The Art Guide - Is art a good investment?

Short answer is no. But it is probably the most fun you can have spending money. And maybe recoup some of your investment.

ART AND HORSES

The subject of art as an investment is always a difficult one. On one side you will have people saying that art should not be considered under the investment angle, and that you should only buy art you love. On the other side you will have a myriad of financiers touting the merits of art as a new asset class, art as an investment, and loads of people hearing their call, mesmerized by the seemingly unstoppable rise of auction prices.

When asked whether art is a good investment, I usually respond with the following question: would you invest horse racing? Silly isn’t it? Art investment relies on a set of measurable, quantifiable facts: auction records, exhibitions, media exposure, etc. But so are horse races: horse pedigree, track record, form, age, trainer, racetrack, etc. But most people considering art investment would not think of putting their money in a fund betting on horse races.

So keep that in mind, investing in art is not unlike betting on horses. You may make some money (some people do), you may loose some money (most people have) but one thing is sure: it will be a thrilling ride!


STOCK MARKET AND VENTURE CAPITAL

Having said that, there are some interesting parallels to be drawn between the world of investing and the art market, that can help you better understand the risks and potential returns associated with buying art.

Auction houses are like a stock exchange. To be listed there, you have to be a large and established company, with desirable shares (at least for the IPO). Likewise auction houses will only accept works by artists that are well established and have a reasonable chance to sell. Artists that are too emerging, or who fell out of fashion will most likely be turned down.

Just like in the stock market you will have the big respectable New York or London stock exchanges (say Christie’s or Sotheby’s) where it is harder to be listed and the smaller, regional, more speculative stock exchanges (Phillips could be the Nasdaq, Artcurial could be the Paris stock exchange).

If auction are the stock exchange, contemporary art galleries would then be more like venture capital. When you buy a work by contemporary artist from a gallery you may be able to do an IPO (i.e. sell it at auction) but you will need a large and diverse portfolios as very few of the companies you invest in will make it to the IPO.

You can choose to buy from established galleries (Gagosian, Hauser & Wirth, David Zwirner, Marian Goodman to name a few) or at established art fairs (Frieze, Fiac, Art Basel), which is a little bit like investing in promising start ups backed by powerful VCs (think Andreessen Horowitz, Sequoia Capital) or having gone through renown incubators (Y Combinator). But to be able to do so you have to belong to a closed circle of “serious collectors” and pay your dues by supporting museums, younger artists, and above all, commit to never ever resell your artworks at auction (which sort of defeats the point). Collectors who have become known for “flipping” works at auction too soon are put on dealers' “black lists” and find it much more difficult to buy promising artists.

You can also choose to focus more on early stage or seed investing by going to edgier art fairs (NADA, Untitled, List) and smaller galleries with a good roster of artists. Some of the artists there sell works for $10-50,000, which could then be resold at auction a couple years later for $400-500,000. Think Oscar Murillo, Lucien Smith, or David Ostrowski, but you have to buy early, and, most importantly, sell at the right moment. Lucien Smith was selling works for around $10-20,000 in 2012 in small galleries. His prices then climbed as high as $200,000 at auctions in 2014. He is now back around $30,000. Ostrowski had a similar rise and fall. Murillo (born 1986!) held up better thanks to the support of mega-gallery David Zwirner. Buying such artists can be an exhilarating ride, but given the risks, more akin to horse racing than investing.

Then you have the equivalent of "love money" (investing in your cousin’s startup because you love him even you don't quite believe him when he is telling you it is the next Facebook). Some galleries or art fairs are showing artworks that will never go up in value and that you will not be able to resell. But you will still buy because you love the artist, the gallerist, the artwork, or just because it matches the colour of your couch. And this is fine too.


CAVEAT!

However there are some notable differences between the art market and traditional investments.

First the cost of entry is enormous. You can easily invest in a blue chip company (say Apple) without being a billionaire, just by buying Apple shares through a stock broker. But it is more difficult to invest in a blue chip artist without being a billionaire because artworks cannot be divided into more affordable shares. There has been a lot of talk about artworks securitization, but all attempts to do so have failed. And even if you want to buy very emerging artists, a modest artwork by a totally unknown artist at a good gallery or fair (i.e. with a very small but real chance to increase x 50) will still cost you between $10,000 and $50,000. And to diversify your portfolio you will need to buy 50 such artists.

Second the transaction costs are very substantial. While your stock broker will charge a fraction of percent, and the most expensive hedge funds used to charge in their heydays 1% management fee and 20% carried interest, a typical auction house will charge 25% Buyer’s Premium and between 5 and 20% vendor’s commission depending on how good a client you are. This means the auction house will keep 30-40% of the final sale price. Galleries will charge 50-60% commissions on new works (and believe me, they deserve every penny. Opening an art gallery is an even surer way to lose money than investing in art). Again there have been a lot of talk about new trading platforms, especially online, where transaction costs would be much lower. But such platforms have either gone bankrupt (remember Fine Art Bourse and their 5% buyer’s premium) or increased their commissions under investors' pressure (e.g. Paddle8). A notable exception is Sotheby's who launched to much fanfare no buyer's premium online auctions though they still charge hefty vendor's commissions. 

In conclusion, buy art you love, do your homework if you want to be able to resell it one day, and maybe one day when technology catches up with the art world, you will be able to add some Warhol or Picasso shares to your stock portfolios. But it would not be much fun, would it?   



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