Document grading standards

I fervently believe in grading standards, and have long been an advocate of accurate and highly predictable grading.

However, I see little evidence that today's stock and bond collectors are concerned with grading. And I think that, for the foreseeable future, they are justified with that view.

Huh?

Stick with me, and I will explain. Let's start with "THE" rule. Every collector in every hobby embraces the relationship:

higher quality = higher demand = higher price

Obviously, certificate collectors want high quality certificates. So why are they so unconcerned about grading?

It is very simple. Low population.

First off, there are limited numbers of collectors interested in any particular certificate at any point in time. That is good, because the numbers of certificates available for collecting is extremely limited. In stock and bond collecting, the search for rarities is simply more important than quality.

I truly believe that quality is very important to collectors. Just not as important as acquiring rarities.

Ask yourself, all other things being equal, which would YOU rather have? A very rare certificate in crappy condition or a very common certificate in the best possible condition?

Most hobbies are typified by huge numbers of collectibles with small percentages of rarities. In contrast, the stock and bond hobby is typified by low numbers of collectibles and high percentages of rarities.

In truth, we have an intriguingly large number of varieties of certificates available for collecting. Unfortunately, a dramatically high percentage of those varieties are exceedingly rare. The world's most common certificate variety would be considered scarce in many hobbies.

To further explain, let's view our hobby in comparison with others.

Grading is most important in hobbies where there are large numbers of participants and large numbers of collectibles. The coin hobby is a perfect example.

Between 1794 and 1935, the United States government minted approximately 839 million silver dollars. Depending on your definition, there are approximately 10 distinct varieties and 5 sub-varieties available to collect. Each of those varieties and sub-varieties can be further subdivided by date.

Coins of certain specific dates can be exceedingly rare. Nonetheless, there are sufficient numbers of silver dollar coins to go around. Anyone who wants to collect American silver dollars can.

It is the width of the collectible spectrum that is supremely important in keeping the coin hobby popular. There are so many collecting possibilities, even within specific years, that differentiation is necessary. Grading fills that role.

Grading differentiates otherwise identical coins. Grading helps establish values. There are millions of coin collectors and they all accept the premise that higher quality coins are more desirable. To assure predictability within that premise, grading companies have evolved whose sole purpose is insuring accurate grading using stringent standards.

Grading is less important with extreme rarities. Of the millions of coin collectors, only a select few are sufficiently wealthy to specialize in collecting extreme rarities. At that level, one can notice that the pursuit of rarity outweighs the pursuit of quality.

The "King of American Coins" is the 1804 silver dollar and there are fifteen examples known. Essentially all American collectors would love to own one, but only a few are rich enough. I ask, would any collector ever turn down an opportunity to buy one of these coins based on quality considerations alone? While collectors always want to spend the least amount possible, they know they will need to spend between one and four million dollars to acquire an 1804 silver dollar in any condition.

Even rarer is the 1913 Liberty head nickel with only five examples of are known. All Two are in museums. While all examples are proofs, some are better than others. Ask any advanced collector whether quality will be a serious consideration when the next 1913 Liberty head nickel comes up for sale.

Maybe you don't realize it, but there thousands (!) of examples of railroad stocks and bonds that are rarer than either of these two fabled coins!

Grading in the stamp hobby is an interesting study. Stamp designs change many times per year, so that hobby has vast numbers of varieties to choose from. Since the government has printed billions of stamps, the hobby has extremely wide breadth. With so many collectors having such a wide range of collecting possibilities, everyone agrees that higher quality stamps are more desirable.

While collectors acknowledge the better grade stamps are more valuable, grading in the stamp hobby is less mature than in the coin hobby. Experts acknowledge that this lack of absolute grading standards adversely affects values. Since collectors are less confident about the relationship between grade and value, they pay less.

On the other hand, the absence of a serious push toward grading standards reflects the reality that the overwhelming majority of buying and selling takes place in the middle grades. Average stamps deserve average prices.

But, at the highest echelons of rarity, we again see that stamp collectors defer quality considerations for rarity.

One of the rarer US stamps is the inverted 1918 20¢ airmail (Scott C3a). Collectors accept the theory that only one sheet with the biplane mistakenly printed upside down escaped quality control and made it into the general market. One stamp of the original sheet of 100 was used. The remaining "Inverted Jenny" stamps were sold to collectors.

Stamp collectors definitely try to pay less for stamps that have been hinged. But, even with that consideration, the entry price for owning one of the 99 unused inverted Jennys is still around $100,000 each. Quality may be seriously important, but obviously, not as important as acquisition of this great rarity.

There are only 100 "Inverted Jennys" to go around to all the hundreds of thousands of stamp collectors on the entire planet. Yet, those stamps are more common than probably 99% of all collectible railroad stocks and bonds!

What is so different about the stock and bond hobby? Unlike the coin and stamp hobbies, stock and bond collecting is typified by large numbers of collectible varieties with most having very low populations. Average stocks and bonds are much, much scarcer than average coins and stamps. There are too few certificates to go around so there is little demand for consistent and accurate grading.

Grading and quality matters most when collectors have choices between several items. The fewer choices available, the less collectors care about quality.

Most certificate varieties are typified by such low populations that there are great variations in prices between purchases. Grading concerns are completely overwhelmed by rarity. It is not uncommon to see "upside down" prices between sales. By that I mean a low grade item in one sale will commonly sell for more than a nearly identical high grade item in another sale.

Will grading ever become popular for the stock and bond hobby? The low numbers of collector and the high rarity of certificates makes it very hard to predict. There are simply too few certificates to go around and too few collectors to force prices dramatically higher.

Conceivably, demand for dependable grading will grow as the hobby matures. But I think that maturation may take another couple of decades. When that demand develops, it will likely depend on two major factors.

1) Hoards of "common" certificates must be disbursed to help eliminate the uncertainty beginners feel. I get questions all the time like, "How can one dealer offer this certificate for $8 while another asks $30?" I don't even tell them that I can spot those same certificates selling in bulk for $1 each. Obviously, grading accuracy cannot become a concern until such extreme price differentials disappear.

2) The demand for "common" certificates must pick up. That can only happen when the population of interested collectors grows. Collectors who purchase extreme rarities hardly ever express concerns about quality, so the necessity for grading will likely develop in the low and middle parts of the rarity spectrum. Until "common" certificates become popular as collectibles, the need for grading standards will remain minimal.