What's New in the Universe
David Hall finds new worlds to conquer
By Leon Worden
A Southern Californian through and through, Hall seems more at home in a pineapple print than pinstripes, and he’s happier hobnobbing with old coin buddies than fielding calls from hedge-fund managers. That’s a chore he leaves to Chief Financial Officer Joe Wallace.
When COINage caught up with him in September, Hall was more comfortable addressing his first love the coin business, and particularly the third-party grading firm he co-founded 20 years ago, the Professional Coin Grading Service than he was in discussing the inner machinations of the company into which PCGS evolved, Collectors Universe (Nasdaq: CLCT).
Today it is CEO Michael R. Haynes who runs the day-to-day corporate affairs at Collectors Universe headquarters in Newport Beach, California, but it is Hall who has the title of president and the face that the numismatic community sees.
Hall was in Long Beach, California on Sept. 14, the first day of his first coin show. Not the first he ever attended, of course, but the first he could consider his own. In July, Collectors Universe bought the Long Beach and Santa Clara Coin, Stamp and Collectibles Expos, two major California shows, from veteran Santa Barbara coin dealer Ron Gillio for $2.4 million in cash a bit less than the price of a single 1913 Liberty Head nickel.
Except for the write-up in the program book, the buyout was invisible to the hundreds of dealers and thousands of visitors in Long Beach. Gillio and his team still run the shows under a five-year management contract, with a $750,000 bonus at the end if specified performance targets are met.
"Our plans for the Long Beach coin show and the Santa Clara coin show are to make them better, to make them more fun, to make more people participate," Hall said. "Our plans are for growth."
Hall took a break from examining coins at the PCGS booth to share his thoughts on some hot coin topics. Among them: First Strike certification ("it’s our definition and we’re sticking to it"), the 1-to-100 grading scale ("as sensible as it is, it’s dead and it isn’t coming back") and grade inflation ("grading standards were too strictly applied with certain coin series in the 1980s").
In the Beginning...
It had taken years decades for the late coin dealer Abe Kosoff’s dream of standardized grading to gain traction. Grading was in the eye of the buyer and the seller, who rarely agreed, and minor differences of opinion didn’t matter too much. Except for a handful of dealers who paid top dollar for the best coins, there wasn’t a wide price differential between VF and XF or "choice uncirculated" and "gem uncirculated" in the 1960s and 1970s. Grades were adjectival; Dr. William Sheldon’s 1-to-70 scale wasn’t used except for pricing early large cents, as he intended it.
Finally, in the late 1970s, all of Kosoff’s pushing, prodding, threatening and cajoling paid off. A core group of dealers adopted grading standards, and the American Numismatic Association Certification Service (ANACS) went from merely authenticating coins (culling the counterfeits) to assigning Sheldon’s numerical grades to all U.S. coin series, as well. Ironically, Kosoff thought a 1-100 scale made more sense, but he felt it was too late in the game to change from 1-70 and the game hadn’t even started.
Like most new concepts, third-party grading wasn’t widely welcomed at first. Not all dealers were convinced and some were downright insulted at the suggestion that they shouldn’t expect their own coin-grading expertise to be trusted. It took time to catch on and in 1986, David Hall was in the right place at the right time with the right concept: Take a promising idea and make it better.
Hall had been buying and selling coins since he was a teenager in Orange County, California. He frequented all of the local bid boards and started attending coin shows; his first was Long Beach in 1966.
"I love coins," said Hall, now 59. "They all tell a little story, and I was really good at it and could make money doing it. I loved the action."
He worked for some large coin firms for the experience and then, around 1977, "I finally went on my own for the last time, so to speak."
He started to make a name for himself and rubbed shoulders with other up-and-coming dealers who agreed that the implementation of grading conformity could be taken to a higher level.
"In the early 1980s, misrepresentation of the product was a big problem," Hall said. "Misrepresentation is a problem in all collectibles markets. It’s just kind of the way it works. The seller is usually the expert; a certain percentage can’t help but put their thumb on the scale."
At the time, ANACS was an arm’s-length stepchild of the nonprofit American Numismatic Association. It was grading about 3,000 coins per month and issuing photo certificates showing each side of the coins it graded, with different grades for obverse and reverse.
"No offense to nonprofits," Hall said, "but they’re not run the same as for-profit businesses. We had a certain idea of how we wanted to do it." PCGS’s for-profit structure made it "easier to motivate the initial owners to participate in the grading and really focus on that."
"We actually toyed with the idea of making our company a nonprofit company," Hall said. "I’m kind of glad that we didn’t do that, because we’ve made a lot of money.
"What we thought of that was different was putting the coins in plastic holders and, most importantly, guaranteeing the grade so it was more than just an opinion. It was an opinion backed by money, and using the world’s top experts as graders, which wasn’t going on at ANACS." (ANACS switched to plastic holders in 1989 and the ANA sold it in 1990. Today it is a private, for-profit company that functions in much the same manner as PCGS and the second-largest grading service, the Numismatic Guaranty Corporation of America. The ANA no longer operates an authentication or grading service.)
"The original guys," Hall said, "were myself, John Dannreuther, Gordon Wrubel, Bruce Amspacher and my partner, Van Simmons. It was our idea." He said they called their company the Professional Coin Grading Service to emphasize that professional numismatists were doing the grading.
"We underestimated how successful our idea would be," Hall said. "Frankly, we thought we’d grade 3,000 or 4,000 coins a month. We opened our doors in February 1986. The first month, we received 18,000 coins. The second month, we received 35,000 coins. We were so oversubscribed beyond our wildest expectations that I guess it was an idea whose time had come."
"We did have third-party grading with ANACS," recalled California coin dealer Donald Kagin, a current member of the ANA Board of Governors, "but what David did with PCGS is, he went out and paid for some of the best graders in the business. He put his money behind his vision and lent credibility to the third-party grading system."
Kagin made his remarks at a PCGS-sponsored "grading summit" during the 2006 Florida United Numismatists convention in January. Another panelist there was longtime professional numismatist and author Q. David Bowers.
"When PCGS first came out," Bowers said, "like any innovation, it was resisted. I thought it was completely unnecessary because I felt, I can grade coins and everyone else should be able to grade them or they shouldn’t be collectors." (Plus, Bowers’ then-partner, Jim Ruddy, had written Photograde, a book meant to help teach collectors how to grade coins themselves.)
"But that’s not realistic," Bowers said. "After about a year or two, PCGS became recognized, by me and by many other dealers, that if a coin is called MS-65 by PCGS ... by gosh, it really was a 65.
"For the first time in numismatics," he said, "you could go out and buy a coin ... and have a very good chance, a foolproof chance, that you could take that coin to someone else and they would agree with you" about its grade and authenticity.
"It’s not just that we grade coins," said Hall. "We bring structure to the marketplace."
It didn’t take long for PCGS to have market competition. New Jersey dealer John Albanese was involved in the formation of PCGS, but left six months later to form what would become its biggest rival, NGC.
"You needed competition in the market," Albanese told COINage. "If you didn’t like the grade you got from PCGS, you had nowhere to go."
Hall was still presiding over PCGS and running his own coin business in the early 1990s when he turned another passion sports cards into profit. He started a new grading service, Professional Sports Authenticator, following the PCGS model (but using a 1-to-10 grading scale). By 1998, it had achieved market dominance.
In 1996, Hall purchased Coin Universe, a popular, two-year-old Web site that facilitated coin trading and provided valuations. In December 1998, Hall consolidated his growing empire into a new company he called Collectors Universe. Eleven months later, he took the company public to raise capital to buy even more collectibles businesses.
"I had this idea of a collectibles mega-company," Hall said. "I loved coins and so did the other founders, but we also loved other collectibles. So we thought, gee, why don’t we make this wonderful, big company, and we’ll grade and we’ll sell and we’ll have auctions. So that’s what we did."
Concurrently with its initial stock offering on Feb. 5, 1999, the reconstituted Collectors Universe acquired the assets of two well-established coin dealerships Lyn F. Knight Rare Coins and Kingswood Coin Auctions and placed PCGS and its various affiliates under its corporate umbrella.
If PCGS was Hall’s coup de grace in the coin business, then his coup d’etat came in early 2000 when Collectors Universe acquired Bowers and Merena Galleries and its management team including, for a time, Bowers himself.
Many observers feared that the day of the little, independent coin dealer was gone and corporate America was taking over (forgetting, apparently, that Hall himself was once a little, independent coin dealer).
Few noticed that the universe was beginning to collapse under its own weight. But investors noticed. Investment bankers were hesitant to keep Collectors Universe in their asset portfolios when the bottom line started to run red.
"The auction business is a very tough business," Hall said. "It’s capital-intensive, and it has low margins. The grading-service business is not very capital- intensive. It has good margins, and we’re really good at it. So if you looked at our company and asked why we were doing this, the original answer was, we wanted to make this big, inclusive company. But it wasn’t really working."
On Dec. 4, 2003, the Collectors Universe Board of Directors voted to shed the business units that were dragging the company down the coin and sports card auction houses and dealerships and refocus on the company’s core competency.
"We found out we weren’t so good at the auction business," Hall said, "so we changed the focus of our company to what we do really well, which is grade and authenticate."
Collectors Universe literally dropped everything and switched gears. Gone were Bowers and Merena, Lyn Knight, Kingswood and others. Kept were PGCS, PSA (sports card grading) and its sister company, PSA/DNA (autograph authentication), and PSE, the stamp-grading service that Collectors Universe started in 2000.
Just as quickly as it entered and exited sales, Collectors Universe expanded its authentication and grading services both vertically enhancing existing functions and horizontally delving into new markets where it could apply its grading proficiency.
In early 2005, it created PCGS Currency, a paper money-grading offshoot of PCGS. It then launched a dealer financing program, offering short-term loans to dealers who used PCGS-graded coins or other collectibles as collateral.
That July, the company paid $500,000 for Ron Guth’s CoinFacts.com information Web site and a few months later, it named Guth president of PCGS. Hall had been president of both Collectors Universe and PCGS; now Hall would "have more time to devote to the expansion of Collectors Universe in other areas of the numismatic and collectibles markets," a company statement said.
Hall doesn’t hide his excitement about CoinFacts.
"CoinFacts is just a minor preview of things to come," he said. "I think part of the attraction to coins and all other collectibles is the information and the stories that go with them. CoinFacts is a big pile of information. I want to make the pile bigger. I want you to have an easy time finding out everything you want to find out about an 1889-CC dollar. I want you to be able to know what David Hall and all of his friends know about that coin. And we’re probably going to give it to you for free.
"We’re pretty smart people at Collectors Universe," he added. "I’ll bet you we’ll figure out a way to give it to you for free and make a lot of money doing it."
If Coin Universe was the 1990s version of an online trading medium, then the Certified Coin Exchange is the upgrade. It allows dealers to trade certified coins sight-unseen. Collectors Universe bought the service in September 2005 for $2.18 million.
One thing high on Hall’s to-do list is developing a system to record the survival rates of various U.S. coins. How many were issued? How many were melted down? How many were stashed away in Grandma’s attic?
"I’d like to have the experts come together and establish survival estimates for all U.S. coins," Hall said, "and not just how many have been graded by PCGS" which is what the company’s population reports show. PCGS, NGC and ANACS publish lists of coins they’ve graded, by series and condition; readers sometimes misinterpret the information as a listing of how many coins actually exist.
"Population reports are exactly what they are," Hall said, "and people shouldn’t try to make them any more or any less than what they are. I’d like to see them taken a step farther. I would like to see the educated guess of the world’s top experts of the survival rate for every U.S. coin, including all varieties. That is information that is valuable and interesting and needed."
With proceeds from a new stock offering in the bank, Collectors Universe made one of its boldest moves into a new market in November and December 2005 when it spent $10.5 million to buy patented technology and a laboratory in New York to grade diamonds, followed in August 2006 with the $3.5 million acquisition of a laboratory that grades colored gemstones such as rubies, sapphires and emeralds.
For now, coins are still generating approximately two-thirds of all Collectors Universe revenues. The company’s top five coin dealer customers account for 22 percent of all its business. The stamp, paper money and diamond grading services are still in start-up mode and haven’t yet turned a profit, the company reported.
During the fiscal year ending June 30, 2006, PCGS graded 1.789 million coins, a 7-percent increase over the previous year, while its sister, PSA, graded 1.2 million sports cards, an 11-percent increase.
Since 1986, PCGS has graded more than 13 million coins with a total declared value of $14 billion.
Room for Growth
As impressive as those numbers may look, Collectors Universe estimates that fewer than 10 percent of all rare coins (and sports cards) have been graded by third-party firms. Of the 150,000 to 180,000 coins that are listed on eBay at any given time, only about 15 percent are third-party graded.
There is plenty of room for growth in the coin market, Hall said, and PCGS is increasing demand for its services by launching new, value-added products.
"The way to understand Collectors Universe is very simple," he said. "We make money by helping collectors and dealers. We make money by helping there be more fun, more participation, more safety and liquidity in our markets."
One popular add-on to make collecting more fun and to attract more business is the PCGS Set Registry program, in which collectors compete against one another to see who can compile the finest set of PCGS-graded coins in a given series. Registration on the PCGS Web site is free, and winners receive awards and personal satisfaction.
Not to be outdone, NGC launched a virtually identical service called The NGC Registry for NCG-graded coins.
"Set Registry is still a very big deal in the coin market, and we’re expanding it," Hall said. Coming soon is a PCGS Lowball Registry, where collectors can compete to assemble the worst possible sets of coins.
"There are people who are working on the world’s worst silver commemorative type set," Hall said. "A lot of the commemoratives of the 1930s were purchased directly from the Mint. They never saw circulation. So if you take a New Rochelle [1938 half dollar], you’re not going to find a circulated New Rochelle.
"There are people who are working on United States type sets who send us coins and say, ‘Are you sure this is a 4? Maybe it’s just a 3. Could you review the coin and see if it can go in an AG-3 holder instead of a Good-4 holder?’ People love coins, love to collect them, and the Set Registry services that."
Another new PCGS add-on has attracted a healthy share of customers and controversy. In January 2005, it started adding the description "First Strike," upon request, to holders for newly minted U.S. gold and silver bullion coins that were "submitted to us in their original Mint-sealed containers or with other evidence" that they were issued during the first month of the year.
"We authenticate and grade and then encapsulate them in our tamper-evident, clear plastic holders with an imprint designating the coins as First Strike coins," the company reported to investors. "We believe that, due to their limited availability, First Strike coins will generate interest among and demand for our authentication and grading services from dealers and collectors."
They have. PCGS encapsulated 75,000 "First Strike" coins in 2005 and 253,000 in 2006 (as of September), representing the lion’s share of the year-over-year growth in coin submissions.
NGC, ANACS and the Independent Coin Grading Co. followed suit with similar programs.
So what is the controversy? The definition. "First strike" historically has connoted the first coins to be pressed from new, unworn dies. Heritage Auction Galleries, for instance, in its glossary of coin terms, uses a classic definition: "A coin struck early in the life of a die. ... First strikes are almost always fully or well struck, with crisp detail."
Proof of packaging in January has little to do with the date the coins were minted, much less the state of the dies when they were struck.
The United States Mint got involved in the controversy this summer, when it issued an advisory disavowing any part in the designation of 2005 or 2006 bullion coins as "first strikes."
"Currently, there is no widely accepted and standardized numismatic industry definition of ‘first strike.’ Coin dealers and grading services may use this term in varying ways," the Mint said.
"We’re defining it a certain way because some people find it appealing and want to buy those coins," Hall said. "The Mint has done a fabulous job of promoting coin collecting, and our idea with First Strike was to give collectors another option. Everybody seems to love it minus a few critics who, by the way, don’t have to buy them if they don’t like them."
Sheldon to Stay
Topping the list of topics for the PCGS grading summit panelists in January was the idea of switching from the 1-70 grading scale, adapted from Sheldon’s large- cent valuation formula, to a metric or 1-100 scale.
"I didn’t like the 70-point grading scale back in the 1970s," said Bowers, who was involved with Kosoff, Kenneth E. Bressett and others in drafting the initial grading standards. "I don’t think switching would be any problem whatsoever logistically, but I think there would be cries of anguish from the public."
If the system were to change, Bowers would want to see it accompanied by better descriptions of die varieties and other detailed information about the coins in the holders.
"We’ve made too big a commitment to the 1-70 scale, and it’s too late to turn our back on it now," New York City coin dealer, author and consumer advocate Scott Travers said during the summit. "Numerical grades suggest precision," and even more so than an oddball 1-70 scale that makes sense only to numismatists, "1-100 would denote a scientific precision that absolutely isn’t there."
"Things have changed in the last 20 years," he said. "We’ve been changing because grading has become more and more precise. We’ve gone from a half a dozen grades to 30 grades and now potentially 70 points. Not all the numbers are used, yet I’ve seen decimal points used" by individual dealers.
"I think the market demands" more precision, Kagin said, "and I think soon we will be ready for it."
He said a 1-100 scale would be less confusing to new collectors, and regrading all coins from the last 20 years "should take mistakes off the market." The time will come, he said, when computers can scan a coin and determine its grade and record its digital signature so it will be recognized if resubmitted.
Collectors Universe isn’t about to rock the boat unilaterally. Instead, it wants to calm the waters and provide the material for consumers to build a bigger boat.
"It’s an idea that we ran up the flagpole and ran right back down the flagpole," Hall told COINage. "It went over like a lead zeppelin. It’s not going to happen.
"We try to be responsive to the needs of the marketplace," he said. "No matter what logic there is to the 1-100 scale, if the collectors don’t want it, we’re not going to try to swim upstream."
Hall also discussed the phenomenon of "grade inflation," or the perceived loosening of standards over the years.
"There is some subjectivity to grading," he said. "When we started out, it was uncharted territory. I think that in certain series, the application of the standards by the graders has evolved.
"I’ll give you an example. In 1986, gold commemoratives, if they were perfect, and I mean perfect, were graded 65. Well, that’s not logical. A silver dollar that was 65 would have a few marks on the cheek and whatnot. It was almost as if gold commemoratives were graded by a different standard than other coins. Now that has changed. Now the way gold commemoratives are graded is more in line with all the other series.
"Other than that," he said, "the standards maybe have evolved a little, but with the exception of the application in certain series a few series it is not as much as people think.
"I’ll always remember, in the very first few months that we had PCGS going, somebody submitted a gem 1893-S silver dollar, a six-figure coin even then. It was so important a coin, the first really nice one that we graded, that we had 11 people grade it. These were world-class graders. Six people graded it a 64 and five people graded it a 65. That coin was a pure liner.
"There are coins like that. Sometimes you submit them and they’re graded 64, sometimes you submit them and they’re graded 65. There are some dealers who play that arbitrage game, crack out coins and resubmit them in hopes of getting a higher grade."
At the Florida summit, Kagin noted that thanks to grading arbitrage, over time, only the lowest MS-65s, for instance, are going to stay in their holders; the highest MS-65s will be broken out and regraded MS-66. Translation: Grade inflation.
"One thing that is interesting," Hall said, "is that coins are graded much more precisely than any other collectible. We have 11 grades of Mint State. You don’t have that in sports cards. Stamps have a 1-100 scale, but it’s 95, 98, 100, not 91, 92, 93, 94."
"If I could wave a magic wand," Hall told the audience in Florida, "I would make it so there’s only one major grading service, and not for the reasons you think. There is basically one major grading service in sports cards, and it works a lot better. A lot fewer resubmissions, a lot less fluctuation in the grading, a lot more consistency.
"That’s not going to change, because there is too much money to be made in grading coins."
©2006, MILLER MAGAZINES INC./LEON WORDEN. RIGHTS RESERVED.
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