Volatility in the market, and news of insider trading and other corporate shenanigans, has scared away many investors, especially those with long memories, from stock investing. Very low interest rates have been a major deterrent to investing in bonds of every kind, as well as simple money market funds. Partly due to these factors, many investors have been driven to more exotic investments; art, coins, rare wines, and other collectibles.
Investing in collectibles only makes sense if you have the time and inclination to develop real expertise, and, because it takes so much time to develop such expertise, it really only makes sense if you have such a deep interest in one of these areas that you really enjoy the research; it should be pleasure, not work. Any of these types of alternative investments will have all the disadvantages we outlined for real estate investments above; especially lack of liquidity and transparency, as well as very high transaction costs.
Of course, lack of transparency can also be an opportunity. If value is not clear, and you can really recognize value, you can be the person that buys the Warhol original at the garage sale. But even if you have this expertise, you’ll have to go to hundreds of garage sales before you find a hidden gem, which only makes sense if you really enjoy garage sales. This is true of all collectibles; and of every type of active investment – you need to look at scores and scores of possibilities before you’ll find one that really makes sense.
The best reason to buy art is because you love it, although you may also wish to encourage certain artists or types of art through your patronage. Art has all the other disadvantages of collectibles like lack of liquidity, but pricing for art is even more irrational than pricing for other collectibles. In fact, art pricing is the most difficult to understand of any asset class. We believe the best book ever written on the contemporary art market is Don Thompson’s The Curious Economics of Contemporary Art. Consider some facts he presents:
- • Only one out of 200 established artists will ever have their work sold at the sort of glamorous art auctions that you read about. And remember, that’s out of established artists. In 2006, only 810 works of any kind of art were sold at auctions for more than $1 million. Reading the newspaper you may think such sales happen all the time, but in any given year millions of new works of art are created, and an infinitesimal amount of those works will ever be worth a lot of money.
- • “There is no close relationship between the rankings of artists (by experts) and the prices their work brings”.
- • The art market is relatively very small; there are about $20 billion in contemporary art sales each year, and contemporary art is the biggest part of the art market. While that sounds like a big number, the US government sells about $100 billion in new bonds – every month. A single corporation, Apple, had about $165 billion in sales in 2012.
- • There are about 80,000 working artists in New York and London, the world art capitals. Of those, about one in a thousand is a famous artist making a lot of money. There are about 300 or so more making over $100,000 a year. All the rest, well over 99% of the total, are just getting by, or supplanting their art sales with income through teaching, or have some other source of income, such as a supportive spouse.
- • 80% of the art bought from local dealers and local art fairs will never sell for as much as the original purchase price.
Just as you should buy a home because you will enjoy living in it, you should buy art because you will enjoy living with it. If your objective is to have fun, spend your time in interesting ways, or spark your creativity, by all means buy art or other collectibles. If your objective is to make money, buy a low cost stock market index fund. We say this as very active art collectors and entrepreneurs with a long history in startup companies. In fact, we encourage Attitude Media users to invest in our ventures, but only if they have the time, interest, and appropriate risk tolerance.
The Bottom Line
The most lucrative investments are often the most boring. Sure, lots of people get rich with investments in startup companies, art, or complex financial engineering. But far more lose whatever they invest. For every startup company that makes it big, there will be a hundred, or a thousand, that fail. For every emerging artist that goes on to fame and fortune, there will be ten thousand that make art you can never resell. At Attitude Media, we love start-up companies, art, and all sorts of other high risk investments. But we never go into them blindly, but instead make a careful calculation of costs and benefits, including non-economic benefits.
The only reasonably sure investment is a government insured bank account; if you can tolerate risk and volatility, and have a long term perspective, you should probably follow our model portfolio outlined above. Life, and investing, is fraught with danger and risk. Be careful. But life is short. Spend your time and energy, and, occasionally your money, on the things that really matter to you.