Buy Art, Even If It's Not Much Of An Investment
By Piet Viljoen: First Published in Business Day Live.
THE art market survived — and thrived — during and after the financial crisis of 2008, leading many investors to consider adding art to their portfolio. With bankrupt governments implementing financial repression, competing assets yield little or nothing. Art indices are cropping up with invariably upward sloping lines and financial advisory firms suggest art possesses "wealth preservation qualities".
To judge whether art can qualify as a legitimate asset class in an investor’s portfolio, we need to understand how investments are priced and what returns we can expect.
Stock markets are efficient price-discovery mechanisms but dealers’ rooms — where most art sales take place — are not. The dealer sets the price; there is no aggregation mechanism, where buyers and sellers can get together to determine a price.
In the art market, price creates value and buyer satisfaction rather than reflecting it. The incentives are inverted. There is a strong Veblen effect — the higher the perceived price, the more valuable the object is and the greater the buyer satisfaction, the opposite of how investing works.
Real investments are priced after carefully calculating the present value of all the future cash flows that will accrue to the owner of the asset. Many investors with different assumptions and methods do this; their views are expressed via bids and offers on a liquid stock market and they try very hard to do a good job of it through the rewards of owning a growing stream of dividends.
A serious investor would be crazy to trust the art market to price his "investments" correctly. For a real investment, value determines price, while, for art, price determines value. To earn good returns from art is hard. You might end up with the right pieces at the right time, but to get into that position requires an interest bordering on obsession and deep pockets.
But the main headwind to good returns comes from the mundane. Stocks and bonds don’t need to be insured against damage, don’t need to be transported by trained handlers, and don’t need to be kept in a climate-controlled environment.
In the stock market, you don’t pay your stockbroker 20% of value to sell nor do you pay 10% of its value as a "buyer’s premium". As a result, most art will never show any return at all, except possibly a negative one.
Looking at a real life example: the Whitney Museum of American Art sold Picasso’s Garcon a la Pipe for $104m in 2004 after acquiring it for $30,000 in 1950. This seems to be a staggering gain but, as Bill Clinton said recently, do the maths. It is an annual rate of growth of only 16% — before costs. The whole Whitney collection has shown annual gains of less than 7% a year over past 50 years.
And art indices? They have many flaws: they measure only paintings that have sold at least twice at auction, and they do not include work that failed to sell. So they measure only successful artists. That is like setting up a stock market index that includes only stocks that have gone up in price. They also exclude private sales, dealer sales and sales at art fairs — all significant sources of turnover in the art market, where prices can differ substantially from those achieved at auction.
The art market is highly psychological and social. But buying art doesn’t just offer a sense of community, it engenders feelings of victory, cultural superiority and social distinction. A common term used by collectors, however, is that buying art gives them a "high". As an investor, it just doesn’t make sense to compete for assets in a market that is primarily driven by emotion.
Having said all this, I strongly recommend that we all go out and buy as much art as we can afford. Buying art has tremendous positive social benefits. Collectors facilitate the examination of societies’ values and norms by people who have generally not been co-opted into the power structures of politics and business. As such, collectors play an important role in developing our ability to look at ourselves critically.
Importantly, in addition to its function as a mirror to society, art can also simply be beautiful to experience, thus providing even more social benefit. And this should be the primary driver of our decisions about what art we buy and why.
• Viljoen is executive chairman of asset manager RE:CM. This is an excerpt from a lecture he will give at the Prince Albert Art Festival next weekend.
