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The flawed thinking behind buying art as an investment

Posted by artreview.com on 17 November 2008 at 1:30pm

By Franklin Boyd

Only a month ago – well after the Crisis had kicked off – Forbes was breathlessly reporting that some billionaires had managed – inadvertently or otherwise – to 'hedge' their balance sheets by investing in fine art. Eli Broad, for example, had lost approximately $2 billion in his equities portfolio over the previous year, the magazine reported, but the 'soaring value' of his art collection (it increased by $1.9b in the same time, according to a recent appraisal) had nearly made up for it.

Well, I've got some bad news for Mr Broad and anyone else with art on the balance sheet. Based on last week's auction results (and last month's in London), collectors should be marking down the value of their holdings by roughly 40 percent – which, as it happens, parallels the year-to-date losses on the Dow Jones Industrial Average (down 37 percent since this time last year) and the S&P 500 Index (down 42 percent for the same period).

While the contemporary art auctions in New York last week were not the bloodbaths that some had feared (or hoped for) — Christie's and Sotheby's sold 68 percent of the lots in their evening sales (but only 54 percent and 43 percent by value, respectively) — one thing should now be perfectly clear: art is not the strategic investment it has been widely proclaimed to be.

It wasn't supposed to happen this way. According to the money magazines, the art-investment fund advisors and the auction houses, art was supposed to be a 'safe' alternative to equities, because the 'returns' on art had a negative correlation to returns on stocks, meaning that in an economic downturn you might take a bath on your stock portfolio, but the value of your art collection would hold up (or at least long enough for the economy to pull through and for the equity markets to rise again). As Citi Private Bank's Suzanne Gyorgy told The Business Times last month, when there is a decline in equities, investors will turn to tangible assets and the art market will see a 'bump' in value, 'counter-cyclical to the equities markets'.

Unfortunately an overwhelming number of art market analyses have been relying solely on the conclusions provided by the Mei Moses Fine Art Index. The Fine Art Index compiles 'art market returns' (which are derived by looking at works that have sold multiple times at auction) and compares them to the S&P, concluding, primarily, that when the stock market skids, the art market won't follow suit for another 18-24 months. And sure enough, the last art-market peak came two years after 1987's 'Black Monday'. But looked at from a Japanese perspective, there's no such lag: just as the art market was peaking, so did the Nikkei, which to this day has not returned to its high of 29 December 1989. When the stock market of the world's biggest art collectors went into freefall, the art market immediately followed. In short, the art market doesn't trail, and neither is it 'counter-cyclical', particularly today, when the bulk of the buyers are far more reliant on wealth that in many instances exists only on paper (and can disappear very rapidly).

Yet no one has been more enamoured of applying financial lingo in the service of increasing prices for contemporary art than the auction houses. Based on recent statements, Tobias Meyer (Sotheby's Worldwide Head of Contemporary Art) and Amy Cappellazzo (International Co-Head for Christie's Contemporary Art Department) seemed to believe that art at the high end was not just a good alternative to stocks, but close to bullet-proof. As Meyer told Forbes in October, 'There is an enormous amount of cash out there for very limited [numbers of] works of art… It's the golden ratio for any market: limited supply, unlimited demand…. The high, high end will get more expensive.' Of course, Meyer just presided over a sale where demand was not only limited, a mere six works managed to meet their low estimates. And this past April, Cappellazzo, participating in an Artforum panel, told the audience, 'Warhol's market trades like currency — it is the most efficient market there is… If you execute the trade at the right level… the market will absorb it all at all levels. It is a perfect market, really.' Based on the results for Warhol this week (13 percent sold by value at Christie's), that market isn't so perfect after all. Can we all now agree that having a painting of a dollar sign isn't the same thing as having dollars?

None of this is to say that there aren't good deals on art out there. Just like in the stock and real estate markets, there are works available right now whose value will increase, if not soar. But the thing is, those values are going to peak in tandem with the next run-up in global wealth. Gone are the days of the geographic and financial isolation of art collectors, and gone too is the 'alternative' of art as an asset.

Tags: amy cappellazzo, art market, artreview, christie's, contemporary art auction, ei broad, franklin boyd, sotheby's, suzanne gyorgy, tobias meyer

6 Comments

Comment by THE GEWGAWSIAN on 17 November 2008 at 6:49pm: ya win some, ya lose some.

Comment by Judy Rey Wasserman on 18 November 2008 at 11:57pm: Historically art is one of the best investments that one can make.
Art has weathered every storm of history and it's owners and their heirs come out on top -- if they can maintain custody of their art.
A van Gogh will remain a van Gogh, and the painting will not go out of business for poor management or because its technology becomes obsolete or surpassed by some new artist. 300 hundred years from now, assuming we still have a planet and civilization, the van Gogh will be valuable.
Very few companies survive 100 years.
There are certainly good deals left in the art world. Maybe great deals now that some collectors are less prone to pay over the top prices.
Of course there are and probably will be problems in the Contemporary Art market, which was highly inflated for some, even many artists.
Historically, the artists whose work is revered usually are pioneers, who founded authentic art theories and movements, inspired other artists for generations to come (something we cannot predict) and whose work is meaningful for many people.
Also, although I cannot argue the recent lack of sales for Warhol works at auction, the works offered were generally not some of his best. Andy Warhol has inspired and influenced many of today's artists, including me, so I would not dismiss his work and its lasting power quickly. My first Post Conceptual portrait in the Essence series was of Andy Warhol, then I began to create the other artists including van Gogh, Monet, Rembrandt, etc. that will be used in that upcoming body of work.
Art may not be an alternative asset. Along with precious metals and jewelery it may still be one of the best assets if one has a top or good painting by an artist whose work will stand the test of time.
Yesterday I read several articles on the web that are beginning to point to inflation. If that occurs investing in art today is an excellent idea!

Comment by Brenda Weiss on 21 November 2008 at 7:23pm: That's why in times like these, It is wise to HOLD ONTO those Named pieces, and invest in the next master, The Damien Hirst before he Becomes "Hirst", that we all now know.

As I recently reported...
The best way to make a killing investing in art is to pick the next big thing before everyone else does.
"Why an emerging artist?"....Well, in the same way that stock market investors get into the habit of attaching too much worth to their favorite stock despite all fundamental evidence to the contrary, artificially upholding its value 'til the very end, art enthusiasts too often 'place their bets' based upon name, or brand, recognition, when it is more often than not the lesser-known artists who are the better value.
When looking at investing in art it is easy to focus purely on the aesthetics which is really only part of the investment. If you purchase an artwork you are not just investing in the artwork its self, you are also investing in the artists career which is especially important when looking at emerging artists.

Comment by Jo Hurlow on 23 November 2008 at 12:27am: Indeed what can be flawed in supporting an ambitious emerging artist whose work you appreciate. Their career develops, society gets more art to interact with and because they are ambitious their work will increase in value.
So their work will not be hyperinflated in the current climate, but how can that be a bad thing? Despite this so called crash, the emerging lower financially valued artist remains healthier.

They start with nothing, but debt, so a slower escalation in their income simply means more of the same. Take the humble artists of Future 50 in Leeds this weekend (www.axisweb.org/future50.aspx) , I know that the 1 year post graduation from RCA Tereza Buskova is still becoming increasingly established and is successfully selling prints at over 200% (£1900) her graduation show value. Despite this she still has to do grounded work to survive, but then perhaps it it this gentler credit crunched rise that prevents grandiosity from overblowing an artist's creativity until it is nothing but a grotesque branded party piece for the tabloids and the financially intoxicated.

Comment by THE GEWGAWSIAN on 26 November 2008 at 10:27am: If one is going to invest, best investments are gold, oil and rubber.

Comment by Hayward Gladwin on 6 December 2008 at 1:52am: This assessment of the current state of the art market is just that, a current assessment of what has just happened. The world doesn't stop moving just because of an auction result and it isn't a wise decision for the long term to go fatalistic and to assume that what has recently happened will that way from now on. A year ago, Mr. Broad's works would have been worth 40 percent more than they are now and they will exceed that amount somewhere in the future. As you can see, he is currently busy buying marked down work at the auctions. The historic works will retain their value over a longer period of time, but as in the stock market, there are no guarantees, just plain insight and perhaps some luck in the cases of new and interesting prospects. In the contemporary market, I would look for artists with significant publicity and solid work that have been undervalued by trendier artists these past five years, rather than last year's approach of spending more buying what everyone else wants to buy just to see if you can.