Thursday, July 8, 2010

Art as Investment

When advising my appraisal clients who want to buy art as an investment, I often stress the risks involved. The first rule is always to buy art you love. Buying art that you have an emotional connection to - is the safest way to invest in art. This is the single, most important element of collecting because if a painting loses its market value, there is still a personal attachment to it.

Building an art collection from a investment standpoint can be very lucrative, but one must also take into account the risks. As we saw in the pre-2008 economic bubble -- art investment was as mercurial and volatile as stocks.

Economists like William Goetzmann, David Kusin, and Michael Moses have conducted studies to evaluate the financial gain of collectors who bought art as their main investment. These economists compared the gain of stocks versus that of art. By analyzing works of art that sold more than once at auction in  2005, Goetzmann suggests the rate of return for art exceeded the rate of inflation. (2)

Moses suggests collectors buy lower-priced art, with more room for growth, rather than million-dollar masterpieces. Contemporary art is risky because of its reliance on ever-changing trends. Kusin suggests American and English furniture as a solid investment. Goetzmann says prewar and postwar art is a good investment because the genre swings both upward and downward in value with great magnitude. It is risky but has great potential for profit. As an art appraiser, I happen to love California art and see it as an undervalued market. Living in Santa Barbara, I see alot of great paintings by West Coast artists selling for much less than their East Coast contemporaries.

One must keep in mind, the cost of selling (or flipping) artworks is high. It is important to have an art appraisal done before selling artworks. This way collectors can be certain they know the fair market value of a painting, before going to a gallery or auction house.

If an art collector decides to sell it through a gallery, the gallery will take a commission.  Auctions also take commission and are often volitile marketplaces. Art is not a liquid asset. Unlike a stock, that reflects the value determined by a large group of people, art is determined by individual taste. The selling price of a piece at auction is determined by the mood or taste of one or two, individual bidders --- rather than thousands of shareholders.

In her article “Art as an Investment,” Wendy Cromwell discusses the difference between traditional collectors and those who use art as investment. She says, “Individual collectors are driven by passion, . . . informed about auction history, and they consider provenance and condition as important variables in determining what to pay for a work of art, whether privately or at auction.” Collectors are usually well versed in the artists they collect. They do not base decisions on simple speculation or profits, but typically take into account a variety of factors when acquiring art.

Many art investment funds believe in diversifying their collection in a similar format as a stock portfolio. This model has worked for funds like the British Rail Pension Fund who made a profit of almost 12% in 2005 by slowly selling off work from a variety of genres. (3) Other investment groups, such as the Fine Art Fund, followed the same model. Many hedge funds and private individuals have used their art collections as collateral for a loan from companies like Art Capital Group Inc.

Investment funds often try to collect iconic works by famous collectors, rather than building a cohesive collection based on style, movement, or genre.  But, as Cromwell suggests, the provenance of a thoughtful collector’s vision often adds value to its marketability. A random selection of paintings that is sitting in a vault might be viewed by future buyers as arbitrary, as commodities rather than unique pieces.

Although appraisers like myself research auction records through a database like the Mei/Moses Index, finding adequate data for art appraisals can be difficult. Moses says, “The S&P 500 and the Dow 30 are broad measures of how those markets are doing. We need the same thing for art.” While auction records post sales prices, galleries do not report such data, meaning the art market is much less documented than the stock market.

Art collecting can be highly rewarding both financially and personally. As an art appraiser I meet collectors everyday, who love the art they bought, inherited, or found. It seems that the traditional model of art collecting still functions best. Collectors should buy what they love and do their research  if they're looking to use it as an investment. Art can be a portion of an investment portfolio but more importantly, enjoyed.

(1) Landon Thomas Jr. and Carol Vogel. “A New Prince of Wall Street Uses His Riches to Buy Up Art.” The New York Times, March 3, 2005

(2) Jori Finkel. “Painting by Numbers.” Art and Auction, April 2004. Pp. 77 - 83

(3) Wendy Cromwell. “Art as an Investment.” Art on Paper, March/April 2005

6 comments:

  1. Many investors make the mistake of only investing in the companies that they think are making profits, or which have strong financial base, only to wake up one morning to find them down. Worldcom and Enron best illustrate my point here. It is important that a portfolio manager splits the invested dollars into the different options, bonds and securities, which would provide them with a balance of the risk involved.
    ------
    regards,
    brook
    Mutual Funds

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