Wednesday, May 17, 2006

Considerations in the Debate on How Good an Investment Art Is

Let's face it, art is expensive. So as much as it makes me cringe when folks want to talk about it as an "investment," I'll sigh and then nod and then take a deep breath and offer as solid advice as I can. But such advice is difficult. Even the best considered opinions vary.

Two bloggers I admire have discussed the reality of "art as investment" recently (with solid calculations), outlining some good examples of why it's certainly not a fait complet that you'll ever see that work you love appreciate. First is Todd Gibson, who in a two-part series (
part 1; part 2) illustrates how unless you're very fortunate (with a better eye than a former curator at MoMA), you stand better odds perhaps with a well-managed hedge fund. And Felix Salmon advises that unless you're flipping work rather quickly, beating out the other investment options becomes less likely:

The trick, of course, is to sell not only at a large profit, but relatively quickly, too. If you wait more than 50 years, then your CAGR [compound annual growth rate] is going to come down to the 10-15% range even if you sell for 400 times the original purchase price.
But is it only an eye better than a MoMA curator or quick turn around that can work toward good returns, investmentwise? This article by John Dizard (found via artinfo.com who picked it up from the Financial Times) suggests bold choices can also make a difference:
The results of the auction of the Refco photography collection produced one of the few pleasant surprises that have come the way of the bankrupt commodities trader’s creditors. Christie’s conducted three sales between April 24 and May 10 that raised more than $9.7m, almost 50 per cent more than pre-sale estimates and about three times what the collection cost to assemble, mostly between 1998 and 2003. That leaves the creditors only a few hundred million dollars to go in filling the black hole in Refco’s accounts.

The money raised was the main focus of the creditors, of course, but there were also some interesting lessons for the rest of the art collecting world, and corporate collectors in particular.

The first is that while caution and conservatism make good sense when conducting legal and regulatory compliance, they don’t serve as well as boldness and experimentation in putting together an art collection. That applies to both the commercial and aesthetic considerations. Who wants to buy something boring, and who wants to look at it?
The article goes on to explain why Corporations with bold collections are more likely to profit handsomly. In fact, most of the lengendary collectors whose relatively modest investments paid off big time when they passed away and their life's work hit the auction block were more than slightly adventurous, consider the Ganz's for example. Of course, by the time the Ganz collection came up for auction, the artists it represented were famous, but many of them were not when the Ganz's first bought their work. What they all were arguably was bold and daring at the time.

Perhaps the most important, but most difficult to measure, ROI with art is the experience it provides. I know that sounds cliched, but from the dialog it fosters with artists, dealers, other collectors, etc. to the opportunities it provides to start a dialog with friends and acquaintances who are less interested in art, not to mention how it reflects on one's personal priorities and intellectual interests, there are many other measures than CAGR to consider when calculating whether a purchase was a "good investment" or not. What price do you place on joy?


But, as I noted at the top, art is expensive, so a reality check about how good an investment it is remains a service to all art collectors. Thanks to Todd and Felix for doing the math.

7 Comments:

Blogger amber said...

very interesting post...this is a continuously solid "debate" of the sorts. What price does one place on joy? is this a question the "investor" answers...or perhaps should be solely left in the hands/decision of the artist?

5/17/2006 10:55:00 AM  
Blogger Lisa Hunter said...

The value of corporate collections is misleading. Many corporations hire art consultants with strong ties to museums or major galleries, so the company is able to buy "unknown" artists with what, on Wall Street, would constitute inside information.

What's more, many CEOs sit on museum boards, where they influence what will be shown in museums (thus raising the profiles and value of their favored artists), while simultaneously being able to buy the emerging artists that curators identify as the next big thing.

The "boldness" of these collections is often the result of hearing what the big-time art world is thinking before the public knows about it. It's not something an unconnected private collector can duplicate easily.

(That's why a collection like the Ganzes' is so amazing. They had amazing taste and a sure eye, all on their own.)

5/17/2006 11:42:00 AM  
Anonymous David said...

Buying art as an investment is like marrying for money. Seems like a shallow and misguided thing to do, and I can't imagine it's very gratifying.

If you want an investment, buy stocks. But not now; wait 'til November.

5/17/2006 11:47:00 AM  
Blogger George said...

Ed sez…. "Perhaps the most important, but most difficult to measure, ROI with art is the experience it provides. I know that sounds cliched, but from the dialog it fosters with artists, dealers, other collectors, etc. to the opportunities it provides to start a dialog with friends and acquaintances who are less interested in art, not to mention how it reflects on one's personal priorities and intellectual interests, there are many other measures than CAGR to consider when calculating whether a purchase was a "good investment" or not. What price do you place on joy?"

Well put Ed. Art as investment? While there is data which can show the art market produces returns somewhat comparable to the S&P. These metrics are somewhat flawed in that they don't model the performance of actual collections individuals own which are most likely comprised of artworks of a different mix and quality. I do believe that a collector with a good eye can build a collection which will hold it's value over time, possibly even produce a positive return. Is this why people collect art? Ed's remark touches on the intangible returns over the course of a lifetime, these values should not be discounted. How much money do we spend on the pursuit of joy, entertainment or for the expansion of our intellectual interests? Applying a cold financial metric to collecting art cannot value these things, they are the intangible "dividend" which comes with personally creating an art collection.

Returns from the art "hedge funds" may or may not produce decent returns because of their ability to diversify, but in order to do so they must eventually sell the art. What happens when a billion dollars worth of art is put to auction? In a strong economic period the marketplace may absorb the offering but if the economy slows, and the paper financial markets decline, the results will not be so rosy.

The very fact that CAGR is even brought up in the context of art collecting, the current approach to collecting art as an "alternative investment" is troubling, it begins to feel somewhat like the arguments made for so many tech stocks in 1999 (see NYSE:JDSU)
In my opinion, this season may have marked the top in the art auction market for at least a year or two. I do not expect a major decline in auction prices, more of a leveling off after the recent extended expansion in pricing as buyers become more cautious. On average, we will probably still see ""record prices" set for specific works by particular artists, but some of the frothy excitement will wane.

5/17/2006 12:50:00 PM  
Blogger Chris Rywalt said...

Art isn't the best investment. Golden Age comic books, now there's where you should put your money.

5/17/2006 03:17:00 PM  
Blogger highlowbetween said...

Art is volatile. And nothing is more sad than hearing of a collector buying something and then wanting to flip it 6 or 8 months later.The way a serious investor curbs against slow growth, at least in contemprary art terms, is volume - invest in art based on 5 or 10 year performance cycles by an artist. See if they survive the standard 5 year market cycle not to mention critical cycle. Then put your money there. And speculate a little on an unknown. Another reason to invest in art beyond portfolio diversification, is that you are investing largely in something that rarely will depreciate below what you actually paid for it. I do think that moving forward, investment in art will become a more stable option as it grows in practice globally, as new financial models are generated to support and profit from such endeavors. This should be good for artists in terms of more being able to sustain a living but will it be good for Art?
Of course I would love think that people simply buy because they need to live with the work and want to support living artists - one can still hope...

5/17/2006 04:32:00 PM  
Anonymous Jeff said...

I don't worry about the value of my collection. I buy what I like, which is mostly drawings from notable artists. I broker a few to help offset my obsession with collecting art. My collection will ultimately go to my son who will have real meaning when he says, "Would you like to come up and see my etchings?"

I've posted some of my collection throughout my blog if you're interested in checking it out.

6/21/2006 04:22:00 PM  

Post a Comment

Subscribe to Post Comments [Atom]

<< Home