy to make a profit in stocks, bonds or other paper investments, money tends to get pulled out of the market for hard goods such as guitars. Musicians will continue to play regardless of the economy, but collectors may scale back. From 1980-83 and to a somewhat lesser extent from 1993-99 guitars looked like a much less certain investment than stocks or bonds. In addition, guitars require proper storage conditions, need to be insured and need maintenance. While a collector may greatly enjoy his instruments, if they simply hold a steady value while requiring storage, maintenance and insurance at the same time at which stocks or other paper investments go up 15-20% a year, from the investor's point of view the musical instrument collection is suffering a loss compared to moving the money elsewhere.

As I am sure all my readers are well aware, the stock market took a dramatic downturn in the year 2000 and has not yet proven to be "easy money" since that time. It is my personal opinion that the downturn came not only because prices had been bid up too high, but because the Baby Boomers as they approached 55 years of age had another turning point in their lives. They started to slow down. Some took early retirement. Today the oldest Baby Boomers are not far off from the 59 1/2 years of age at which they can start drawing money out of their IRA accounts without penalty. While investors in the stock market have lost an enormous amount of money from the year 2000 to the present, those who put money into vintage fretted instruments during the same time period have fared extremely well. Vintage Fender Telecasters, Stratocasters, Precision basses and Jazz basses have gone up dramatically in price since 2000. Many have doubled or more. 1950s Les Pauls, especially mid 1958 through 1960 sunburst Les Paul Standards, have proven to be spectacular investments. Beautifully figured curly maple-topped '59 Les Pauls are now selling for prices in excess of $200,000. During this same time period, vintage acoustic instruments have also done incredibly well. Pre-World War II flat-head Mastertone banjos with one-piece flanges are bringing several multiples more than they did in the year 2000. A clean original tenor flat-head TB-3 Mastertone made during the 1930s can bring $50,000 from players who want to convert it to five-string. Original five-string Style 3's now sell for as much as $65,000 to $75,000. Higher grade Mastertones such as the Style 4 and Granada are bringing even more, with original five-strings commanding figures of as much as $100,000. The market for pre-World War II Gibson F-5 mandolins has also been spectacular during this period. In the year 2000 a Loar-signed F-5 made from mid 1922 through December 1924 would have sold for $40,000 to $45,000, whereas today they are bringing as much as $125,000. Martin flat-top guitars made from the 1920s through the 1960s have also been doing exceedingly well. While the vintage fretted instrument market has been one of the most stellar investment opportunities of any kind from the year 2000 to the present, D'Angelico and D'Aquisto and some other high-end acoustic arch top jazz guitars have not fared nearly so well during this period, nor have fancy tenor and plectrum jazz banjos other than Gibson Mastertones (which are bought primarily by bluegrass players who want to convert them to five-string). While this small segment of the market has not escalated in price recently, it should be noted that they had been bid up in a virtual frenzy during the early-to-mid 1990s such that a "correction" was almost inevitable. Fine quality vintage archtop guitars such as Gibson L-5's, Super 400's and Epiphone archtop guitars such as the Triumph, Broadway, Deluxe and Emperor have fared quite well in recent years and the market for mid-grade tenor and plectrum banjos suitable for professional use on stage or in the studio has held its own quite well.

It should be noted that whereas during the 1970s both Japanese and western Europeans competed on a virtually equal basis for a significant portion of the fretted instrument market such that prices were determined globally, the influence of foreign buyers has varied over time. During the early 1980s when the US prime rate of interest was high and the dollar exchange rate was unfavorable to foreign buyers and the world economy was in recession, both the Japanese and Europeans dropped out of the market and bought far fewer vintage fretted instruments than they had in the past. In 1985 economic conditions changed and the US dollar went down relative to foreign currencies. It was my experience that the Europeans did not come back in force, but Japanese investors took on such a dominant role that throughout much of the mid 1980s to late 1990s prices of American fretted instruments were determined more in Tokyo and Osaka than in the USA. The Japanese scoured the inventories of vintage guitar dealers in the USA as well as in Europe and became a dominant presence at many vintage guitar shows in the United States. Even after the Japanese "bubble economy" burst in the mid 1990s their demand for vintage guitars remained strong. However, eventually economic conditions in Japan curtailed much of their aggressive buying of prime high-end, collectible, American fretted instruments. Japanese economic conditions combined with an aging Japanese Baby Boom demographic and a rise in Japanese Generation X and Y buyers with less money and different interests resulted in a change in priorities for many Japanese guitar dealers. While there are still plenty of Japanese buyers coming to USA guitar shows and checking American dealers' websites, most of these buyers are now concentrating on late-1960s through mid-1980s instruments, which have nostalgic appeal to Generation X and Y buyers and cost far less money than the true golden era classic acoustics of the pre-World War II period or the electrics of the 1950s. Whereas in the past a very significant portion of my business as well as that of other vintage dealers was export, today the market is clearly dominated by American buyers. Rather than seeing many of our finest instruments being crated up for a new life overseas, today we are seeing many fine American instruments sent overseas during the 1970s through the mid '90s coming back home due to far stronger market conditions here than abroad.

I still can't tell you how much your guitar will be worth 5, 10 or 20 years from now, any better than your stock broker can tell you how much an individual stock will sell for at that time. No doubt there will be future economic ups and downs and markets will be affected by changing fads and demographics as the Baby Boomers age upward and Generations X and Y take over. Hindsight can still be far more clear than prognostication. I can at least say that the market has done exceedingly well from 2000 to the present and seems to be vibrantly healthy today.

George Gruhn