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 obvious for several years that the prices for the collectible railroad certificates I track have been collapsing. It was equally obvious that a significant "disconnect" had developed between real price levels and the price levels collectors and dealers thought still existed.

That disconnect is severe. I think it reflects the severe lack of communication between participants. Unlike the huge stamp, coin and paper money hobbies, our hobby has a tiny communication network. Those other hobbies have weekly and monthly publications that communicate prices; our hobby does not.

The nature of pricing is further complicated by the tiny population of collectible certificates. Items with populations below 1,000 are considered very scarce in many other other hobbies. Certificates with populations of over 1,000 are considered common in our hobby.

Using the "market basket" concept to measure prices. A huge number 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 certificates with relatively rare appearances often represent the numbers of catalogs mailed more than true worldwide 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 would fit in the "market basket"? I set out to find a market basket 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 fairly frequently,
• had appeared over 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" diminished to 43 varieties.

See all the certificates included in the market basket. I show images of all certificate varieties either as a group of images or 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 certificate sell for $200 in one sale and $40 in the next. The reasons for such radical price behavior can be rationalized by all sorts of explanations, but the fact remains that the prices of certificates are highly "spikey." We can smooth out extreme price swings by using a moving average.

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. Certificate prices tend to be too variable for a 3-sample moving average. I would prefer to use a 10-sample moving average, but there are simply too few sales recorded.

Measuring the value of the "market basket." I calculated 5-sale moving averages for each of the 43 certificate varieties through time. In other words, each time a new certificate sale was recorded, its price was averaged with the four previous sales. Since sales occurred randomly, moving average values closest to the end of each year were added together. The total of all moving averages for all varieties gave 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. Six years later, the value of the market basket of certificates stands at $4,559, representing a decrease of 33%!

Analyzing the index. It is important to realize that the index does NOT measure the entire breadth of the market nor can it ever. There is no price reporting system and I cannot possibly find all auctions and transactions that take place. With 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 hobby prices have suffered rather dramatic down-trend in the last six years. Most dealers blame the decline on eBay and I heartily concur. We could argue about the reasons for low eBay prices all day, but our agreement is completely unimportant. We cannot do anything about the price decline except try to understand it. The current price trends suggests several important conclusions to me. (As of Feb 28, 2010.

1. 1) Serious price declines appear to be tapering off. We do not seem to be at the bottom of the market, but I doubt we will experience serious price declines from here.
2. 2) The high prices of a decade ago are gone. Typical market behavior suggests price recovery takes longer than price declines.
3. 3) Low auction sales percentages represent overly aggressive price estimates. Recent high minimum bids reflect price levels of five or ten years ago with commensurate low sales percentages. Sellers who want to sell 60% to 75% of their lots will need to reexamine their pricing assumptions.
4. 4) Occasional high prices WILL continue to occur, but do not yet represent a turnaround. I expect to continue to see sporadic and unpredictable high prices, especially in Europe, but expect them to continue to be 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 chart represents a market basket of 43 certificates from North American railroads. I imply no correlation to certificates from other specialties or from other countries.