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Established 1970

Newsletter #23, March 2005

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Surviving the shark feeding frenzy

It has been my observation over the past five years that competition to buy premium guitars, banjos, and mandolins has become more and more fierce. The 'shark lines' at the entrance to guitar shows have become a virtual blood bath, but the number of clean original true vintage instruments being offered for sale at the shows has diminished. Under this scenario prices can become highly speculative.

In the past two years sunburst Gibson Les Paul Standards of the late 1950s, pre-World War II flathead Gibson Mastertone banjos, and pre-CBS Stratocasters have been subject to such a mania that asking prices have as much as doubled and availability of clean original examples for sale has dwindled. It used to be possible to go to a guitar show and see numerous pre-CBS Fenders, 1950s Gibson Les Pauls, and early Gibson and Martin guitars and mandolins in fine original condition as well as a good variety of pre-World War II banjos, but today even at guitar shows large enough to feature several thousand instruments on display, I frequently find that there are virtually no unadulterated pre-CBS Fenders, pre-World War II Martin or Gibson flat top guitars, 1950s Les Paul Standards or Customs, or pre 1960 Gibson Mastertone banjos on exhibit in the entire hall. The vast majority of instruments brought in by the public for sale at these events are either recent issue utility grade instruments or pieces that have been highly modified such that they would have little appeal to collectors.

While fine vintage instruments are in short supply and being vintage by definition no new ones are being made so the for sale supply is finite, it is my opinion that the shortage experienced at guitar shows and being offered to the public today is not due to a diminished number of instruments as much as the fact that most of the prime examples are now in the hands of collectors who do not wish to sell them and that when and if such pieces are offered for sale the dealing is often done privately between collectors rather than at guitar shows or posted on highly visible internet websites. Many of the finest instruments acquired by dealers are sold for top-dollar prices to clients who prefer for these items to receive no website listings or other promotion. In the past a few collectors such as Akira Tsumura in Japan and Scott Chinery in New Jersey amassed notable collections and promoted themselves heavily, however, today I am aware of numerous collectors who have amassed millions of dollars of instruments each, but have managed to stay virtually "under the radar" such that they are virtually anonymous.

While major manufacturers such as Martin, Fender, Gibson, Rickenbacker, Gretsch and Epiphone have made many hundreds of different models over the years, the fiercest competition among dealers and collectors has been for a very limited number of models which are essentially the same ones that have been the focus of collectors and dealers for at least the past 35 years. Gibson Les Paul Standards of the 1950s, pre-CBS Fender Stratocasters, Telecasters, Precision basses, and Jazz basses, pre-World War II Martin and Gibson dreadnought and jumbo size guitars, pre-World War II Gibson F-5 mandolins, and pre-World War II Gibson flathead Mastertone banjos as well as Gibson ES-335s with patent-applied-for humbucking pickups comprise the short list of the most sought after instruments and those which evoke the greatest shark feeding frenzy response when they are offered on the market. The market for these instruments has been so volatile that it was difficult to quote a current market rate, let alone make any predictions for what they would cost six months or one year later.

While in my entire experience collecting guitars from 1963 to the present I have never seen prices escalating as rapidly as they have in the past two years, it should be noted that this dramatic rise has occurred almost exclusively in the few most sought after models previously mentioned. Much of the rest of the market has performed in a more normal manner, certainly keeping up with inflation but not participating in the feeding frenzy to the point of near mania. A notable exception would be archtop acoustic jazz guitars and four-string tenor and plectrum banjos other than Gibson, which are sought after for five-string conversions. These instruments appear to be holding their own, but in many cases are selling today for less money than when they were the subject of their own shark feeding frenzy approximately 10 to 15 years ago. It is worth noting, however, that Fender Stratocasters went through an earlier mania during the 1970s and prices went down significantly shortly after Guitar Player magazine published a cover story entitled "Stratmania." Needless to say, prices today are much higher than at the height of the earlier Stratmania, but it took several years for the market to recover. Similarly, prices on D-size Martins peaked in late 1992 and then went down dramatically in 1993. Again prices today are higher than in late 1992, but it took several years for that market to recover. Investors who use common sense will seldom suffer in the long run, but buyers who jump into a feeding frenzy may not make the quick killing they expected.

While many dealers and collectors seem to be of the opinion that prices can only go up, it is my opinion that feeding frenzies do not necessarily result in either the best decisions or long term stability. The tulip bulb craze in Holland during the period 1634-37 is an excellent example of what can happen when the market enters a period of mania. For a brief period the price of a prime tulip bulb went as high as the cost of a house. When the market crashed shortly thereafter many investors were ruined.

See the following links:
www.businessweek.com/2000/00_17/b3678084.htm
www.investopedia.com/features/crashes/crashes2.asp
www.jwafinancialgroup.com/articles/the_tulip_bubble.html

One might argue that tulip bulbs can be reproduced by cultivating tulips, and that they have a limited lifespan compared to a fine musical instrument. Fine vintage instruments and other vintage collectibles are no longer in production so there is a finite supply giving them added appeal. That same logic, however, could be applied to real estate. In a bubble economy such as Japan experienced during the mid 1980s through the mid 1990s, real estate prices were bid up astronomically high not only in Japan, but also by Japanese buyers adding to the frenzy in Hawaii, California and New York City. When the bubble burst, real estate prices dropped dramatically and many investors lost enormous sums of money. While the real estate market has recovered to some extent in the USA due to low interest rates, it should be noted that what goes up does not necessarily have to stay there. It has been my experience during the past 40 years that instrument prices have periodically escalated rapidly and then plateaued before rising again, but with the exception of jazz guitars and tenor and plectrum banjos, I have not seen a sustained downturn. On the other hand, it should be noted that during my entire 42 years of collecting, I have never experienced a period in which prices of prime instruments appeared to be rising as rapidly or created such as a manic feeding frenzy as they have for the past two years.

Along with rapidly escalating prices and a frenzied market, I have observed a significant increase in altered instruments as well as outright forgeries, especially in the case of pre-CBS Fender instruments and Gibson Mastertone flathead banjos. Since both Fenders and banjos are built virtually like an Erector set, in which parts can be mixed and matched and in which replica parts are readily available, these instruments are more prone to alteration and forgery than acoustic Martins and Gibsons, solidbody or hollowbody glued-in-neck electric guitars, or mandolins. When the price of an original pre-CBS Stratocaster was only a few hundred dollars there were very few good forgeries, but today when these instruments can sell for tens of thousands of dollars there is a far greater incentive to produce such instruments. In addition, 25 years ago and earlier there were not nearly so many skilled luthiers as we have today. It used to be that it was very easy to tell a refinish job from an original; if it looked professional, it was original whereas if it looked like barn paint applied with a broom, it was a refinish job. There was very little in between. Today there are numerous individuals with considerable experience producing finishes which match factory quality. Some of these individuals are going as far as to artificially age finishes with lacquer checking and faded sunbursts which require an expert to distinguish from original. Custom-color Fenders in particular must be studied with the greatest of care. Much as violin dealers and collectors rely not only on their experience in examining instruments, but also are concerned with provenance to establish the history of an instrument, this is becoming increasingly more important with fretted instruments. It has been our experience that in recent appraisals we have done with careful in-person inspections that a very high percentage of the purported custom-color Fender instruments have turned out to be either refinished or forgeries, and that the majority of purported Gibson Flying Vs and Explorers we have been asked to appraise recently have not been authentic. Pre-World War II one-piece flange flathead Gibson Mastertone banjos have been copied for many years and numerous raised-head tone ring Mastertones have been converted over the years as well. This problem continues to grow as prices escalate for original examples.

It should be noted as well that fine original instruments are significantly older today than they were when I first started collecting. In the mid 1960s it was easy to fine pre-World War II acoustic instruments which had not been highly modified and many of them did not show great wear. The electric guitars which we consider to be vintage collectibles today likewise were not old in the mid 1960s. When I started collecting guitars even a Broadcaster was only a 13- year-old guitar and L-series number Stratocasters were brand new. Today acoustic and electric "golden era" instruments which have been used over the years typically will show enough wear that even if they have been well cared for, they may need refretting, neck sets and other such maintenance and adjustments to be in good playing order. While pristine, virtually unplayed, original instruments are highly sought by collectors, it is unrealistic to expect that many such examples will turn up today. Just as the finest violins of the 1600s and 1700s have all been modified to modern specifications and have been restored over the years but still are highly sought by collectors and investors, it is reasonable to assume that the same will be true for fretted instruments.

At Gruhn Guitars we have a staff of eight full-time repairmen and are trying to hire more to keep up with our needs. We are not taking in outside repairs. The sole purpose of our repair shop is to service instruments to get them ready for sale. It takes anywhere from a few minutes to an hour or two for us to buy an instrument that may need anywhere from 30 minutes to 100 hours of setup or restoration before it is ready for sale. Whereas new instruments are ready for display and sale immediately upon arrival, the vast majority of vintage instruments are typically ready for sale only after set up and restoration work. Regardless of how many vintage instruments we are able to acquire, the speed at which we are able to put them on the market is determined by the amount of work which can be turned out by our repair staff. Repair and restoration requires great skill and is extremely time consuming and costly when done properly, but the Gruhn repair staff sets us apart from most other dealers.

I consider vintage fretted instruments to be a better investment in most cases than money in the bank or in most mutual funds. However, in today's volatile market in which prices on prime collectibles have escalated more rapidly than ever before, I urge buyers to use common sense and good judgment rather than to participate in a shark feeding frenzy. Unlike the Dutch tulip bulb market, the vintage instruments which are most sought after today are the same models which have been considered most desirable for the past 35 to 40 years. I am not anticipating a market crash in the fretted instrument market akin to that of the tulip bulb crash, but I would urge collectors and investors not to expect market prices to continue to escalate on the most desirable items at the same pace in the coming five years as they have in the past five. It is my opinion that good investment opportunities remain in many models which have been overlooked in the recent feeding frenzy. Early Martin 0, 00 and 000-size guitars, Gibson hollowbody electric guitars, early Gibson SG model solidbodies, Gretsch Chet Atkins models and Duo Jets, Gibson pre-World War II mandolins other than F-5 models, fine banjos by Fairbanks, Vega, Bacon & Day, Paramount and Epiphone, and vintage Rickenbacker guitars are all very fine instruments which are historically interesting, aesthetically pleasing and likely to prove excellent investments in the future. Acoustic arch top jazz guitars, which have been relatively stagnant in value for the past ten years, have been holding their value and, in my opinion, are likely to escalate in value and be fine investments in the near future.

In managing Gruhn Guitars, I have done my best to avoid the shark feeding frenzy, but rather to take an approach more like the tortoise rather than the hare. I am leery of get-rich-quick schemes and I do not anticipate that anything that has doubled in price in the past one or two years will continue to escalate at the same pace, but I remain firmly of the opinion that a diversified portfolio of vintage fretted instruments is not only better than money in the bank, but has far greater utility and is more fun to own. After 35 years running the shop and over 40 collecting fretted instruments I have seen many ups and downs in the economy and the marketplace, but instruments which cost only a few hundred dollars when I started out are almost all worth vastly more now, some such as the 1959 Les Paul Standard having risen from as little as $100 as a used guitar in 1963 or '64 to over $200,000 today for a fine example. Needless to say, the vast majority of instruments have not risen to this great an extent, but virtually all good-quality vintage fretted instruments today sell for at least ten times as much as when I first opened the doors to my shop. My advice to my customers has been consistent over the years: Buy and invest in instruments which not only are historically significant model in good condition, but choose instruments which you truly enjoy owning and playing. Following this program you will have the best of both worlds since the instruments are an artistic pleasure to behold, the music will enrich your life, and your financial investment will be secure.

Sincerely,
George Gruhn