October 10, 2010

Cox "Market Basket" price index updated

I recently updated my price index for collectible railroad certificates. Prices continue to slide, although the rate of decline has not worsened with the typical summer doldrums. Prices only dropped about a percent since April and I choose to take that as a good sign.

My price index is based on a "market basket" of 43 certificate varieties. You may read a long-winded description of the index on my special Price Index page. You may also see images of all certificates included in the index.

In short, the price index is a total value of what you could expect to pay if you bought all 43 varieties of certificates at prices averaged over the five most recent sales. These kinds of averages are called "5-sale moving averages." They are calculated by taking the last actual sale price, no matter where that sale occurred, and averaging it with the previous four sales. Each time a new sale occurs, it becomes part of the average and the oldest sale is dropped.

Certificate prices tend to be VERY "spikey". I commonly record a $50 price in one sale followed by $125 in the next, $35 in the next and so forth. Moving averages help smooth out big ups and downs so we can see underlying trends without getting confused by the "noise." I would like to use more sales and more varieties in the calculations, but there are simply too few sales. We have to play the hand we're dealt.

As I have mentioned elsewhere, the price index shows that prices were essentially flat from 1999 through 2002. Prices grew at an 8% to 9% rate in 2003, helped along by strong prices in Europe and a weak dollar/Euro conversion. Prices then dropped steeply thereafter. We can certainly blame part of the drop on the great shifting of purchases from big auction houses to eBay. I don't think anyone would suggest the global recession has helped collectibles, either.

Curiously, the rates of price decline decreased after 2007, even in the face of the deep and lingering recession. All things considered, it appears prices are almost 34% off the top of the market in 2003.

I am unconcerned whether these particular 43 varieties "represent" the full breadth of the collectible certificate market. After all, the Dow-Jones Industrial Index is a mere 30 heavily-traded companies that by no means represents the full breadth of the American stock market. We could argue whether a 3-sale or 4-sale moving average would show a different picture. We can wonder whether displaying the data by quarter would show more predictive behavior. We can bemoan the fact that we have no price contributions from dealers and very few from collectors. I'm not convinced it matters.

I've tried all sorts of adjustments and finally decided this picture is adequate for my needs. It tells me what I want to know about the health of the market and how I should adjust price estimates to match reality.

I will make a couple of final warnings.

Don't over-read or over-think this chart. It is simply designed to tell us whether the market is trending up or down. This chart represents the condition of the market based on 43 medium scarce North American railroad certificates. Charting more common and more scarce certificates WILL show different price behaviors. Charting certificate prices in different specialties WILL look different. Charting certificate prices from other countries WILL look different.

My crystal ball is in the shop, so I cannot possibly predict when prices will start trending up. No one is going to get me to say that certificate prices have hit bottom. However, I feel safe in suggesting that sellers hoping to unload certificates at 2003 levels will be sorely disappointed for several more years.

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