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Newsletter #21, December 2004

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Investing in fretted instruments

One of the most frequent questions I receive is "What instruments do you recommend for investment potential?" A close second is "How much will my instrument be worth five or ten years from now?"

After dealing and collecting vintage fretted instruments beginning in 1963, it has been my experience that hindsight is far clearer than my predictive abilities. Just as a stock market analyst can plot market trends over the past 100 years and explain many of the ups and downs in the economy and investment opportunities, but still not be able to tell what a particular stock will be worth five or ten years from now (or even next week for that matter), I am keenly aware of market trends in the fretted instrument market for the past 50 or more years, but cannot tell you with any great degree of certainty how much a pre-World War II Martin D-28, mid-'30s Gibson flathead Mastertone banjo, Loar-signed Gibson F-5 mandolin, 1952 Telecaster, 1950s Fender Stratocaster, or late-1950s Gibson sunburst Les Paul Standard will be worth five years from now. These particular instruments have gone up in value very substantially in the past five years. While these are all models that have a long track record of desirability, those who have been able to buy and hold them over the past five years have seen a greater appreciation than I would have anticipated had I been asked early in the year 2000.

As I have written in previous newsletters and articles, it is my opinion that fretted musical instruments have proven to be extremely good investments over the years. They have frequently fared especially well during periods in which it was difficult to achieve good investment returns in the stock market. When stocks and mutual funds are booming and appear to be "easy money," musical instruments, which require physical space for storage and need maintenance and insurance and which do not provide dividends but only yield a return if they are sold, may seem to be less attractive. From 2000 to the present when stocks and mutual funds were certainly anything but "easy money," investors who were able to get out of the stock market with a significant amount of their cash still intact were looking for other investment opportunities and frequently opted to invest in musical instruments, art and other hard commodities. Musical instruments have the obvious added bonus of being beautiful to behold, fun to play and for professional musicians can be a source of income when they are played. While I cannot state with any certainty exactly how much appreciation will occur in the fretted instrument market over the next five to ten years, it is clear that prime vintage instruments have appreciated tremendously during the past five years and are likely to do well in the future.

My experience over the past 40 years has been that vintage instruments have been exceedingly fine investments, but just as other markets have ups and downs, growth in the fretted instrument market has not been uniform over the years. Unlike the stock market in which there have been great peaks and valleys, it has been my observation that the fretted instrument market has had periods in which prices go up and times in which prices plateau but do not drastically fall. When I started out in 1963, used sunburst Les Paul Standards had a market value of $100 whereas today they easily bring $100,000 for examples with virtually no curly grain in the top and $200,000 for spectacularly figured examples. While this is an extreme example, virtually all fretted instruments were exceedingly cheap in the mid 1960s by today's standards. Five years ago sunburst Les Pauls seemed very high-priced, but today they are bringing three to four times as much as they did in 2000. While I find it hard to believe that they will appreciate as much in the coming five years as they have in the past five, as I stated previously hindsight appears to be sharper than predictive ability. In 2000, it was my opinion that market prices were relatively high and that the aging baby boomers would very likely not fuel the market as much as they had in the past. Not only did prices go up far more than I anticipated, but collectors' and investors' enthusiasm does not appear to be cooling off at present.

While instrument prices are astronomically higher today than they were when I first opened my shop in 1970, the makes and models that bring the highest prices currently are little changed from those that were in demand 35 years ago. In 1970, pre-World War II herringbone-trimmed D-28 Martins, 1950s Stratocasters, dot-inlaid ES-335 Gibsons, 1950s and '60s Telecasters, and even sunburst Les Paul Standards from the late 1950s could all be had for $1,000 or less. Pre-World War II Martin D-45s, Lloyd Loar-signed Gibson F-5 mandolins, 1950s Gretsch White Falcons and Gibson five-string flat-head Mastertone banjos from the 1930s were among the very few instruments bringing over $1,000 at that time. Prices rose rapidly from 1970 through 1975, but still remained very low by current standards. The fact remains, however, that the instruments most sought by collectors and musicians at that time were essentially the same models that are considered most desirable today.

When people ask me for investment advice they typically want to know which models in my opinion will go up in value the most in the coming five years and which models, if any, are potential "sleepers" which are not especially sought today but which have the potential to rise from obscurity and achieve collector's item status and thereby command much higher prices. While I do not have a crystal ball enabling me to look into the future, I feel more confident in my ability to predict future prices than almost any stock market analyst would be to predict the price of shares of, eBay or numerous other stocks five years from now. It is my opinion that those makes and models that have stood the test of time will continue to be highly sought after and valuable in the future and that there are few if any vintage models which are obscure today, but which will be highly sought after five years from now.

As with many other markets the fretted instrument market experiences fads which are influenced by musical trends and popular performers. When Crosby, Stills, Nash and Young used 1959 Gretsch stereo-wired White Falcons on stage in the early 1970s these guitars shot up in price such that for a brief period they were more expensive than pre-World War II herringbone D-28 Martins and even rivaled the price of a prewar D-45. While Falcons are still valuable today, they do not bring nearly as much as a good 1930s D-28 and certainly only a small fraction as much as a D-45. Occasionally specific vintage models which in my opinion are quite mediocre will at least temporarily bring high prices due to fad status as a result of use onstage by a popular perfomer. Kurt Cobain elevated the Mustang guitar to cult status and Jack White of The White Stripes has elevated his fiberglass body Valco-made Airline brand guitar to similar status recently. Stratocasters of the early to mid 1970s with the three-bolt neck fastening system and the staggered-height pole pickups, while in my opinion not nearly as good as many new offerings by Fender, are bringing much higher prices than I would ever have imagined ten or fifteen years ago. Fads are not necessarily related directly to the quality of a particular make or model instrument as they are to who is using what onstage. By their very nature, however, fads are ephemeral. The tried and true vintage collectibles which have stood the test of time in all probability will continue to be good long term investments, whereas any model which has recently shot from obscurity to the limelight due strictly to the use of such an instrument by a popular star rather than due to the true merit of the instrument is likely to be a "flash in the pan," which may be a good short tern investment, but heavy cash investment in such items can backfire as a long term investment strategy in much the same matter as those misguided individuals who thought they could invest in Beanie Babies to put them aside to pay for their toddler's college education 16 years in the future.

In 1970 when I opened my shop there were very few collectors who would have even for an instant given consideration to purchasing new instruments for long term investment. Collectors wanted vintage "golden era" classics such as pre-World War II Martins, Loar-period Gibson F-5s, 1930s Gibson flat-head Mastertone banjos, 1950s Fender and Gibson electric guitars, 1950s Gretsch electrics, and fine hand-made jazz guitars by D'Angelico, Stromberg and D'Aquisto. While all of these makers except for D'Angelico and Stromberg were still in business in 1970, collectors had virtually no interest in the new guitars produced at that time with the exception of D'Aquisto, who was viewed as being in a totally different category since he was a hand builder and the apprentice of D'Angelico, thereby giving any instrument made by him virtually instant collectible status.

Obviously, all instruments which achieve recognition by collectors at one time were new. Therefore, it would have been possible for a collector with sufficient foresight to have bought new acoustic instruments in the 1920s and 1930s and select electric guitars of the 1950s as investments. However, if a collector had done so he would have had to wait a long time to get a good return on his investment. Obviously acoustic guitars of the 1920s and '30s and electric guitars of the 1950s have gone up tremendously in value such that today they bring prices no one would have dreamed of when they were new, but if one takes into account how much money an investor could have earned simply by putting the purchase price of new guitars in the 1930s into the bank and getting compound interest or into the stock market, he would have had to wait at least until the mid 1970s to do nearly as well with instruments as with cash in the bank. Prior to the early 1960s, vintage acoustic guitars had virtually no value and simply were not sought after. In addition, it should be noted that while hindsight may be crystal clear, back in the 1920s and '30s it would most certainly not have been self-evident which models would go on to appreciate the most. Flat-top guitars were often viewed back then as "hillbilly instruments" while sophisticated professional players bought archtop acoustics. In the mid 1930s, a Martin D-28 cost $100, a D-45 cost $200, a Gibson L-5 cost $275 and a Gibson Super 400 with case cost $400. Today the L-5 and Super 400 would be worth far more than their original price, but only a small fraction as much as the D-28 or D-45. An investment of $70 in the mid 1930s in a Martin D-18 would today be worth more money than $400 put into a Super 400. Similarly, a Gibson RB-3 original five-string flat-head banjo cost $100 new in the mid 1930s and would be worth as much as $100,000 today while a tenor Gibson All American Mastertone with a 40-hole raised-head tone ring, which at that time cost $550 new and was certainly considered a far finer and more sophisticated instrument, would today, although quite valuable, be worth much less than the five-string RB-3. The same holds true with prices of electric guitars in the 1950s, which are not directly related to what they will bring today. An investor at that time buying new instruments could easily be excused for thinking that an electric L-5CES or Super 400CES might be a better investment than a Les Paul Standard or that a Les Paul Custom which cost $375 new would be a better investment and more sophisticated instrument than a Les Paul Standard which cost only $265 new. Needless to say, today sunburst finish Les Paul Standards from mid 1958 through 1960 bring vastly more money than any L-5CES, Super 400CES or Les Paul Custom. I don't know of anyone who bought Fender Broadcasters, early Telecasters or 1950s Stratocasters whether standard finishes or custom colors for investments when they were new. They were considered to be utility tools. If someone had been asked to invest in new Fender guitars during the early to mid 1960s with the stipulation that they would have to be held for investment, it is quite likely that they would have put the money into Jazzmasters and Jaguars rather than Telecasters and Stratocasters because at that time the surfing sound was in and Teles and Strats were considered to be somewhat out of fashion. Fender, Martin, Gibson, and other manufacturers didn't make their money selling vintage guitars. They needed to sell new ones.During the early to mid 1960s, Fender made far more money selling Jazzmasters and Jaguars than Teles or Strats and buyers of that time would have had no way to predict today's market. At least buyers of electric guitars in the 1950s through the mid 1960s would not have had to sit as long on their investments before they became valuable as buyers of the 1920s and 30s, but it would have been equally difficult for an investor in 1955 through 1965 to have known what to buy new at that time for future investment potential as it would have been for a buyer from the 1920s and '30s.

There have been extremely few instruments which could have been purchased new in the early to mid 1970s which would have proven to be better investments than money put in the bank at compound interest and held until today. It is my firm opinion that if there was any "dark age" for American guitar manufacturing it is the period from the late 1960s through the late 1970s. The quality of instruments made at that time was not nearly as good as those made earlier or as good as those made by major manufacturers today. This is a topic I have written about at great length in previous articles and newsletters.

There were a few limited edition reissue models intended to be "instant collectibles" such as the Medallion Firebird V Gibson of the early '70s and limited edition new models such as the ultra-deluxe The Les Paul made during the 1970s, but it was not until the early 1980s that major manufacturers such as Martin, Fender and Gibson made a serious effort to manufacture vintage reissue models or high-end limited editions at premium prices which were marketed as investments rather than utility tools. This trend became especially pronounced after the baby boomers had their midlife crisis and entered the market in force. My newsletter #2 addresses this trend in depth.

Today virtually all major manufacturers such as Martin, Fender, Gibson, Rickenbacker and Taylor produce limited edition models which are offered at very premium prices targeting investors rather than players who want utility instruments. While most of these instruments are beautifully crafted, it is my opinion that much of the cost is related to ornamentation and the fact that they are touted as "instant collectibles" rather than their true merit as musical instruments. This is in marked contrast to the true golden-era acoustics of the 1920s and '30s and the collectible electric guitars of the 1950s through mid 1960s. Just as a Stradivarius or Guarnerius violin of the classic era is not judged on the basis of fancy ornamentation, since they are no more elaborately ornamented than many student model instruments which can be purchased for a few hundred dollars, the original golden-era fretted instruments are in most cases no more elaborately ornamented than modern instruments which can be purchased new or used for a few hundred dollars. It has been my experience that it is exceedingly difficult to predict the investment potential of new, limited edition instruments, but most of them produced during the past 15 years have not appreciated significantly over their original purchase price. The fact remains, however, that today there are many people who consider themselves to be investors and collectors, but who have no instruments that would qualify as true golde-era collectibles. They are instead buying new limited edition instruments touted as instant collectibles and holding them in the hope of reaping an investment return as they appreciate. It has been my opinion expressed in previous articles and newsletters that this strategy has not in the past, and in all probability will not in the future, achieve nearly as great a return on investment as the same amount of money put into true vintage instruments.

While I do not have a crystal ball to predict the future, market trends over the past 40 years have been far more stable in the fretted instrument market than in the previous 40. During the 1920s through the mid 1960s it would have been exceedingly difficult to predict which models would be considered desirable ten years in the future since instrument designs were evolving so rapidly, whereas the acoustic models which are most sought after today are virtually the same ones my friends and I were seeking in the mid 1960s and the electric guitars which today are held in the highest esteem and bring the most money are the same ones my customers were seeking during the early 1970s. My advice to those who wish today to invest in fretted instruments is to buy makes and models you are familiar with and that you enjoy playing and owning. If you are thoroughly knowledgeable about the type instruments you are investing in and enjoy playing them you are far less likely to go wrong than if you buy only as a "number cruncher."

During the period 1984 to the present, musical instruments have been great investments such that I now consider them to be far superior to money in the bank (especially at today's interest rates) or in most stocks or mutual funds. I anticipate, but certainly cannot guarantee, that vintage instruments will continue to be good investments in the foreseeable future. Professional musicians have the added bonus that they can purchase instruments with before-tax dollars since they are tax deductible as a business expense. Not only are the instruments excellent investments which appreciate with time, but professionals who earn their living playing them get the additional benefit of actually using them to make more money. In many cases professional musicians are able to claim depreciation over time for tax purposes. High profile celebrity musicians can hardly miss in investing in instruments, since by virtue of them owning the instrument it becomes a piece of memorabilia. The track record of instruments certifiably owned by musicians such as Jimi Hendrix, the Beatles and Eric Clapton shows an absolutely staggering return on investment.

Any time of year is good to buy instruments, but for those considering tax strategies at the end of the year, December is the last opportunity to act. Whether one is a professional musician or not, a fretted instrument portfolio properly invested over the past five years would easily have done better than most any mutual fund. Before going out and planning your tax and investment strategies, however, I would strongly advise that you consult a professional investment counselor or tax preparer. I do not represent myself as being a professional tax advisor or investment counselor, but I certainly have enough faith in the fretted instrument market that I personally do not put my money in stocks, bonds or mutual funds, but choose to invest in my own business and in the instruments I understand best and enjoy the most.

George Gruhn