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Newsletter #27, March 2006

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Are vintage guitars really good investments?

We've stated numerous times through the years that vintage fretted instruments have proven to be excellent investments, that they often outperform the stock market, and that they are unique among investments and collectibles because you can play them while they are growing in value. While those general statements remain true, the vintage market is at a point where investors need more specific information. A recent article in Vintage Guitar provided some specifics by comparing the performance of an imaginary "guitar index" of 42 vintage instruments with the Dow Jones average over the past 15 years. We would take issue with some of the models chosen to represent the guitar market, but nevertheless, it's a good starting point for discussion. Entire books have been written on how to invest in stocks or real estate, and the vintage instrument market is large enough, complicated enough and volatile enough now to warrant an entire book, so we'll only touch on some of the major points in this newsletter.

First of all, we should note how ironic it is, at a time when the guitar market seems quite volatile with prices on some models rising almost daily, that the Dow has actually been the more volatile of the two markets in the past 15 years, careening up and down while the guitar index has climbed steadily (except for a short flat period from 1991-93).

The second obvious point is that a "guitar fund" made up of a cross-section of models is likely to perform like a diversified stock portfolio, without too much risk and without much potential for explosive growth. In fact, if you had invested in the "guitar index" in 1991, you'd be about even with the stock market for the period covered. If you had started investing in instruments before 1991 (the first year of the "index"), you would probably be happy with the results. The index guitars that cost $153,000 in 1991 could have been bought in 1980 for around $37,550 and in 1970 for around $15,100. Our experience has been that from 1963-75 vintage fretted instruments increased in value as much as 25 percent per year. From 1976-84, guitars went up slightly but not enough to keep up with the high inflation of the period. Beginning in 1985, the guitar market took an upward turn that continued into the period covered by the "index."

However, if you had stepped outside of the index models and invested in Martin dreadnoughts and 000s from the 1930s, Gibson Loar-signed F-5 mandolins and Fender pre-CBS custom color Stratocasters you would have done a lot better than the index - especially in the past year, when prices for several vintage models have tripled. On the other hand, if you had invested in archtop guitars, 1930s Dobros and four-string banjos (other than prewar Gibson Mastertones with one-piece flange), you would not be very happy with their performance. There are certainly parallels in the stock market where, as in the vintage guitar market, the trick is picking the right stock at the right time. Past performance is not a guarantee of future results, no matter if you're investing in stocks or in guitars.

So yes, generally speaking, guitars can be excellent investments. And they have the unique appeal of being an investment that you can hold in your hand and play. Furthermore, if you're a working musician, your investment can be the tool with which you make your living. The only other investment field that can offer that kind of return is real estate - where you can buy a property and then make it pay for itself through rentals.

However, there are some serious downsides to guitar investments that, if we were subject to the rules and regulations that govern the financial world, we would have to include in the small print of a disclaimer:

Expenses. There is considerably more expense involved in buying and selling guitars than with paper investments:
- Insurance: 0.4 to 0.5 percent per year (40-50 cents per $100 of value).
- Storage: instruments need a room with proper climate control and a good security system.
- Maintenance: Even if an instrument is never played during the period of ownership, it will still require cleanup, new strings and setup before it is sold.
- "Brokerage" commission: Expect to pay 10-25 percent to a dealer or even more to an auction house (if you factor in the buyer's premium) to sell your instrument. EBay would be cheaper, but would also require time and effort. There's no guitar equivalent to the stock trader's mouse-click and $7 transaction fee.

Liquidity. Stocks and mutual funds are virtually the same as money. You can't pay for your groceries with a stock certificate, but you can convert stocks and funds into cash in a matter of minutes. And you can usually do it in smaller increments than you could with a guitar. If you need $7500 in cash, for example, you can probably sell off the number of stock or fund shares that would be within $100 of the amount you need. With a guitar collection, hitting the mark of $7500 would require having a guitar with value in the target range, and having it be one that you are willing to part with.

Volatility. The safe, steady growth line of the "guitar index" is deceptive. The instrument market, like financial, real estate and other collectible markets, is segmented. Just as stock in service-oriented companies can soar while tech stocks sink, Strats can soar while archtops sink. And, as Strat buyers found out during the late 1980s after "Stratmania" peaked, Strats can sink, too (although have since recovered very nicely).

The risks in the vintage guitar market are greater because of the small size of the market. The entire musical instrument business in the U.S. - including pianos, band instruments, sheet music, karaoke, etc. - is estimated at only $7 billion annually. Accurate figures for vintage fretted instrument sales are not available, but they are probably in the range of $100-200 million a year. That's tiny compared to the trillions of dollars in stocks that change hands every day on the New York stock exchange. Even in a collectibles market, such as art, a couple of Van Gogh paintings can bring as much as the entire vintage guitar business does in a year.

Segments of the guitar market are so small that they can be destabilized by the infusion of money from just one or two heavy hitters. Japanese collector Akira Tsumura single-handedly drove up the price of tenor banjos when he was building his collection in the 1980s. American collector Scott Chinery's high-profile collection-building in the early 1990s drove prices up on virtually all types of American-made guitars, especially archtop jazz guitars. However, Tsumura's legal problems (from diverting corporate funds for personal use) in the mid 1990s and Chinery's untimely death (at age 40) in 2000 removed them from the market, thereby greatly reducing the demand for tenor banjos and archtops. Prices of tenor banjos and archtop guitars have yet to fully recover.

In the financial world, no individual could exert such a profound influence on a market as these two men did with investments that were probably no more than $10 million. If you went to Antwerp with $10 million, intending to corner the diamond market, you wouldn't cause a ripple. In the late 1970s, when the Hunt brothers (and some wealthy Arab partners) tried to corner the market on silver, they spent billions of dollars; silver prices rose dramatically, but then fell almost as dramatically when the "silver bubble" burst, sending the Hunts into bankruptcy and into criminal court. If the Hunts had set their sights on the guitar market, however, they could have owned it. Today, if a handful of investors accustomed to spending millions on stocks, real estate or collectibles, happened to read one of the articles in Forbes or other investment publications touting vintage guitars as a new investment opportunity, and they decided to throw that kind of money into the guitar market, we wouldn't know what hit us. Only after the market leveled off, which would prompt them to cash in, wave goodbye to vintage guitars and look for investment opportunities in other markets, would we know what happened.

The guitar market is also small in terms of supply. There's never a day when there are no shares of Microsoft for sale. Even in a collectibles market, such as art, we suspect that there is seldom a time when some work by Picasso is not for sale. In fact, a prolific artist like Picasso could easily turn out drawings at the same rate that Martin made guitars in the 1930s (about 10 a day). And the dollar value today of Picasso's output for any one year would dwarf the dollar value of all the guitars that Martin made in that same year. While there are millions of shares of MicroSoft and thousands of works by Picasso, there are only around 150 Stromberg guitars significant value, 250 Gibsons signed by Lloyd Loar, and 91 Martin D-45s. There are 300 million people in the U.S., and there aren't enough good vintage instruments for everyone to own even one.

Guitars are fine investments - but only for people who understand the guitar market. Neophytes in the stock market typically invest in mutual funds, letting experts pick their stocks for them, but to date there is no comparable fund in the guitar world. We can compare the "guitar index" to other types of investments all day long, but in our opinion the guitar market does not have the potential to replace these other markets as an investment option for the masses. However, if you understand it and enjoy it, the guitar market can be uniquely rewarding.

George Gruhn and Walter Carter