Sotheby’s Sells Itself to One Rich Collector
Telecom mogul Patrick Drahi is paying $3.7 billion for the auction house.
Art collecting and investment is no longer limited to only the wealthy elite. If you have an interest in art, then you can diversify your assets and even find something nice to display. At the very least, your investment will look a heck of a lot better than a stock certificate.
When you invest in a piece of art, you're buying it with the expectation that demand for that piece or similar pieces will increase faster than the supply. If that happens, then the value of the piece will increase, and you may be able to sell it for a profit.
That's easier said than done.
Despite the high costs often associated with investing in art, it still could deserve a spot in your portfolio.
The art market is not very highly correlated with the stock market or bond market. That's exactly what investors should be looking for when diversifying their assets. No matter what the financial markets are doing -- moving up or trending down -- the art market isn't much affected.
But investors should be wary of being enticed by the high returns that they could theoretically earn by investing in fine art.
Does art go up in value? It's possible, if you are selective, diversify your collection, and hold pieces long-term. The same guidance for your stock portfolio applies to art investing: Do your research and don't put all your eggs into one basket. Art investors should expect returns more comparable to those of bonds, not the stock-market-beating returns touted by the art indices.
There are several ways to invest in art, each with varying degrees of risk and reward.
High risk and high price tag: You can buy original works at auctions, galleries, and art fairs; however, doing so comes with the highest price tag and highest amount of risk. You can try to buy works by an up-and-coming artist, hoping that you've found the next Banksy. A one-of-a-kind painting or sculpture could someday be worth much more than what you paid, or you may have trouble reselling it. The artwork could end up being just an expensive home decoration.
Low risk and low price tag: Instead of buying an original, you could opt to buy a print of an original painting or drawing. A high-quality, limited edition print can be very valuable and costs a fraction of the price of the original. But since prints usually aren't unique, they don't increase in value in the same way as the originals.
Low risk and high price tag: You can buy pieces by "blue chip" artists like Andy Warhol, which generally hold their value better but offer less capital appreciation, or upside. Blue chip artists are those whose works' values are the most stable and not subject to fashions and speculation.
Importantly, if you're going to buy individual works of art, then you probably want to buy works that make you happy. If you invest $10,000 in a painting that you think is ugly just because you expect its value to rise, then you're missing out on the fun part of investing in art versus other assets.
If you don't want the hassle of owning a piece of art, it's still possible to invest in artwork without taking possession of the physical asset.
Art funds, which are structured much like other investment funds, allow investors to partially own pieces of art. MasterWorks, for example, is a fund manager that acquires blue chip art at auctions on behalf of its investors. It creates a holding company for each piece of art, to acquire the art, store it, promote it, and resell it for profit. It registers that company with the SEC and issues shares to those who want to invest in that specific piece of art. Securitizing artwork in this way makes investing in art more affordable and the market for the artworks' shares more liquid. Investors can buy and sell shares much more easily than buying and selling the pieces of artwork themselves.
This type of partial ownership can be an accessible way to get into art investing. Firms like MasterWorks conduct the research to identify artworks with good chances of increasing in value, and they oversee all of the maintenance required to keep the artworks in pristine condition. However, their investors pay a fee for this service, and don't get to physically take possession of the art.
Unfortunately, there is no such thing as an art exchange-traded fund (ETF) or mutual fund. Focusing an ETF or mutual fund on art is impractical due to the illiquid nature of the art market. Art's singularity and inherent scarcity prevent fund managers from simply buying more Renoir or Basquiat paintings, like they could with stocks, to satisfy increasing investor demand. Similarly, if many shareholders of an art fund wanted to redeem their shares, then the illiquidity of the art market would prevent the manager from easily selling the fund's assets.
Firms like Sotheby's (NYSE:BID) and Christie's that sell art as investments will often cite Art Market Research's Art 100 Index to justify their starting bids. The index, which tracks sales of 100 artists across various regions, styles, and periods from 22 auction houses around the world, can convey a broad sense of how the global market for artwork is performing.
In 2018, Artprice launched its Artprice100 Index, focusing on blue chip artists. The company says that the index grew at an average annual rate of 8.9% from 2000 through 2017. Meanwhile, the S&P 500 grew at less than half that rate during the same period (which, notably, starts just before the dot-com bubble popped and includes the Great Recession). That said, the S&P 500 outperformed the Artprice100 in 2018 and 2019.
There are a couple of problems with these art-focused indices. First, they only account for the auction prices of the artworks sold. All of the costs associated with investing in artwork are disregarded, and would certainly drag on art's performance as an investment. The sale price of a piece may not generate any profit if the art is sold at a price lower than the amount of the upfront costs (like sales tax and transportation).
The second problem is a phenomenon called "selection bias." Art market prices don't update every moment or day like the prices of securities traded in the financial markets. Art indices are based on the available auction data. If a piece of art never sells, then there's simply no data. And the works that aren't going up for auction are often worth less than what the most recent buyer paid. That makes these indices post returns greater than those prevailing in the overall art market. The indices are "biased" to only account for the winners.
You can find art for sale just about anywhere in the world. You could walk down to your favorite local coffee shop; there's a chance that you'd see some art hanging on the walls that you could purchase.
Brick-and-Mortar Galleries: Investors looking for art shouldn't ignore art galleries. They charge a hefty markup, which investors may see as wasted money. in order to make a profit. But galleries also provide the service of promoting an artist and getting their works into museums. The investment from a gallery in an artist is a sign that the gallery views the work as a valuable contribution to the arts. The art, therefore, likely has more monetary value than that painting on the wall at the coffee shop.
Online Galleries and Auction Houses: You can also buy art over the internet, either through an online gallery or online auction house. The big names -- Sotheby's, Christie's, and others -- accept online bids. You can also find smaller, exclusive online galleries and auctions via a simple web search. Be sure to research the reputation of any online art dealer before you bid or buy.
Here are a few more things to consider before you decide to commit your money to investing in artwork.
Investing in fine art may be a good fit for you if:
Avoid art as an investment if:
Investing in art isn't for everyone. It carries a lot of risk, and investors shouldn't expect huge returns, even from a diversified collection of works. But if you buy artwork that makes you happy, at the very least you'll always own pieces that you love and can display proudly in your home. If any of your artwork increases substantially in value, then you can sell those pieces for a handsome profit and use the proceeds to redecorate.
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