Comparisons to Painting and Sculpture

Market valuations for guitars, mandolins, banjos, ukuleles, tipples, and similar stringed instruments are complicated. It would be easier if it was a simple question of supply and demand. Guitars have become popular culture icons. Various instruments have taken on special meaning from when and where they were made, who made them, who played them, what music they are connected to, political movements, historical events, and myriad other market forces. In essence, instruments should be thought of as works of Art. Perhaps the best approach to discussing market valuations for stringed musical instruments is to compare them to the market forces playing upon the world of painting and sculpture.

First, Getting the Terminology Right a Definition of ‘Market Value’ and ‘Market Price’

“Market Value” or “Open Market Valuation” is defined as the price an asset would trade for in the setting of a competitive auction. “Market Value” is sometimes used interchangeably with “Fair Value” or “Fair Market Value”, though each of these terms have their own definitions in different standards and circumstances.

International Valuation Standards defines “Market Value” as “the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion.”

Since we are splitting hairs to economists, “Market Value” is also distinct from “Fair Value” in that “Fair Value” depends on the trading parties involved and “Market Value” does not. For example: “Fair Value” requires the assessment of a price that is fair between 2 parties taking into account the respective advantages or disadvantages that each gain from the transaction. Although “Market Value” might meet the criteria, it is not always the case. “Fair Value” might be used in a corporate transaction, when synergies between the 2 parties could mean that the price agreed between them is fair, but higher than a price obtainable in the wider market. In other words; there may be some “Special Value” in the deal. “Market Value” theoretically disregards the element of “Special Value”, but “Special Value” still forms part of the assessment of “Fair Value”.

Another way to look at it: “Value” is theoretical and “Price” is what the market will bear right now.

In Economics, “Market Price” is the economic amount offered in the marketplace for a Good or Service. This is used in the study of Microeconomics. “Market Value” and “Market Price” are equal only under conditions of market informational efficiency, equilibrium, and rational expectations. For example: on a restaurant menu: “Market Price” (abbreviated to m.p. or mp) is written instead of a fixed price to mean: “the price of the dish depends on the Market Price of the ingredients, and the actual price is available upon request”. This might be used for seafood, where the cost of lobsters or oysters fluctuates daily.

“Market Value” is a slightly different concept than “Market Price”. “Market Value” attempts to describe the true underlying value. This distinction comes into play when markets are inefficient and/or disequilibrium exists – where prevailing market prices do not reflect true underlying market values.

Several examples:

  1. In 2012 a drug called Ceredase, which treats a rare condition of bone deterioration, cost about $300,000 for a one year dose. The cost to produce the drug is tiny. The market apparently would bear the high cost in order to save the quality of life for those with the rare condition. If you’re sick enough, you’ll pay almost anything to get better.
  2. Silver and gold have been used as a measure of value since they were discovered. Tracking the market prices, however, show sharp rises and deep falls. 1998 and 2008 saw steep declines. A few highlights from Silver prices:
    • 1917 $16.05
    • 1921 $8.51
    • 1925 $9.75
    • 1931 $4.58
    • 1935 $11.42
    • 1942 $5.50
    • 1946 $10.63
    • 1961 $7.58
    • 1968 $17.58
    • 1974 $28.63
    • 1977 $18.52
    • 1980 $110.08
    • 1982 $16.23
    • 1983 $34.55
    • 1986 $11.28
    • 1993 $6.36
    • 2001 $5.82
    • 2011 $52.84
    • 2015 $14.97

    In other words: what is the underlying value of silver? If it has an underlying value, how is that measured by this amount of price fluctuation?

  3. Oil has been called “Black Gold”. We have learned that supply and demand do play a role in the price of a barrel of oil on the international spot market. But, we’ve also seen price fluctuations from $20 a barrel to over $100 per barrel. OPEC can manipulate the price of oil by withholding supply during periods of high (or even constant) demand. What is the underlying value? Presumably, the underlying value is tied to the need for energy. With the arrival of cheap natural gas and solar, (and other alternative energy sources) the prices of oil will have new market forces to deal with. How does that affect the underlying value?

Price and Worth

To some economists, the value of any commodity is simply the act of assessing its worth by price. This is a calculation that measures a commodity’s worth by comparing it to other things that can be bought for the same amount. Is the painting “The Scream” by Edvard Munch (1895) recently sold at auction for about $120 million worth a new super yacht? It is a fair comparison in the sense that someone who can afford the painting can also afford the yacht. What cannot be ignored, however, is that it is a relative choice of value. Will the owner derive similar pleasure from each?

The choice is made more complex by relating ownership (stewardship) to the possible future values. It is possible (but not certain) that the painting could gain value. It is likely, however, that the yacht will simply be a ‘used boat’ that will steadily lose value.

Both choices have a significant ego value: How important is it to your status and image to be the owner of the “The Scream” by Edvard Munch? It may help if people know what you paid for it, or, perhaps your brand is better served to host lavish parties on your massive new yacht?

There is an element of sophistication, education and intellectual enlightenment to surround yourself with a cultural icon and something of immense beauty (to you). What is the prestige worth?

For those that argue that the very essence of Art is beyond reason and economic calculation, and the ‘raison d’être’ of Art is to remain aloof – set apart from such material considerations: Given that those who are knowledgeable in the field are fully aware of the costs – this argument appears a bit absurd.

Measuring Returns – or – Return on Investment

For measurement of potential financial returns: the market forces are varied and complex – fickle at best – and capable of being manipulated at worst.

For measurement of potential psychological returns: It would appear that comparative values can be largely personal. A work of Art can be a suitable investment if it brings great pleasure to the owner. The returns are measured on a more cognitive scale:

  1. Decorative, functional or beautiful.
  2. Altruistic need to support the Arts.
  3. Collections: the need to be surrounded by what makes them happy.
  4. Prestige: status from owning famous works.

All of that being said: let’s focus only on the concept of “Market Value” and treat it as if it is equal to “Market Price”. There are enough complexities to follow that we can (and should) ignore a subtly parsed economist’s view of the wider markets.

Oscar Wilde once said (defining a cynic): :”An economist is someone who knows the price of everything and the value of nothing.”

Fretted Instruments as Investments

Any discussion of fine fretted instruments as investments assumes that they will be compared to an existing index: the Dow Jones Industrials stock index, for example. If they do better than the Dow, then they are viewed to be a good investment. If they do worse than the Dow, then the discussion is over.

The numbers are intriguing and delightfully misleading.

Like every investment, if you are very knowledgeable and have years of experience dealing vintage instruments, you have a distinct advantage and might do quite well in the open market. Please focus on the word: “might”. As with every other investment, the market is fickle. Art seldom responds solely to supply and demand and is subject to ever-changing public tastes.

Vintage fretted instruments have been excellent investments that outperformed the stock market during some periods. They are unique collectibles since you can play & enjoy them while they appreciate in value.

The Vintage Guitar Price Guide published by Vintage Guitar Magazine selected a group of 42 guitars and began to track their values starting in 1991. The selected instruments avoided certain star performers like a 1959 Les Paul ‘burst, Loar period L-5s or 1949 Fender Broadcaster (for example). The choices included 14 Fenders, 14 Gibson’s and 14 Martins. The selections were made by the 36 contributing dealers to the Vintage Guitar Price Guide. The values are based upon prices fetched for similar instruments in actual sales as cataloged and published each year by the Price Guide.

The numbers are interesting. The Dow Jones Industrials have been volatile since 1991 but, if you average out the highs & lows, has risen from 2,500 in 1991 to 21,000 in 2017. It is important to note that the ‘Dow Jones Industrials’ is an index based on 30 Blue Chip publicly traded American stocks. If any of those 30 significantly underperform, they are dropped from the index and replaced with a new stock that performs better. There have been 51 changes since the index inception in 1896.

Here are a few highlights:

  • 1991 2,500
  • 1995 3,900
  • 1998 9,100
  • 7,900market correction?
  • 1999 10,000
  • 2003 7,000 another market correction?
  • 2007 14,000
  • 2009 6,600 following the market crash of 2008
  • 2017 21,000
  • Now: a comparison to the The Vintage Guitar Price Guide 42 Guitar Index:
  • DJIA- Dow Jones Industrial Average
  • 42GI- 42 Guitar Index
  • %- Percentage increase (overall from 1991)
  • Year DJIA% 42GI%
  • 1991 2,500 $153,000
  • 1995 3,900 56% $215,000 43%
  • 1998 9,100 264% $275,000 83%
  • 7,900 216%
  • 1999 10,000 300% $295,000 97%
  • 2003 7,000 180% $375,000 150%
  • 2007 14,000 460% $820,000 450%
  • 2009 6,600 164% $900,000 500%
  • 2017 21,000 740% $750,000 400%

Average increase: 270% and 215%

Strictly by the numbers, in the year 2017, the Dow Jones had been a better investment. If the year was 2008, however, the 42 Guitar Index would have been a better investment. This is, of course, only a theoretical exercise: The 42 Guitar Index is imaginary and not publicly traded.

Despite that fact, the rise in prices of vintage instruments did not go un-noticed on Wall Street and beyond. In 2008, a group of investors started a hedge fund based upon the purchase of a large group of vintage guitars. London based Anchorage Capitol Investment Management, Ltd (ACIM) felt that the value of Vintage Guitars had significantly outperformed major stock markets such as the Dow Jones, FTSE 100 and S&P 500 over the past 20 years.

Acting on their belief: Anchorage Capitol structured a fund to invest in the vintage guitar market over a 10 year period to take advantage of their newly created asset class. The Fund’s objective was to outperform the 42 Guitar Index (which they determined) had demonstrated an average annual return of over 22% for the past 19 years. Since the index did not include the ‘Blue Chips’ of top tier vintage guitars such as late 1950’s Gibson Les Paul’s and pre-war Martin D-45s, they felt that it should be viewed as a conservative index. In fact, for the two and a half years (2007 through 2009) surrounding the market turmoil of the credit crisis, data collected by the publishers of the Index demonstrate a 24% increase in the value of the ‘top 100 most valuable guitars’ verses the first decline of the Index. Please notice that they were trying to build confidence around The Vintage Guitar Price Guide 42 Guitar Index. ACIM asserted that they had assembled fund managers who are both vintage guitar experts and seasoned investment advisers, each with over 25 years of experience in the financial markets. They raised about $30 million and set about looking for a lead investor(s) to boost that to about $100 million.

ACIM defined ‘Vintage Guitar’ as certain models of primarily U.S. manufactured acoustic and electric guitars produced before 1970.

Their fundamental pitch was: Because wooden stringed instruments (violins, cellos, guitars etc.) improve with age from the constant vibrations of strumming and bowing. They explained that their sound became warmer over the years and each one developed it’s own individual sound and feel. They reckoned that this was something that modern technology has not been able to replicate. Because of a dwindling supply of available vintage instruments and a growing demand, that the prices will steadily increase, based upon 40 years of past performance.

They represented that their managers would buy inherently valuable vintage guitars as well as examples that had been played by stars. They represented that there was no other investment fund like ‘The Guitar Fund’ and their managers believe that this investment strategy was a very good alternative for portfolio diversification, especially in the case of generational wealth management.

They went on to point out that Vintage Guitars are unlikely to lose the infatuation of guitar players and collectors, and as new performing artists continue to use the rare collectibles on stage, their desirability should continue to flourish. As the concept took hold and evolved, they strategized that they could enhance the values by putting some of these highly desirable instruments in the hands of famous players who would perform with them on-stage. The photographic or recorded record would add to the provenance of the instruments and help drive the value of the fund upwards. They even reckoned that major investors could take some of the purchased vintage instruments home to play from time to time.

A Dose of Reality

As it turns out, even experts don’t always pick the right investments. Picking guitars solely on a bet of future returns turns out to be about as easy as picking stocks to get rich.

If the Vintage Guitar Price Guide 42 Guitar Index was publicly traded and you had invested in 1991, you’d be about even with the stock market in 2017. If you had started investing in instruments in 1980 for around $37,550 you’d probably feel pretty good about it since the 1991 value of the 42 Guitar Index had risen to $153,000. If you started in 1970 for around $15,100, you would be considered a pretty savvy investor.

As a group, we appear to have missed the signs that seem so clear in hind-sight. The Folk Boom, starting in the late 1950s, caused a burst of demand for acoustic guitars. The major manufacturers could barely keep up. As production increased, quality decreased. By the late 1960s musicians began to discover that the older guitars were better. What was an undesirable used guitar in 1959, became a desirable vintage guitar by 1970. The shift to the vintage market had three impacts: it began to hurt the manufacturers, it supported the import market of inexpensive but reasonably well-made guitars and it created a market for hand-made instruments from individual Luthiers and small production shops turning out instruments that rivaled the best of the older instruments.

Rock-n-Roll, Rhythm & Blues and the British Invasion increased demand for electric guitars and the public reacted in a similar way to acoustics. The best time to have acquired vintage instruments was in the late 1950s and 1960s.

One view: from 1963-75, vintage fretted instruments increased in value around 25% per year. From 1976-84, the increases were not enough to keep up with inflation. Around 1985, the guitar market began to accelerate and continued into the period covered by the Vintage Guitar Guide 42 Guitar Index.

As investments, fretted instruments are unique. When you buy a stock, your best satisfaction can be watching the value rise. When you acquire a beautiful instrument, it can be admired as a work of Art, played for the enjoyment or perhaps used to make music with others. There are, however, costs associated with the ownership (or should I say: custodial relationship) of a fine fretted instrument.

The expenses that need to be considered with instruments:

  • Insurance. Generally about .4% or .5% per year.
  • Alarm systems. Monthly service and monitoring charges.
  • Storage. Climate controlled, especially if you are in hot, cold or dry climate zones.
  • Maintenance. If the instrument is played, there is normal wear and tear, strings, frets, adjustments, etc. This is even true if it is not played.
  • Liquidity. You may or may not be able to sell an instrument quickly. Market timing can be important. If forced to sell quickly, the resulting values can be quite low.
  • Cost to sell: If you are not a dealer, there are costs associated with selling a vintage instrument. These can range from 5% to 25% depending on the venue for the sale. If an auction house is used, the commissions and fees can be much higher plus the buyer’s premium.
    When these very real costs are taken into account, the ultimate return on investment does not look quite as good.

Compared to many other markets, the Vintage Guitar market is small. The small size implies risk. The entire U.S. musical instrument business (including sheet music, band instruments, pianos, etc.) is estimated at around $8 billion/year. Vintage fretted instrument sales probably represent $100-200 million/year. In the Art realm, the painting “The Scream” brought as much as the entire annual vintage guitar business.

The fretted instrument market is so small, in fact, that it can be destabilized by individual rich investors. Two examples:
Japanese collector: Akira Tsumura drove up prices of tenor banjos while building a collection in the 1980s. Tsumura’s subsequent diversion of corporate funds for his personal use in the mid 1990s created legal problems that stopped his ability to acquire instruments. Values on tenor banjos began to fall immediately.
American Scott Chinery built a collection in the early 1990s that was so large that he drove prices up on all types of guitars (including his preference for archtop jazz guitars). Chinery’s untimely death in 2000 temporarily removed those instruments from the market, reducing demand for archtops. Prices of archtop guitars have not fully recovered.

The take-away should be that the Vintage Guitar market is tiny. If Anchorage Capitol Investment Management, Ltd had succeeded in raising $100 million to invest in vintage guitars, the actual market could not have supported it. There are only around 150 Stromberg guitars, 250 Gibson’s signed by Lloyd Loar and 91 Martin D-45s. This is not to say that there are not many valuable instruments out there; it is just that there are not enough to build that massive a market.

The Fickle World of Art

We have seen the market for guitars rise over the past 4 decades, though some peaks and valleys have been dramatic. Based upon an index called “The 42 Guitar Index” started in 1991 by The Vintage Guitar Price Guide; values of 42 carefully selected vintage guitars have been tracked each year by a group of 36 knowledgeable vintage instrument dealers. The value of the 42 guitars started in 1991 at about $153,000. It reached about $300,000 in 1999 and shot up to almost $1,000,000 in 2008 before falling to $700,000 in 2013 and starting a slow rise to about $750,000 in 2017. Clearly, the economic recession starting in late 2008 was reflected in the falling prices of vintage guitars, though, $750,000 in 2013 is still a respectable increase of value over the original investment of $153,000 in 1991.

What drives the values? People, and an ever-changing world. Art, craft and music. New musical trends and what the popular artists are choosing to play. The cultural changes in each new generation: Baby Boomers, GenX, Millennials. The economy, international affairs, politics, news, methods of communication, technology, whim… Basically: Life.

Guitars at Auction

On June 24th, 2004, the Fender Stratocaster known as “Blackie” assembled from parts of various old Stratocasters that Eric Clapton bought for $100 each – sold at auction for about $1 million.

Since then, several notable artists guitars have been sold at auction:

  • Fender Stratocaster “Reach Out To Asia” signed charity guitar:$2,700,000
  • John Lennon’s Gibson 1962 J-160E acoustic:$2,410,000
  • Jimi Hendrix 1968 Fender Stratocaster:$2,000,000
  • Bob Marley’s Washburn 22-serie Hawk:$1,200,000
  • Keith Richard’s 1959 Gibson Les Paul Standard:$1,000,000
  • Bob Dylan’s 1964 Fender Stratocaster:$965,000
  • Jerry Garcia’s Doug Irwin “Tiger”:$957,500
  • Eric Clapton’s 1964 Gibson ES-335 TDC:$847,500
  • Eric Clapton’s 1939 Martin OOO-42:$791,450

Most high priced auctions feature artist guitars but not all sales have been attributed to artist owned (or signed) guitars:

1958 Gibson Explorer $611,000
Sold in October of 2006; This instrument is one of only 100 made and was in mint condition.

1949 Fender Broadcaster Prototype: $375,000
The first of its kind and the birth of the solid body guitar.

Mandolins have fetched sizable prices as well:
In 2008: Gibson F-5 Loar mandolin:$200,000
In 2017: the same mandolin:$178,000

Paintings at Auction

As a comparison (and to keep some sort of perspective on the value of things) the following relates to the world of paintings:

On May 2nd, 2012, the painting “The Scream” by Edvard Munch (1895) sold at auction for about $120 million.

Sales at auction tend to better represent the Market Value and Price. This assumes, of course, that there are more than only two bidders. The greater the number of bidders, the better the representation of a fair market price.

The private market is something quite different. A private sale does not represent ‘Market’ value or Price. A private sale represents what a single buyer is willing to pay for a good or service. This could be well above (or well below) Market Value. If I’m rich and there is something I simply “gotta have”, then whatever I pay for it only represents its value to me. Please note: that could make me a very savy investor or what P. T. Barnum described as a fool easily separated from my money. Either way, for some period of time, I would be happy. Viewed another way: if you have lots of money, then the money has less value to you than special or rare objects that you desire. The bottom line: a private sale has nothing to do with Market Value, but might have an effect on Market Prices.

With that in-mind – Here are some other paintings by notable artists that recently sold (many of these are private sales):

  • 2015 Willem de Kooning $303,000,000
  • 2015 Paul Gauguin $303,000,000
  • 2015 Paul Cézanne $276,000,000
  • 2011 Jackson Pollock $202,000,000
  • 2014 Mark Rothko $188,000,000
  • 2015 Rembrandt $182,000,000
  • 2015 Pablo Picasso $172,200,000
  • 2015 Amedeo Modigliani $172,200,000
  • 2006 Gustav Klimt $160,400,000

Instruments Have Underlying Value

Guitars, mandolins, banjos, ukuleles, tipples, and similar stringed instruments are unique items in the marketplace:

  1. They are masterworks of craft. Despite current forms of computer aided design and manufacturing, all prototypes (and many instruments from small Luthier-based shops) are hand-made. Even the largest manufacturers hand assemble many aspects of a musical instrument’s production. They are formed largely from natural materials: wood, hide glue, sinew, bone and shell. Their construction has evolved from woodworking crafts that predate written history and have endured by a Guild system: Master training apprentice, apprentice becoming a Master and the process repeats. Each generation has added refinements and advancements in bracing, strengthening, tooling and finishing techniques. Every generation also struggles to improve the tone, projection and voice of their instruments. The craft understands that the product – the instrument – will outlive its creators and speak to future generations. Roughly 650 instruments built by Antonio Stradivari (1644 -1737) have survived and many continue to be played by some of the world’s finest musicians. The term: “Stradivarius” has become a superlative associated with excellence. To be called “the Stradivari” of any field is to be deemed among the finest there is.
  2. Instruments are tools of the musical arts. Every aspect of their shape and function have evolved to work in harmony with the human body. The length and shape of the neck must fit the hand comfortably while simultaneously providing sufficient strength to withstand the tension created by the strings. The body must be of a size and shape that allows the creation of the right sound while fitting the human body. Musician often describe their instruments as extensions of their body. It needs to be true if the musician is to create the depth of expression required in communicating music.
  3. The instruments must be beautiful: they must embody a sense of proportion and craft that draws the musician in – that make you want to play it. The materials are not only selected for their tonal qualities, but for their visual qualities as well. Tone woods from all around the world are gathered and sorted for their color, figure and visual richness. Methods of finishing the woods have evolved to enhance the visual qualities (depth and richness of color and texture) while not compromising their natural ability to vibrate and produce the desired tone.
  4. Instruments are marvels of engineering. They walk a tight-rope between strength and lightness. In order to be sonically powerful: they need to vibrate freely to produce plenty of pleasing sound. At the same time, they must be strong enough not to collapse under the constant tension of strings tuned to pitch. The top of a steel string flattop guitar, for example, needs to be thin enough to vibrate freely to create sound. The bridge supporting those strings must be centrally placed and able to withstand about 180 pounds of tension. The strings create a rotational pull, trying to rip the bridge off the guitar top. The same tension is trying to bend the neck forward. The neck, of course, must remain straight. The best instruments have found the delicate balance between strength and lightness.

Each instrument, based upon its craft, function and beauty rises to the title of Art. They are remarkable anthropomorphic sculptures that speak directly to all the issues raise above. Anyone who has attempted to play them quickly appreciates their evolution, and with appreciation comes emotional content – it is easy to become very attached to an instrument. All musicians understand the notion of bonding with their instruments. These bonds reach the emotional level of friendship or even family. They are loved. It is not hard to understand why there are so many instrument collectors.

Despite all this, or perhaps, in addition, these objects have another purpose: they were created to make music. Art created for the making of Art. This cannot be said of paintings or sculpture. Instruments are a unique form of Art.

This is the argument for underlying value. It is easily understood by musicians, players and collectors. On the other hand, to the cold outside investor that has no interest in music: this is just another niche collectors market. So, what is the true underlying value?