April 02, 2018

Boone Auction 60 in Less Than Two Weeks

Mario Boone’s next auction is scheduled for April 14 in Antwerp and will feature yet another great selection of American railroad rarities. As usual, he features stocks and bonds from around the globe, all arranged by country. The unquestioned highlight of this sale is a Spanish banking and loan document dated 1279 (!). If you are in the market for a 739-year old rarity then, chances are, you already have the catalog for Auction 60 and have planned your bid.

I count 81 rail-related lots from the U.S. plus eight more from elsewhere in North America. I ask you to get online quickly at www.BooneShares.com and look for certificates in your specialties; you are bound to find several pieces of interest. I will mention a few items that caught my attention, either because they are the first I have seen or they APPEAR to be unique or extremely rare.

1901 debenture from the Cuban Central Railways, Ltd. (lot 1607): new to me.

1902 gold bond from the Havana Electric Railway Co. (lot 1608): only the second issued bond I have recorded.

1911 bond from the Havana Terminal Railroad Co. (lot 1613): another item I have never encountered before.

1851 stock from the Rochester & Syracuse Rail-Road (lot 1694): the second serial number known to me.

1865 stock from the Schuylkill & Dauphin Improvement Railroad Co (lot 1703): first recorded.

1872 stock certificate from the Schenectady & Susquehanna Rail Road Co (lot 1709): the second one to come to my attention in 30+ years.

1889 stock from the St Augustine & Halifax River Railway Co (lot 1729): first stock certificate that I have recorded for this company.

1890s specimen stock certificate from the Schenectady Railway Co. (lot 1732): if not unique, then nearly so.

1893 issued stock certificate from the Kaaterskill Railroad Co (lot 1739): while familiar in unissued form, this is the first issued example I have encountered.

1905 uncancelled stock certificate from The South Omaha & Western Railroad Co (lot 1753): serial #1 and still the only example I have ever recorded.

1915 uncancelled stock certificate from the New York & Queens County Railway Co (lot 1760): so far, only one known to me.

1947 stock certificate from the Salt Lake Rail & Bus Terminal Co (lot 1771): although recorded before, this remains the only certificate I know from this company.

The word unique means one of a kind; the only one in existence in the entire world. Unless there is some sort of definite proof, I am exceedingly reluctant to speculate that any certificate is truly unique. And I hate to say that another will never appear. ALL of us have been surprised more than once. Nonetheless, based on thirty years of recording over a million offerings of railroad stocks and bonds, I will suggest that several items in this auction APPEAR to be highly rare. Therefore, if sold, I believe we are unlikely to ever encounter several of these certificates again in our collecting careers.

Please visit www.BooneShares.com or email to receive a copy of this 263-page, full-color catalog. And yes, I know that commissions, VAT, postage and the declining value of the dollar relative to the Euro are penalties on American collectors. No argument there. But, what value do you place in your quest? And how many of these items do you expect to ever see again?

December 28, 2017

HWPH auction January 20 & 22, 2018

I received the latest offering from Historisches Wesrtpapierehaus AG (HWPH) over the Christmas weekend. Auktion 47 will offer 928 lots, predominately from Germany and Russia. There are only a few lots representing North America and only one 471-item lot related to American railroads. Thankfully Herr Schmitt posted a complete list of the contents of that large lot on the web. (See lot 47.)

For collectors of American railroads, online Auktion 48 is more enticing. 60 of the 2,398 lots involve American and Cuban railroading. About half are seen very rarely in the United States and are not the kinds of certificates any experienced collector should hope to find on eBay. For that reason, I suggest collectors take a serious look at this sale. Several certificates in this sale will not be seen again in the next decade, so I will mention a few that caught my attention.

Several collectors will recognize a $1000 bond from the Brooklyn & Brighton Beach Railroad (lot 2064). One of these certificates appears for sale every couple of years, but the number of collectors who want one routinely pushes auction prices over $150. It is more elusive than its familiarity might suggest.

Certificates from the American Car & Foundry Co should also appear familiar, but the 100-share certificate offered in this sale (lot 2032) is much scarcer than most people realize. Similarly, a 1908 $1000 bond from the Chicago Subway Company (lot 2079) is another infrequently-seen beauty that might be overlooked.

Now to the rarities.

Labeled 'Brunswick & Albany Bahn', the certificate in lot 2066 is a certificate of deposit is one of only five I have recorded. This unassuming certificate was used for bonds deposited with the Brunswick & Albany Committee in Frankfurt in 1872. Only one of the five was sold in the U.S.

Lot 2140 is a £250 bond from the Havana Railroads Company, dated 1859 and only the third to come to my attention. Sadly, Cuban railroad certificates seldom attract the attention their rarity might imply. This is especially true of on orange 1-share preferred certificate from the Cuba North & South Railroad (lot 2115). This is a bearer share certificate and I can attest that bearer shares are very uncommon from anywhere in North America other than companies that operated in the Caribbean island. This orange variety is one of only four that I have encountered.

However, there is also a green common share companion (lot 2114), which just happens to be the first I have ever listed. Hmmm, I wonder how many collectors are going to realize the rarity (!) of this certificate, especially considering HWPH's minimum bid is only €140.

Another first to me is a warrant from the Erie Railroad to purchase common stock (lot 2126). It is admittedly plain, but still a new item for my catalog.

Also the first of its kind is a specimen 1925 equipment trust certificate for $1000 from the Great Northern Railway (lot 2126). Yes, it also is plain. And yes, not very many people collect equipment trust certificates. Still, if a collector is attracted to rarity for the sake of rarity (as many are), he/she should take a look at these kinds of certificates that usually fly under the radar of most collectors.

I can't remember exactly when I first started cataloging railroad certificates, but I think it was about 1987. If true, then lot 2169 seems to be rare. It is a $10,000 bond from the New Orleans & Northeastern Railroad Co dated 1917 and only the fourth serial number I have recorded of this variety. No question about it, there are probably more around. After all, there is no way anyone could have listed every railroad certificate offered over the last 30 years by hundreds of dealers in fifteen or more countries. But no true collector should ever call this certificate common!

Another uncommon certificate is lot 2081, a 10-share common stock certificate from the Chicago Milwaukee & St Paul Railway, dated 1912. It might look a familiar to the uninitiated, but it is only the third such certificate I know about.

Still not impressed? How about a certificate I have recorded only once before? Lot 2150 is a $1000 second mortgage gold bond from the Kansas City & Northern Connecting Railroad. Minimum bid? €100.

Finally, do you just want a great vignette? Then look at lot 2082 from the Christopher & Tenth Street Rail Road. Minimum bid: €30.

See all these certificates and about three thousand more at www.hwph.de, the website for Historisches Wertpapiere AG. Once you reach the home page, click on the flag appropriate to your language. (Click this link to go directly to the complete list of auction items in Auktion 48.)

Finally I personally recommend you also acquire the beautiful full-color print editions.

November 21, 2017

Fully paid and non-assessable

Why 'Fully paid and non-assessable?"

Many railroad stock certificates carry the declaration "Fully paid and non-assessable." In simple terms, that means that companies agreed to NOT demand money from shareholders beyond the amount they paid for their shares. While stock exchanges did not require such statements on certificates, many companies added the phrase to purposely distinguish their issuances from companies that could – or would – demand extra money from shareholders.

It was very common to see the phrase "Fully paid and non-assessable" on paper stock certificates before electronic trading came along in the 1990s. While not necessarily understood by investors at the time, its presence on collectible certificates now serves as clear evidence that most early stocks were assessable.

Assessability grew out of high par values

Prior to 1910, approximately 90% of all railroad companies sold shares for $50 or $100 per share (the par value). That percentage did not vary much throughout that entire period. While $100 shares do not seem overly expensive today, $100 was a very hefty investment at that time. Here is a chart that shows the purchasing power of $100 at various times in the past if converted to today’s (November, 2017) dollars.

$100 in 1840 = about $2,700 in 2017
$100 in 1850 = about $3,010 in 2017
$100 in 1860 = about $2,820 in 2017
$100 in 1870 = about $1,800 in 2017
$100 in 1880 = about $2,170 in 2017
$100 in 1890 = about $2,490 in 2017
$100 in 1900 = about $2,660 in 2017
(rounded from Bureau of Labor Statistics measurement of U.S. inflation rate.)

There are disagreements over the many ways to estimate the value of a dollar through time and what the various results mean. Nonetheless, suffice it to say that average citizens were hard-pressed to invest in a single share of stock, let alone multiple shares. By limiting participation to only the wealthier slice of society, $50 and $100 par values often made it hard for startup companies to raise sufficient funds for development and equipment.

Enticing investors to pay for shares a little at a time

Certificates from the 1830s are not common, but the few that survive suggest that companies discovered early on that they could raise more money by offering shares for lower initial amounts and then assessing buyers for the remainder over time. Out of the need to entice sales, companies invented investing on a layaway plan. 

The initial par value of stock from the Baltimore & Ohio Railroad was $100. However, even as early as 1835, the company sold some of its shares for $50 and $75 and assessed buyers for the remainder after purchase. (See BAL-662a-S 25a and S-25b.)

Evidence of discounted sales from other companies can be inferred from rare (and seemingly under-priced) assessment requests and assessments receipts that survive. Here is an 1864 example of an assessment receipt from the Agricultural Branch Rail Road.

And here is an example of a stock certificate identical to one that the shareholder above would have owned. 

What if shareholders did not pay their assessments?

By the middle of the 1800s, many companies were selling shares for 10% down and assessing stockholders for the remainder, usually 10% per quarter. That does not mean all stockholders had the abilities or desires to pay when demanded. On the flip side, the refusal by stockholders to honor their commitments often created financial hardships for companies. Many companies responded to non-payments by modifying their corporate by-laws to force stockholders to forfeit their shares for failing to pay assessments.

(Note that the stock certificate above is silent about either assessments or potential pentalties.)

Did all shareholders know about or understand such penalties? Probably not. In fact, I currently know of only one railroad company that mentioned the penalty of forfeiture on its certificates. Here is an example of that text from the Mohawk Valley Rail Road Company (S-40, courtesy of Thomas O'Shaughnessy.)

Records are scarce, but we can surmise that losses of initial investments through non-payment of assessments would have come as shocking surprises to small investors.

Assessments for additional funds

In addition to ordinary assessments for partially-paid par values, an unknown percentage of companies also retained the right to assess stockholders for operating funds if needs arose. Such companies argued that stockholders were part owners of companies and therefore were responsible for contributing more money if companies fell onto hard times and economic trouble.

Records of lawsuits between stockholders and companies show that corporate by-laws generally prevailed when stockholders balked at onerous demands for money above and beyond par values. While often ignored by courts, shareholders often claimed that they should not be required to pay for the fiscal irresponsibility of operating officers. Charges of overly high presidential salaries are not a new phenomenon.

Did assessments help stock sales?

It seems obvious that stockholder lawsuits of any kind could not have been good for corporate stock sales. As early as 1866, railroad companies responded to objections over assessments by declaring their shares non-assessable. The earliest non-assessable stock certificate currently recorded in the database is S-50 from The Montgomery & Erie Railway Company.

With the perspective of 150 years, it seems logical that stockholder lawsuits over assessments probably dampened sales of assessable railroad stock. We have no clear proof among railroad certificates, but boisterous arguments among western precious metal mines about assessable stock certainly quickened the trend toward non-assessability in that industry.

When did assessable railroad stocks disappear?

Lacking access to all but a few corporate records, it is terribly difficult to determine a date when assessable railroad stocks disappeared from trading. I can find mentions of assessable western mining stocks being sold as late as 1916. Although he offered no proof, author Thomas Gibson specifically stated in 1919 (Simple Principles of Investment, p118 )that, “There is no such thing as an assessable railroad stock.” It is hard to prove a negative, but I have been unable to find any records of successful assessments on railroad stockholders after 1898. (Stuart Daggett, 1908, Railroad Reorganization.) Splitting the differences between those dates, I suggest it is reasonably safe to assume that most assessable railroad stocks were gone by 1910.

How can a collector know if a stock certificate was assessable or not? 

Generally, the determination is unclear. The most obvious evidence appears in the form of phrases found on collectible certificates attesting to non-assessability:
  • Full paid
  • Fully paid
  • Full paid and unassessable
  • Full paid and non-assessable
  • Fully paid and non-assessable
  • Fully paid up and non-assessable
  • Full paid shares non assessable
  • Full paid and non-liable
  • Full paid, not subject to assessment
  • Full paid and neither assessable or redeemable
  • Full paid and forever non-assessable
  • Fully paid and free from assessments
  • Fully paid and not liable for any further calls
  • Full paid and not subject to further calls or assessments
  • Not subject to any future calls or assessments
  • Paid up
  • Paid up and non-assessable
Currently, only about 14% of varieties of collectible railroad certificates can be positively identified as non-assessable. On the other hand, printed evidence of assessability is much scarcer and harder to find. Collectors will find sparse mention on stock certificates in text similar to:
  • assessable shares
  • subject to assessments
  • subject to all payments due
  • subject to assessments as provided in the By-laws of said corporation
  • subject to each assessment as may be legally made thereon
  • on which there is due and to be paid on call of the directors
It appears that companies often understated assessability by referring to provisions in company by-laws. It would seem that few investors would have known how to acquire company-bylaws and fewer still would have taken the time to do so. What appears to be possible references to assessability may be found in rather common and oblique language on certificates such as:
  • subject to the provisions of the Charter and the By-laws of the Company
  • subject to the Memorandum and Articles of Association thereof

Most evidence of assessability can be implied by certificates that sold initially for less than par value. That behavior was relatively common between about 1840 and 1880. Such shares often carried phrases similar to:

“…on which ______________ Dollars per share have been paid.”

Does assessability affect collector bids?

As a group, railroad stock certificates that clearly state assessability are much scarcer than those that display phrases similar to "Fully paid and non-assessable." Assessable stock certificates that mention forfeiture penalties are highly rare. However, I cannot find any evidence that collectors are willing to pay premiums for such rarity. At this point in time, the issue of assessability is barely a curiosity.

October 10, 2017

Mario Boone Auction 59, October 21 and 22

We have another fine offering from Mario Boone to be auctioned in Brussels later this month. Among the lots are some truly fine rarities including the certificate shown on the cover. Dated Oct 20, 1777, that stock certificate will turn 240 years old the day before the auction. It was issued by The Iron Bridge Trust to build on iron bridge across the River Severn in Shropshire, England. The bridge has been honored by UNESCO which proclaimed that it is the symbol of the industrial revolution and that "the world's first bridge constructed of iron had a considerable influence on developments in the fields of technology and architecture."

The bridge still stands today. It was built by the Coalbrookdale Company and opened on January 1, 1781. Eleven years later, the same company built the world's first railroad locomotive, which brings me to the purpose of this article.

The 59th Boone auction will auction 1,348 lots, 76 of which involve North American railroads. One of the fun things about recording information about certificates over such a long period is that I get to witness the movement of certificates from continent to continent and from collector to collector. In this case, I recorded many of the certificates offered in this auction in the early 2000s from images and lists graciously provided by the owner. Many of those certificates had appeared in early Boone auctions, as well as in auctions by R.M. Smythe and Scott Winslow and catalogs by famous dealers such as George LaBarre.

On the other hand, this auction also lists several items I have never seen before. Even after a quarter century of cataloging, I still get to record new items every week!

One of the new items I noticed is a an attractive new red specimen from the United Railways of the Havana & Regla Warehouses (lot 946). That company controlled over 1,200 miles of western Cuban railroad by the 1920s.

Another intriguing Cuban scarcity is a 1-share stock certificate from Compañía Consolidada de Ferro-Carriles de Caibarien a Santo Espiritu dated 1866 (lot 945). This certificate makes the only the ninth example known to me.

Lot 979 is a cancelled stock certificate from the Mohawk & Hudson Railroad Company. The certificate was issued in 1837. While not the oldest railroad stock recorded, as far as I can tell, this company was the first to issue stock in the United States. I know of several 1839 certificates from this company as well as one other from 1837. However, the certificate being offered in lot 979 is the only one of that variety that I have recorded and it is the lowest serial number (#1556) recorded from the company

A still earlier 1834 certificate from the Boston & Providence Rail Road & Transportation Co appears in lot 980. While Mario calls that item a subscription receipt, I list it as a full-fledged stock certificate. Note that it displays serial #7. Collectors may never have another opportunity to secure a lower number.

Not many people have seen (or own) a stock certificate from the National Suspended Monorail Company (lot 1038). No, the company was not a main line railroad nor was it a standout in any historical way. The certificate is not vignetted. Nonetheless, I pause to point out that this certificate is one of a minuscule number of of stock certificates that display punch panels in both the left and right borders. Since the punch panels had the capacity to display as many as 9,999 shares, I list this certificate as a "less than 10,000-share" certificate. (No, you're probably not impressed, but it is a fun fact to me!)

Lot 1030 is from the Duluth, St Cloud, Glencoe & Mankato Railway Co. Usually seen in unissued form, issued examples are normally seen converted to first preferred shares by handwritten or rubber-stamped notices. This is the first issued example I have seen that was not converted from ordinary capital shares.

I am afraid that lot 1018 might confuse a couple of collectors. While titled Jamaica & Brooklyn ROAD Company, it was actually a horse car operation. It took its name from the consolidation of the Jamaica & Brooklyn Plank Road Company and The Jamaica Woodhaven & Brooklyn Railroad Company in 1880. This item remains the only certificate I have yet recorded from this company!

Another item that I suspect collectors will overlook is a temporary preferred stock certificate from the Fort Dodge Des Moines & Southern Railroad Co (lot 1033). While illustrated online, it is not shown in the printed catalog. Even if it were shown, like most temporary stocks it is fairly plain and easy to ignore. Nonetheless, it has so far proven unique in my experience.

Several collectors have told me they, "only buy on eBay." I understand their bargain hunting, but I always warn them that their collections will never grow past a certain point until they branch out to auctions and professional dealers. I'll go even one step further for my more advanced readers here.

Your collection will ultimately be stymied if you do not continue to widen your horizons to foreign sources.

By foreign I mean that if you live in North America, you should consider buying in Europe. And if you live in Europe, you need consider buying in the opposite direction. Why? Because different items routinely appear in different markets. Items in our hobby are too rare to appear in very many places and many items tend to congregate on one side of the Atlantic or the other. Yes, professional dealers always try to shop the world for inventory, but even they cannot buy everything. And they may not  consider buying something in your specialty.

Bringing things back around, I want all of you to consider items in this sale. While there are certainly scarcities and rarities, all of the start prices in this sale are reasonable. Some are even on the low side by American standards! Most of the items in this sale are seen infrequently and very, very few will ever appear for sale in eBay. I will go a step further to suggest that there are several items in this sale that won't appear for sale again for another ten or more years.

The easiest way to get started is browse Boone's online catalog at booneshares.com. At the left side of the page, click either "Browse by Country" or "Browse by Theme." Personally, I always want a physical catalog so I can flip back and forth at will. If you're such a person, be sure to request a printed full-color catalog as soon as possible. Or make sure you get on Mario's list for his next sale. (Catalogs are $15 / €10.)

Yes, Mario speaks perfect English. And since he grew up in the worldwide scripophily business, he knows how to ship internationally without problem. He accepts PayPal, Visa, Mastercard and bank transfer. Since there is no language barrier or currency transfer problem, why not branch out now?

September 04, 2017

The flexibility of bearer and registered bonds

This is the third article in a series discussing railroad bonds. See also:

July 27, 2017 – Terminology - 'coupon bonds' versus 'bearer bonds'
August 31, 2017 – Digging deeper into bearer and registered bonds

People unfamiliar with out hobby tend to classify all certificates as 'stocks.' That is easy to understand because the nightly news always reports results of the latest trading day on the New York Stock Exchange but rarely mentions bonds. Nonetheless, bonds are highly important, both to corporate finance and our hobby. At the current time, 39% of all identified railroad certificates are bonds.

Understanding Bonds 101
Bonds are the primary sources of funds for many, if not most, railroad companies. While bonds seem mysterious at first, they are actually quite simple in concept. Bonds represent loans made TO companies.
The most common types of railroad bonds are mortgage bonds. Mortgage bonds are highly similar to ordinary mortgages on typical single family homes. In fact, railroad mortgages include many of the same conditions as home loans. Both types of mortgages are security agreements whereby mortgagors (borrowers) give mortgagees (lenders) the right to seize their collateral (property) if they default (cannot or will not pay) on their bonds (binding, written promises to repay.) 
Bonds are written promises to repay at a specific future time. The two main differences between mortgage bonds and home mortgages are, 1) the entire principal on bonds is normally repaid at the time of redemption while some principal  is repaid with each home loan payment, and 2) foreclosing on corporate bonds is a much longer, more difficult process than foreclosing on home loans.

The need for more money and more flexibility. In the high-growth period following the American Civil War, companies came to realize that many of their bondholders demanded anonymity and freedom to exchange bonds with minimal intervention, while others wanted more security in their investments. Hence the reason that railroad companies turned increasingly toward issuing both registered and bearer bonds after the 1870s.

During that period, companies gradually lengthened the terms of their loans from twenty and thirty years to one hundred years and even longer. The longer the terms of bonds, the more certain that bond ownership would change before redemption. Consequently, companies realized they needed to let their bondholders change the statuses of their bonds between registered and bearer formats.

In order to embrace that concept, most companies allowed their investors to:
  • register bearer bonds, and 
  • exchange registered bonds for bearer certificates.
The stories on the backs of bonds. Most bonds reserve spaces on the backs for recording transitions from one format to the other. Admittedly, most collectors spend little time looking at the backs of their certificates. However, the recorded transitions between bearer and registered status can give interesting insights into corporate histories.

Here are some examples.

Transition from registered status to bearer status.

This investment started life as a registered bond when issued January 23, 1969. The assignment panel on the back of that bond is shown below and attests that the bondholder promptly converted the bond to bearer status on February 5, 1969, only thirteen days later! The assignment to 'Bearer' and the stamp would have been added by the Pennsylvania Railroad Company. Although clearly labeled as a 'registered bond,' it functioned as a bearer bond, with unknown ownership, until cancelled eight months later, in October, 1969. We don't know exactly what happened, but it seems likely that the bearer sold the bond to someone else who traded it in for another registered bond. Whatever the situation, the transaction took place one year after the Pennsylvania Railroad merged with the New York Central and only eight months before it filed for bankruptcy protection.

Registered bond traded for bearer bonds. 

This $5,000 registered debenture bond was issued by the New York Central & Hudson River Railroad, August 20, 1925. Five days later, the bondholder exchanged the bond for five $1000 bearer bonds and the registered bond was cancelled. One can presume that the registered bond would have been traded for bearer debenture bonds of the same series. However, no such bearer bonds have yet been reported. Shown below is the transfer panel on the back. The handwriting and ink does not match any other writing on the bond, so we do not know who wrote the phrase 'Coupon bonds.' It seems possible that the instruction might have been written by someone at the bondholder's brokerage.

Transition from bearer status to registered status.

Shown below is part of the transfer panel on the back of a $1000 general mortgage bearer bond issued by the Cleveland Cincinnati Chicago & St Louis Railway in 1893, more popularly known as the 'Big Four.' The New York Central acquired control of the Big Four in 1906. While certainly underwritten by the giant New York Central, the company made its own interest payments on bonds like this and the company was a solid investment well over half a century. Between 1893 and 1927, the ownership of the bond is entirely unknown. However, the New York Savings Bank came into possession of the bond at some time during that period and converted it to registered status in 1927. During conversion, the bank surrendered all the coupons and thereby registered its interest payments with the railroad company. It appears the bank held the bond through the 1929 stock market crash and the worst of the Great Depression before selling it to Massachusetts Mutual Life Insurance in 1935. That company owned the bond for the next 39 years, during which time the New York Central merged with the Pennsylvania Railroad. The resulting Penn Central filed for bankruptcy protection in 1970, and Mass Mutual ultimately sold the bond to Bear, Stearns & Co. in 1974. Bear, Stearns re-sold the bond six days later to Lerche & Co. which held the investment for three more years. By that time, the bankruptcy had long been in litigation and the value of bonds like this dropped to around $40. A favorable outcome for investors was highly uncertain. Lerche & Co. ultimately sold the bond to Warren Buffet in 1977. The bond was retired and cancelled November 3, 1978, presumably as part of the Penn Central Transportation Company's bankruptcy court agreement of August, 1978. We don't know how much Buffet might have paid for the bond, but one can surmise he did not lose money.

Transition from bearer status to registered status and then back again.

The New York Central & Hudson River Railroad Company issued this $1000 gold mortgage bond in 1897. After an unknown ownership for two years, the Commonwealth of Massachusetts registered this bond as an investment held in trust for the Marine Insurance Company of Liverpool. The bond stayed in the trust for the next 29 years, presumably netting $1,105 in interest. At that time, the new buyer converted the bond back to bearer status. Its history turned dark again and there is no record of who or what might have owned this bond during the Central's merger with the Pennsylvania Railroad in 1967, the bankruptcy of the Penn Central in 1970, or acquisition by Conrail in 1976. Whatever the case, the bond was ultimately retired, on Oct 31, 1978, only three days before Buffett's bond above, and probably for a similar amount. Once cancelled, it lived in the Penn Central archives until John Herzog convinced the Penn to sell its old paper securities instead of incinerating everything. Chances are, the bond sold as part of a large lot in a NASCA/Smythe sale in 1987 or 1988. I ultimately acquired the bond from Clinton Hollins in 2005.

August 31, 2017

Digging deeper into bearer and registered bonds

Let's review some critical terms.
Bonds represent loans that investors make TO companies. Bonds are written, binding promises. Companies use bonds to specify the amounts of money they will repay on specific dates. Bonds usually specify interest rates, the schedules of interest payments and the collateral that companies pledge in case they fail to fulfill their promises. Bondholders are usually 'first in line' in case of corporate bankruptcy.
Notes are bonds with shorter terms, generally ranging from 6 months to five years. There are a few 'notes' in my database with terms as long as 25 years. Very short-term notes were often issued without coupons. In the article that follows, assume that everything I say about bonds also applies to notes.
Coupons are small demand warrants usually attached to bonds. Coupons are worthless until specific dates, but on those dates, they immediately become payable for interest. Other than their names and small sizes, bond coupons bear no similarity to ordinary coupons that today's retail stores give to their shoppers to entice purchase. 

Back in July, I wrote about the most obvious differences between registered bonds and coupon bonds. From the 1880s until the 1940s, most medium-and large-sized railroad companies tended to offer both types of bonds whenever they borrowed money. While the differences seem obvious, it is important to understand why companies issued both types. Prior to the 1880s, most companies issued only coupon bonds. After the 1940s, registered bonds became the issuance of choice. The Tax Equity and Fiscal Responsibility Act officially stopped the issuance of domestic bearer bonds in 1982.

In truth, coupon bonds and registered bonds bonds were actually designed to deal with two different features of loans. Registration involved the security of investment principal, whereas coupons dealt with the payment of interest. Viewed from that perspective, registered bonds and coupon bonds were not quite opposites. Let's look at the differences.

Registered bonds are meant to give security of ownership. Registered bonds are registered in the names of individuals or companies who legally own bonds. Only those specific registered owners are legally entitled to redeem bonds at maturity.

It is important to understand that the true opposites of registered bonds are not coupon bonds, per se, but bearer bonds.

Bearer bonds represent no specific ownership. They are not secure. Whoever possesses bearer bonds can redeem them. There is no implied concern about whether ownership is legal. The differences between registered bonds and bearer bonds represent the differences in who will receive funds at the time of redemption.

Having said that, we must question who is entitled to receive interest payments in the period between purchase and redemption. Legal owners or bearers? Who should be responsible for initiating interest payments? Companies or bondholders? Is interest going to be paid throughout the terms of bonds? Or is interest going to be allowed to accumulate until the time of redemption?

These questions give rise to different approaches and this is where coupons come in.

Coupon bonds push the responsibility for collecting interest to bondholders. Whoever possesses coupon bonds must purposely redeem their coupons for interest, usually twice per year. If bondholders lose coupons or wait a long time before cashing them in, the problem is theirs alone. Viewed from the perspectives of companies, every lost or non-redeemed coupon represents profit.

With rare exception, coupons are bearer instruments. That means that whoever possesses coupons may redeem them. Legal ownership is a matter of concern for the legal system, not for companies.

The vast majority of corporate bearer bonds were issued with coupons, hence the reason that 'bearer bonds' are almost synonymous with 'coupon bonds.'

Bonds issued without coupons. The vast majority of registered railroad bonds were issued without coupons. In most cases, companies would have paid interest on registered bonds only to registered owners.

There is a question, however, whether all companies assumed the responsibility for sending interest payments to bondholders. Did some wait until bondholders requested payments? The text on registered bonds is rarely explicit on this point. Most registered bonds merely say they would make payments at the office of the railroad company or at the office of its agents. Theoretically, bondholders would have been paid through their brokerage accounts, but looking through the lens of time, it is unclear who was responsible for initiating those payments.

It is also important to understand that not all registered bonds were issued without coupons. Some registered bonds were, in fact, issued with coupons. Registered coupon bonds are fairly common among U.S. Treasury bonds, but they are quite rare among collectible railroad bonds. For those reasons, it is easy to understand why most collectors – and many companies – considered registered bonds the opposites of coupon bonds.

As I hinted above, companies and investors might prefer a third method for paying and collecting interest. What if interest is not paid during the terms of loans? What if interest is paid only at the time that companies redeem their bonds?

This is, in fact, the method the U.S. Government uses to pay interest on its savings bonds and short term Treasury Bills. While used more frequently in later years, some very early railroad companies took this approach, too.

Such bonds are issued without coupons and are usually called zero-coupon bonds or 'zeros.' Interest is paid only upon final redemption. Some zero-coupon bonds are sold at face value and allow interest to accumulate over the terms of loans. Interest is not paid periodically, but only when bonds are redeemed. For example, companies will need to pay investors $1,500 each to retire 10-yr, 5%, $1000 bonds. (5% interest on $1000 is $50/year; over ten years, delayed interest payments total $500. In this scenario, interest does not compound.)

Instead of accumulating interest over long periods, companies generally prefer to repay only the face value of zero-coupon bonds at the time of redemption. Consequently, investors must build in their own desired interest rate by purchasing zero-coupon bonds at discounts from face values. For instance, investors willing to settle for 5% non-compounding yield on their money will pay no more than $666 for a 10-year, $1000 bond. (If investors want their money to compound, they will probably lower their offers to less than $614.)

Both kinds of zero-coupon bonds are known among railroad bonds.

How are bonds distinguished in my database? Up until now, I have usually described bonds as either coupon bonds or registered bonds. I recently examined all 8,400 bonds in my database and pushed as many as possible into slightly more elaborate categories. The vast majority are described as:
  • bearer coupon bonds
  • registered bonds (typical bonds issued without coupons)
Long-time readers will notice a few new descriptive categories when I had enough information to determine their types:
  • bearer zero-coupon bonds
  • registered coupon bonds
  • registered zero-coupon bonds
(Don't freak out! There aren't many bonds in these new categories.)

How did I decide whether a bond started life as a bearer or a registered instrument? The key lies in simple, two-word phrases that appear on most bonds:
  • ... 'or bearer' ...
  • ... 'or holder' ...
  • ... 'or assigns' ...
  • ... 'or order' ...
Bearer bonds are the easiest to recognize. A large number were simply issued 'to bearer.' Most bearer bonds, however, have text that shows that bonds were initially issued to companies or prominent individuals followed by the phrase, 'or bearer.' A few companies used the phrase 'or holder,' but the meanings appear to have been entirely synonymous.

Because bonds were commonly written for terms of thirty to well over a hundred years, companies always assumed that bondholders would change through time. Consequently, we can understand the need for phrases like 'or bearer.' While 'or bearer' is not always obvious, some variation can usually be found somewhere on every bond that once had coupons attached.

By contrast, the vast majority of registered bonds left an empty space or line for bondholders' names, followed by the phrase, 'or assigns.' Legally, the word 'assigns' means 'assignees,' and carries the implication of legal transference of all rights.

I personally doubt that assigns was always interpreted using today's meaning.

To complicate matters further, some companies used the phrase 'or order' in place of 'or assigns.' According to current legal definitions, if a document is payable to an identified person 'or order,' it is not payable to a bearer. (See Legal Information Institute at the Cornell Law School.) Consequently, I define 'or order' like 'or assigns.' That does not mean I believe the definition was always accepted that way, nor that every company used the phrase in the same manner.

One final point. Although investors usually had justifiable preferences for one format over the other, they could later change their minds. They could register their bearer bonds or they could trade their registered bonds for bearer bonds at any time. My next blog article will discuss the flexibility of bonds types.

August 24, 2017

What are collectibles 'worth' when they don't sell?

I consider the question of unsold items everyday because it affects my catalog. However, it indirectly affects all dealers and all collectors, in every type of collectible, in every specialty.

Although you may not notice it, I adjust my prices constantly, primarily on the basis of recent sales. However, non-sales also enter my equations. Why did something NOT sell? Should I lower my estimates based upon recent non-sales?

As you might guess, it depends.

It depends, of course, on where item have failed to sell. A non-sale on eBay means almost nothing. A non-sale in a well-attended European auction might signal a sea-change.

Collectors' personal issues control checkbooks. Let's face it; it is a universal truth that life gets in the way. Collectors will get into arguments. Collectors will have monetary problems. Collectors will experience competing needs for money or illnesses or vacations or hail storms or broken computers. These events happen to everyone, but, statistically they don't happen to everyone at the same time. But, sometimes they do exactly that and there is no way of knowing that it has happened. Moreover, life can get in the way for only one or two collectors and their absense might make all the difference in the non-sales of key items.

Lack of eyeballs. No matter what is being offered, sales depend on collectors learning about offerings. Generally speaking, the more people who know about upcoming sales, the greater the number of examinations of inventory. Ideally, the greater the number of looks, the greater the number of sales. That all sounds very simple.

Even if an auction house sends out large numbers of catalogs or eBay touts very large numbers of members, it doesn't mean a thing if offerings fail to reach the right kinds of eyeballs.

Inappropriate audiences. The reality is that eBay sellers are never going to sell thousand dollar items to buyers who never spend more than a hundred dollars. And auction house are never going to sell $50 items when they send catalogs to buyers who routinely buy $50,000 collectibles. Sellers need to match their buyers to their offerings. And vice-versa.

Price. The underpinning assumption of capitalism is that sales depend on price. The accepted rule is that lower prices result in more sales. But that only works to a point. Unrealistically low prices can stymie sales if they cause collectors to worry about the threat of hoards lowering the value of their existing collections. Witness how absurdly eBay prices have adversely affected the sales of practically all collectibles.

Unrealistically high prices can also have a long-lasting effect on sales. Once collectors get turned off by high prices from certain houses and dealers, they may never buy from those outlets again, even if prices subsequently drop.

Risk. In my opinion, the issue of risk in hobbies like ours is the least understood and the most under-researched factor that affects sales of collectibles. I generally consider the impression of risk to be even more important than price. Simply put, every interaction between sellers and buyers affects the impression of risk and the flow of money. Obviously, customer service is a gigantic concern. The more sellers can lower the impression of the risk of purchase, the more likely collectors will buy.

Basically, the more sellers can focus on the qualities of the items they are selling, the more they can positively manipulate the comfort level of their potential buyers. Sellers automatically lower risk when they show good pictures of the exact items they are selling. They lower risk when they give precise information about problems, availability, scarcity, color, smell, feel, texture, age and so forth. There is nothing earth-shaking here; I'm simply talking about David Ogilvy's mantra, "The more you tell, the more you sell."

Sadly, many amateur sellers try to use senseless hype to sell their collectibles. They fail to realize that hype usually works to their detriment among collectors. Do such sellers really think words like "WOW!", "Unbelievable!" and "L@@K" have any positive effect on would-be buyers? If so, why don't they see such drivel in the catalogs of Christie's, Sotheby's, Spink, Heritage and Stack's Bowers? Maybe because it doesn't work? Maybe because hype increases the impression of risk among collectors?

Each of these topics is an article – or book – in its own right. And each affects how I answer the question of, "What is a collectible worth if it doesn't sell?" But here is my general approach.

Non-sale on eBay. I pay little attention if something does not sell on eBay. In fact, unless certificates are extraordinary, I don't even look. And I NEVER adjust prices up or down based upon non-sales on eBay.

Non-sale from low-priced auction houses. I have not encountered any such auctions in a long time. I fear all low-prices auction houses have fallen victim to, or moved their operations to, eBay.

Non-sale from mid-priced auction houses. If minimum-bid prices are reasonable, and descriptions and photos are good, I try to get some feeling from my correspondents about the issues of eyeballs and audiences. If their audiences are good and they are reaching adequate numbers of collectors, then non-sales are probably indicative of weak markets. If the same items fail to sell after a couple attempts, then I definitely lower price estimates 10% to 20%.

Non-sale from high-priced auction houses. I generally assume those kinds of houses enjoy good penetration (eyeballs) in good audiences (good matches with inventory.) At first blush, it would seem most non-sales would result from general high prices. However, it is also possible that some, if not many, non-sales actually reflect an over-valuing of rarity. I have found in conversations with correspondents that many who routinely buy expensive certificates buy only those certificates that fit their specialties. For them, rarity outside of their specialties is not particularly compelling. It is for that exact reason that certain highly rare items may appeal to only limited subsets of collectors. Once a few such collectors acquire rarities for the sake of rarity, there may be few if any more buyers on the sidelines.

I also find high-priced auction houses tend to focus heavily on autographed certificates, and those items follow cycles of interest different from otherwise ordinary certificates. It appears that highly specialized collectors tend to focus on collecting only those autographs of the highest quality. They may well delay buying second- and third-tier items while waiting for better quality autographs to appear.

For these reasons, I usually wait for typical items to go unsold three or four times before I lower my price estimates. It is not unusual to see items of ordinary rarity go unsold several times and then suddenly sell at prices measurably higher than had been rejected several months before.

On the other hand, I often lower price estimates quickly for unsold rarities when historic price behavior suggests they are not remarkably desirable. As I have argued many, many times, desirability is vastly more important for sales than rarity.

The conclusion? I definitely adjust prices based upon non-sales. It seems perfectly obvious to me that if items go unsold several times at one price, then they are not worth that price.