Buying art purely as an investment is a very risky business, in my opinion.
This morning I read an article in El Economista about Javier Lumbreras, the founder and director of the Artemundi Global Fund (AGF) where he talks about how there is no doubt in his mind that collecting art is currently the best investment as it will never lose its value, it is anti-inflation, the risk is very low, and the art market is booming. A few big figures were thrown in here and there by the author of the article, Vicente Gutierrez, like the fact that the art market is currently a $60 B I L L I O N dollar industry (Oh my!). However, Gutierrez failed to specify the minor detail that these $60 billion dollars don’t represent fine art sales only: they encompass everything from luxury goods to real estate, to wines and memorabilia, decorative art and contemporary art. It is a very fragmented market and so that massive figure presented on its own is very, and I mean very, misleading.
This article got me thinking because Mr. Lumbreras is a very respectable man in the art and banking world. He is a devoted art collector, a private art consultant and a published author who at the end of the day has an intimidating reputation. Although it is not my intention to criticize him (because we’ve actually become friends), I simply disagree with the confidence that he places in art as an asset class.
Let me explain a few things first. In the past decade or so there has been special emphasis made on art as an asset class because globalization has increased the market’s boundaries and there are new buyers with new motivations that want, as Mr. Lumbreras mentions, an asset that has low correlation, “low” risk, and that diversifies their investment portfolio. Totally understandable, right? Similarly, wealth management groups have also started adding new “services” to their accounts because competition is increasing and clients need to be satisfied.
Please don’t start thinking that this is another “market bubble”. That term is so overrated in my opinion and this is just the market’s natural progression. Times are changing.
Let’s continue. Yes, there are certain artists from whom you can expect and/or predict return but for others, especially contemporary artists, it is a battlefield. For example, Clyfford Still is an artist who you can be absolutely sure will always make a good return as there is a very small supply of his work and the rest is in the best museums around the world. However, Clyfford Stills are not exactly cheap. The last one sold at auction in November 2012 for $61.7 million. Not just pennies and dimes. On the other hand, an artist like Damian Hirst is a risky and unpredictable investment as for example, in 2008 when he had the Sotheby’s solo auction of his work that totaled at £111 million it seemed as though his market was hot. However, at the same time one of his representatives, White Cube gallery published their Sales & Stocks where many Hirsts appeared to be unsold. Strange, huh? Since it’s difficult to understand the artist’s supply and demand, results can be deceiving and misleading to possible buyers that are specifically looking to invest in art.
According to little old me, this is the problem(s) with buying art as an investment:
- The lack of transparency or liquidity in art as it is a collectable. If all of a sudden you need cash, you must find a buyer and sell the work which is easier said than done. Moreover, the economical climate both in the art market and globally might not be adequate at the time, especially when dealing with contemporary art.
- There is no standardized method of valuing art as finding the right expertise is not always easy and to a certain extent (after its provenance has been cleared) appraising a work is subjective. Don’t kid yourself.
- There is no system or model for measuring market demand: Prices reached at auction do not, I repeat, do not reflect the amount of people interested in the work. At the same time we are all in the dark about an artist’s primary market, its supply and prices. So how are we supposed to make an “informed” decision when investing?
- Buying art is not just about buying; its operating costs have to be taken care of. This includes cleaning the artwork, keeping it safe and paying its insurance. If something happens to the work, there goes your investment.
- The art market inevitably and to some extent is tied to the volatile global economy. Must I mention the 2008 collapse of Lehman Brothers? Part of that year and 2009 were sloooooowwwww years for the art market due to the recession.
- Depending on what you buy, there is always the risk of buying fakes and forgeries. If you are rolling your eyes as you read this, trust me, you’d be surprised how common they actually are. Forgers are not just copying a work but creating new works that in theory fill missing gaps in an artist’s repertoire. The most important German conman of the 21st century, Wolgang Beltracchi who was sentenced last year to only six years in jail after admitting to having forged hundreds of paintings by 20th century masters went as far as to invent a collector (his deceased father in-law) and his art collection to prove the works’ authenticity. Google him if you don’t believe me.
- There is a certain psychological twist in the matter of buying art as an investment. When someone says, “you should buy this, it’s a great investment” you can’t deny that something clicks inside of you. It’s almost like a reassurance that although you are about to freeze and hang X amount of dollars on your wall, it’s okay because it is bound to make a good return. It is not that easy, sorry to break it to you.
- Lastly, the most cliché reason of all, but to me it is the essence of the market: the art market is unregulated and opaque. There, I said it.
I think that we need to accept art for what it is before assessing it from a financial point of view as we first need to understand its underlying risks. Art is different from any other asset; that is the reality. Firms like Mei & Moses and Art Maket Research have created market indices that unfortunately are not suitable or reliable as investment tools but rather as ‘trend spotters’ in the market. It might be worthwhile to stop fighting this reality, understand it, and approach the matter from a different point of view.
So if you are one of the people that are thinking about buying art solely as an investment, my suggestion to you is to take $30 dollars, log on to Amazon and buy The Story of Art by E.H. Gombrich. If you know nothing about art then go, fall in love with it and then, start buying. That will be all the reassurance you will need.