artnet news recently ran an interesting post about recent claims on the strength of the art market and art market returns based upon a Wall Street Journal article. The artnet news article looks at that claim and believes it is incorrect. Part of the equation in most art investment is carrying costs, such as insurance, storage and other connecting fees (such as appraising). Another consideration is some stocks pay dividends, while art investments typically look for long term gains without additional income. Then take into account seasonality of selling and lack of liquidity, along with how the index was computed and smoothed, such as not including buyers premiums in the art index, and you do have some legitimate questions.
Overall an interesting article, well worth reading and understanding some of the difference in art investment vs more traditional investments in stocks and bonds.
artnet news reports
Source: artnet newsOn Monday, the Wall Street Journal ran a story proclaiming that artwork outperformed all other asset classes from the beginning of 2018 through November, including such investment mainstays as index funds tracking the S&P 500 and US Treasury bonds. Which would be colossal news, if it reflected anything remotely resembling an educated view of the financial realities of art collecting.
Unfortunately, that’s simply not the case.
The confusion arrives courtesy of the Art 100 Index, a quantitative model by the analytics firm Art Market Research. Since details about the index and its methodology were scarce in the story, I got in touch with Art Market Research for more information.
According to a representative, the Art 100 tracks public auction sales of work by 100 artists from 17 countries across three centuries who are “chosen for being as well-known as Renoir, Warhol, and Picasso and traded in sufficient numbers to be indexable.” (The representative declined to provide a full list of artists in the index.) Results come from “22 leading auction houses” and are smoothed by the removal of buyer’s premiums, extreme prices, and seasonality, along with other statistical techniques.
By Art Market Research’s numbers, those artists’ works delivered a 10.6 percent return on investment through the first 11 months of 2018—a figure that gives the S&P’s negative 5.1 percent return over the same period all the appeal of plunging your whole arm into a warm compost bin.
However, it’s dangerous to treat this comparison as apples to apples… and Art Market Research actually agrees. Via email, the representative acknowledged that “creating indices on the art market will never mirror financial indices for obvious reasons—lack of liquidity, seasonality, etc.” Apart from those factors, I think two others deserve some unpacking. (The representative declined to comment on either.)
The first key drawback of the Art 100 Index (and any similar model, including one that my employer, artnet, discontinued several years ago) is that it implies the costs and benefits of holding artwork are the same as the costs and benefits of holding immaterial assets like stocks or bonds. But like the notion that you can effectively camouflage male-pattern baldness with a substance you spray out of a can, this is just a slim fiction for sales purposes.
Unlike stocks, bonds, and other immaterial financial assets, artwork and collectibles demand that you regularly pay what are called carrying costs—expenses necessary to keep the asset in your possession.
A share of stock is just an idea. It’s made “real” by an entry in an issuer’s ledger and a certificate in the shareholder’s records—no different than the records memorializing ownership of a conceptual artwork. Since shares have no serious physical form, preserving one share is no more costly than preserving 100.
Obviously, this is not the case for traditional artworks. Each one is a tangible object that needs to be kept in pristine condition, especially if you want to resell it at a profit later. So owning 100 paintings is vastly more expensive than owning one.
This doesn’t just require paying one-time fees for proper framing, packing, crating, and shipping to a secure location. It requires paying monthly fine-art insurance premiums (unless you’re a reckless gambler) and fine-art storage fees (unless you live in a massive, hyper-secure, climate-controlled compound).
Those costs quickly mount into the thousands of dollars for any blue-chip collector. Which, in turn, means that your art “investments” are hemorrhaging real cash every 30 days.
Your art collection is probably making less of this than you think, according to our columnist.
The second key difference is that stocks pay dividends. For the uninitiated, dividends are a tiny fraction of a company’s profits or cash reserves, which get distributed to shareholders at intervals as a return on their investment. The higher the number of shares an investor owns, the higher the total dividend they get paid.
Remember, share prices in the financial markets are more about what buyers and sellers think a company will be worth later than how it’s actually performing in real terms right now. (This is why Netflix’s share price recently topped Comcast’s, even though Netflix only made $550 million in profit in 2018 versus Comcast’s $22 billion.) So even if a company’s share price declines in the financial markets, it can still pay dividends to shareholders.
Even better, investors can choose to re-invest every new dividend into the same stock, automatically increasing the size and value of their holdings without paying any new costs.
But if you own, say, a Picasso portrait of Dora Maar, she doesn’t reach out of the painting and hand you $50 every few months. And even if she did, you couldn’t hand it right back to increase the size (and thus, value) of the canvas.
All of the above means that comparing straight-up annual returns for an S&P 500 index fund ignores reality. Incidentally, past artnet News contributor Felix Salmon just gamed out the consequences of this comparison a few days after the WSJ post:
Over the past 50 years, the level of the S&P 500 has risen by 2,100%. So if you bought a painting in 1968 for $1,000 and it’s now worth $45,000, that’s up 4,400% and you’ve doubled the performance of the S&P, right? Wrong. The S&P has been throwing off dividends all that time. If you didn’t need income from your painting, you didn’t need income from the same money invested in stocks. And if you’d reinvested your dividends, you’d actually be up 9,300% since 1968.
Obviously, it’s still possible to make money—and sometimes, a lot of money—by reselling art. But it’s a hugely different process from Wall Street’s. (The Art Market Research rep was keen to point out that its indices “are typically used for retrospective valuations. As such, we do not offer investment advice.”) If we refuse to acknowledge the difference between making money off of art and stock, we’re not having an honest conversation about art “investment.”
[The Wall Street Journal]
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