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- Investing in Fine Art
Sunday, January 7, 2024 |
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Art as an Investment Makes Sense But for Whom? And How?
The following synopsis explains fine art as an alternative financial asset. It delves into the intricacies of art valuation, which is influenced by both subjective aesthetic factors and objective financial considerations. The aim is to assess art's viability as a financial investment by comparing its performance with traditional financial assets.
Unique Features of the Art Market: The Role and Risks of Auctions
Art valuation is complex, influenced by both tangible financial value and intangible factors like historical significance and personal taste. This dual nature of art valuation differentiates it from other, more straightforward, financial assets.
A key aspect of the art market is the role of auctions. Auctions provide a transparent setting for pricing art, making them crucial for understanding market trends and valuations. However, while auctions provide the only publicly available valuation data points, there are data distortions.
Fine art auctions, due to their relatively low regulatory oversight compared to other financial markets, can be susceptible to self-dealing practices. Fine art auctions can sometimes be a bit like the “Wild West” due to less strict rules compared to other financial markets. This can open the door to self-dealing, where those involved might look out for their own interests more than they should. Here's what that can look like:
Price Manipulation: Auction houses or insiders may artificially inflate prices through shill bidding, where fake bids are placed, by undisclosed agreements between sellers and bidders, to drive up the price. Such manipulation can misrepresent the true market value of the artwork.
In my 33-year history of collecting art, for both passion and investment, I know of several instances where sellers that owned multiple pieces of an artist employed someone to bid for their auction item with the proceeds returning to the same seller minus the auction house’s standard 20% commission (yikes!). As a result, a seller could artificially inflate the value of their existing inventory, and even obtain loans based on appraisals that reflected the inflated value created by the shill bidding.
Insiders Playing Favorites: People employed at the auction houses may have their own stakes in some artworks, which can lead them to push certain pieces or clients unfairly.
Playing the Market: Some folks treat art more like a quick money-making game, buying and reselling fast for profit, without really caring about the art itself. This can make the market unpredictable for artists and/or serious collectors.
Behind-the-Scenes Deals: Secret agreements about prices or guarantees between buyers, sellers, or the auction house can impair the fairness of the auction.
Art Market Speculation: Auctions may be used for speculative trading, where art is bought and quickly resold for profit, often disregarding the artistic value. This speculation can create bubbles and an unstable market, affecting artists and genuine collectors.
Money Laundering: It wasn't until the 2001 passing of the Patriot Act legislation that auction houses were also required to implement robust KYC (Know Your Customer) and AML (Anti-Money Laundering) procedures. But they only started really adhering to these requirements a few years ago. Prior, buying fine art, where a painting that can fit into your briefcase could cost $2 million, was a prime method for criminals and foreign governments to ‘launder’ criminal revenue.
So, while not all art auctions have these issues, the potential for such shenanigans shows why much more transparency would keep the playing field level for investors and collectors alike while benefiting the creators of the art.
“Outlook” by Julie Curtiss. 500% appreciation since 2019
Exploring the Art World as an Investment Opportunity
Did you know that investing in art isn't just about owning beautiful pieces? It's a whole financial adventure! Early on, experts like Baumol thought that art didn't make as much money as, say, government bonds. But more recent studies show a more colorful picture - sometimes, art investments can really shine!
Art vs. The Stock Market: An Interesting Comparison
Researchers have been comparing art to big financial players like the S&P 500. Guess what? Art and the stock market don't always dance to the same tune, which means art could add a nice twist to your investment portfolio.
How Do We Put a Price Tag on Art?
This is where it gets really interesting. Many writers try to figure out what art is worth. They use something called the hedonic price index, which looks at things like who made the art, what it's made of, and how big it is. To make their points, the authors gather data from sources, such as artnet.com, which keeps track of famous artists' auction sales.
What Did They Find Out?
Roller Coaster Returns: Sometimes, art can outperform other investments or indices, like the S&P 500, but hold on tight – it can be a risky ride!
Art and Stocks - A Gentle Connection: Art and stock market returns have a bit of a connection, but it's not super strong. So, investing in art might add a little spice to your portfolio, but it's not a total game-changer.
Comparing Risks: Using a fancy model called the Capital Asset Pricing Model (CAPM), art may be a bit safer than stocks in some ways, but generally, they both tend to be positively correlated.
Wrapping It Up
The big takeaway? Art can be a great investment with some pretty impressive returns. But it's not always a smooth journey, and there are many things to consider, like personal tastes and market trends. The paper suggests we need more research, especially looking at different types of art and more up-to-date data.
“Art is your wealth on the wall.”
Curated For You
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