Saturday, November 28, 2009

Graded Stamps: Perpetuating the Decline of Stamp Collecting

This past year I've posted a couple of satirical criticims of stamp grading.  This post will be more direct.

As you may know the hobby of stamp collecting has been hemorrhaging collectors for years.  The membership roll of the American Philatelic Society has been in long term decline.  There are fewer dealers now than 50 years ago.  Kids have many other very compelling distractions -- like the computer and internet connection that I am using.  Now there is another threat to the hobby: stamp grading.

I've been watching the phenomenon for years.  In one sense I don't get it.  Take a common stamp, say a US C19 like Tom Vaillancourt of Croton Stamps wrote about in a post this past fall.  $4.00 catalague value, sells at auction for more than $500.  He says this is sane.  Sane?  +$500 for an +XF stamp that catalogs at VF for $4.00?  For me, that kind of price differential defines insane.  I do get this phenomenon in the get-rich-quick sense, though.  If you can con somebody to pay such a premium, why not?  Its a P.T. Barnum world.

I guarantee that if I look hard enough I can find a C19 of similar quality to the stamp that Vaillancourt referred to above.  Without a graded certificate, the stamp would be worth some fair multiple of the catalog price of $4.00, even if it is identical to the graded stamp.  The price has nothing to do with the stamp or its quality in the case of the graded stamp.  The purchaser of the graded stamp is paying for the certificate, which is created by a panel or some individual expert.  Why should philatelists care and pay for a certificate?  Don't we care about stamps? 

For the most part, I would guess that true philatelists don't care for the certificates, though  I suppose some are culling their collections to see if they can make a big haul by getting their superb stamps graded and putting them up for sale to speculators that believe full-out in the greater-fool-theory. 

I am not an expert in this type of commoditization process, but here is how I figure this charade could play out if taken to its logical conclusion:

1. Phase 1: Free market demand vs. limited supply: The situation we have now. Supply controlled by graders. Not by availability of stamps of gradable quality. E.G., 1000 total Scott US C1 stamps could be 98J, but if only two have been graded, that is the supply. In this situation, price is determined by what people will pay due to the condition of limited supply. Supply is determined artificially by stamps seen and certified, not by those that would otherwise be graded similarly.

2. Phase 2: Manipulation of supply. The coming and inevitable phase. More modern stamps cannot tolerate endless grading by grading agencies, whatever the fees generated by these firms. 10,000 98Js of C1 would overpopulate the graded market for this stamp and ruin the business. As the market approaches these situations on more common stamps, the grading agencies will have to control and regulate supply by actively managing the numbers they grade against projected demand.

3. Phase 3: Consolidation of graded stamp market. If and when supply becomes controlled, meaning all stamps of a gradable type have been graded, or graders collude to control the release of graded stamps, the market population is finally known. At this point prices can be set based on expected demand given fixed or controlled availability of a given grade. This is how DeBeers attempts and fairly succeeds to control the diamond market. All diamonds are graded, assigned a classification, and released onto the market varying with demand to maintain price equilibrium.  If diamonds of every quality were released onto the market the value  of a 1.5 carat white VS1 would fall like a stone.  Not something DeBeers, jewelers, or wives and husbands everywhere would want to see.  Yikes!  The loss of the cartel would mean the destruction of the institution of marriage?  See how savvy businessmen perpetuate their business models?  Build'em on sand but make sure you jack up the house and pump in concrete once your done.

So much for the great conspiracy.   There is more.

There is the reliability of the stamp grading services.  The key to any accurate survey, which this business actually conducts (some services even use sampling terminology like "population") is an accurate and reliable measurement of each variable in the survey.  In this case, every service should grade the same stamp the same way, everytime, regardless of changes in the expert or time of assessment.  But the example of coin grading points to a future of unreliabilty.

In the magazine Coin World in May 26 2003, the editors announced they had investigators conducting a year-long study of several grading organizations.   In their investigation, Coin World used the same coins to send to these grading organization.  The magazines investigators found that none of the grading services agreed on the grade of any given coin, "and in some cases the difference in grading was as much as seven points off".
So we will likely have a future of wildly different grading practices and expert judgments. 

And there is counterfeiting. Yikes. We used to have to worry about counterfeit stamps, or counterfeit cancels, counterfeit overprints or counterfeit covers. Now we get to add counterfeit grading certificates. A history of coin grading is instructive here as well:

At the 2004 Long Beach Coin Show, American Numismatic Association members identified counterfeit "slabs" or the holders of graded coins.  These slabs were produced by the Numismatic Guaranty Corporation.  The next year and in subsequent years similar counterfeit slabs were found on eBay.  By 2008 the Numismatic Guaranty Corporation took action and published the following statement:

"NGC has identified and confirmed that (counterfeit replicas) of its holder has been produced.......The holder has been seen housing counterfeit dollar or foreign crown size coins. While the enclosed coins are also counterfeit, the label information matches the coin type enclosed. The label information is copied from actual NGC certification labels, and the certification information therefore will match the NGC database. Most frequently, Trade Dollars and Bust Dollars are found, although Flowing Hair Dollars and foreign coins have also been seen. A range of grades is also represented."

If the difference between a VF C19 and a highly graded C19 is more than $500, you can be sure the counterfeiting is yet to come. 

One measure of how far the rot is spreading would be to count mentions of stamp grading or graded stamps for sale in advertisements in US Scott Specialized Stamp Catalogs.  The catalog is annual and the gold standard for US collecting.  At hand I have the 2009 and 2010 catalogs.  Here are my counts:

2010

Page 19  Full Page  PSAG, Philatelic Stamp Authentication and Grading
Page 21  Third Page  Steve Malack
Pages 36, 37  Full Pages  Casper Coin
Page 43  Full Page  Gary Posner
Page 49  Half Page  Century Stamps
Page 79  Full Page  Heritage Stamp Auctions
Page 85  Third Page  Casper Coin
Page 303 Third Page  Casper Coin
Page 315 Third Page  Casper Coin

2010 Totals:  6 Advertisers
                     5.83 Pages

2009

Page 7  Full Page Matthew Bennett
Page 25  Third Page Steve Malack
Page 37  Full Page  Jay Parrino
Page 39  Ninth Page Steve Malack
Page 41  Full Page  Momen Stamps
Page 49  Full Page  Rupp Brothers
Page 51  Half Page  Century Stamps
Page 57  Full Page  Professional Stamp Experts
Page 71  Ninth Page Steve Malack

2009 Totals:  7 Advertisers
                     6 Pages

Curious this.  Two data points do little to define a trend.  But total pages and the number of dealers or grading services mentioning graded stamps declined slightly from 2009 to 2010.  Maybe there is hope.  Also, only Steve Malack Stamps and Century Stamps were repeat "graded stamp" advertisers.  Not sure what that means.

To those who want to speculate in stamp "slabs", or even in graded stamps without a slab, caveat emptor.  To the philatelists reading this message, sell your XF stamps for a fortune to the highest bidding speculator.  And use that money to invest in a world of fabulous sub 95 stamps.  You'll have better access to more material than ever before.

11/29/09 BTW:  Check out page 37 in the 2010 US Scott Specialized Catalogue. It is the second page of a Michael Casper ad. Here is what you see: a dark page, a man with long hair at a desk, inspecting a stamp in a plastic case with piles of graded and certificated stamp material around him and a box of "slabs". In the upper left corner is this statement: "Collecting stamps is a hobby for some, a serious hobby for others, and for a few people its just plain serious". The implication being that those engaged in the collecting of stamps in slabs is somehow serious. Seems like a carpet bagger from the coin world showed up and is trying to become a market maker in graded stamps, in part by buying a bunch of ad space in the 2010 catalog. 

Michael Casper's own mini-bio is here:  Caspercoin.

3 comments:

  1. Your spot on with the grading - fully agree with you and I have been saying this for years to people...

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  2. Thank you Andrew. I appreciate your support.

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  3. I fail to see the need for this discussion. Would you buy a home, rare coin or anything else of value without having a third party grade and appraise it? If so you will get burned quickly. the only people that dislike having stamps graded are those that like to buy a stamp as a ongh75 and sell it as a 90. Grading cleans up what has for decades a dirty hobby.

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