« LCB Brasserie Rachou | Main | The politics of global warming »

Friday, May 19, 2006

Todd Gibson on money and art

The interplay of art's domain and money's is very complex. The relationship of money to any individual work of art, however, is very simple. There is none. In practice, the culture usually sets a minimum value on works of art, which is really just an ante. When I was an art dealer, any biggish work of art was worth five hundred dollars. Any littlish work of art was worth two hundred. Today, a biggish work is worth a thousand dollars and a littlish work is worth three hundred. Everything you pay over that is the consequence of previous external investments taken at risk.
So you pay a grand for a painting from an unknown artist's studio. If you wait until that artist has a dealer, you are going to pay more. If you wait until she has good reviews, you are going to pay more still. It you wait until Paul Schimmel down at MOCA notices her work, you are going to pay even more than that, and if you wait until everybody wants one, of course, you are going to pay a whole hell of a lot more, since as demand approaches "one" and supply approaches "zero," price approaches infinity. But you are not paying for art. You are paying for assurance, for social confirmation of your investment, and the consequent mitigation of risk. You are paying to be sure, and assurance (or insurance, if you will) is very expensive, because risk is everything, for everybody, in the domain of art.
–Dave Hickey, Dealing, 1997

OK, so now I've buggered myself royally. You can't start a blog entry with a long quote from Dave Hickey and then expect to write anything which doesn't shrivel up in comparison. But I felt impelled to get something really good down here on the subject of art and money, in response to Todd Gibson's latest on the subject.

Gibson starts by setting up a classic straw man, in the form of an inchoate "many managing art investments today". These "many," it would seem, claim that art "is an alternate investment class that keeps pace with or outperforms the market."

First off, there aren't many people managing art investments today: certainly not in the portfolio-manager type way that Gibson would have you believe they are. Every so often some bright spark tries to set up an art investment fund, and nine times out of ten it fizzles out before it is even officially launched. So far, no one has set up a fund which has really caught the imagination of investors and stayed around for long enough to demonstrate clear returns on investment.

As a result, the handful of people who are trying to set up a business by managing art investments certainly do not make the kind of claims that Gibson says they make. Yes, it's an alternate investment class. But no, they're not selling its outperformance compared to "the market", whatever that might be. (The US stock market, I presume, although I'm not sure.)

Rather, there's a very good reason that people are interested in alternative investments, and it has nothing to do with outperformance: it's called diversification. If you had your money in a portfolio of high-flying stocks in 2000, you would have seen your net worth plunge over the next couple of years. If you'd diversified into high-flying contemporary artists as well, then the ability of your art to hold its value in the face of plunging equity valuations would have saved you some of that pain. Contrariwise, technology stocks proved a very good investment during the art-market slump of the late 1980s. The fact that the two asset classes are barely correlated is enormously valuable to certain investors, and essentially helps explain the whole attraction of "alternative investments".

And yet, as I say, art funds have essentially gotten nowhere over the past few years, even as the art market has gone through one of the biggest booms in its history. Why is that? Obviously, because no one sees the point in investing in art which they can't personally enjoy. There's a lot of talk in art-investment circles about art's "negative carry": the fact that far from paying interest or dividends, art actually costs money to own – mainly the costs of storage and insurance. The best-case scenario, if you buy something really good, is that you can put the artwork on long-term loan to a museum which will shoulder those costs for you. Art will never give you the kind of returns you can get from reinvesting dividends – returns which are crucial to the evaluation of any stock-market investment. Instead, art's dividends (as opposed to its capital gains) are entirely non-financial. You buy a work of art because you love it, and because of the personal value that you derive from owning it and seeing it on a daily basis. Buying a share in an art fund is like buying a value stock without a dividend.

But this is not to say that it makes no sense to invest in art. Certainly, I'd never recommed doing so: quite the opposite. But for someone with enough investments, or a high enough income, that day-to-day expenses are no longer much of an issue, there is wonderful value to be gotten from art which one loves. And if a wealthy investor spends a lot of money buying or "collecting" art, then his financial advisor would be remiss not to take that art into account when setting out his investment strategy. After all, the collector now has a large natural diversification out of traditional investments, so it might well make sense not to put more money into other high-risk, high-diversification strategies.

And Todd Gibson's complaints ring rather hollow. He chastises the Mei-Moses art index, for instance, on the grounds that "it only looks at the winners," conveniently ignoring the fact that the same thing is true of pretty much any equity index you care to mention, and certainly of the DJIA and the S&P 500 indices that he mentions in his previous post.

And he also has a most peculiar riff on the perceived success of Dorothy Miller qua art investor, despite conceding early on that "she wasn’t, I’m sure, collecting as an investment." Miller bought widely and bought well, and scored enough home runs (Gibson cites Johns, Kline, Calder) that I'm sure she made a handsome (if posthumous) financial return on her investment – a return which, since she didn't sell this art in her lifetime, she obviously had little interest in. Gibson zeroes in, however, on one of her less successful investments, a painting which sold at Christie's in 1993 for just over $1,000. What does he conclude from this?

Assuming that Miller bought the piece in the mid-1950s for around $125, the painting as an investment barely kept pace with inflation and under-performed the stock market. Even MoMA curator Dorothy Miller, with her great eye and access to work by artists whose reputation she had a hand in making, was not able to consistently pick investment quality art for her personal collection.

As Tyler Green might say, Huh?

Firstly, Miller wasn't trying to "pick investment quality art". Secondly, notwithstanding that fact, Miller undoubtedly put together an investment quality portfolio. And most importantly, the fact that Miller bought some art which didn't skyrocket in value is a necessary consequence of the fact that she bought a lot of art which did: see that Hickey quote, above. Even Gibson says that a lucky collector with a great eye will see big returns "one or two times out of ten". This painting at Christie's is a counterexample of what, exactly? It's like saying that Warren Buffett can't be a great investor because some of his investment picks went down.

And the really crazy thing is that Gibson concedes that Miller's "bad" pick actually increased in value in real terms. Think of all the times you buy a thing you love – something you get value just out of owning. It might be a book, or a car, or a kitchen appliance,or a diamond ring, or a watch, or a computer, or a handbag, or a pair of shoes, or a cellphone, or anything, really. The only thing these things have in common is that none of them increase in value. Even in nominal terms, let alone real terms. And yet when Dorothy Miller bought something she loved and it appreciated eightfold in value, Gibson dismisses the purchase as under-performing the stock market. The stock market! As though Miller might have been better advised to hang brokerage statements on her wall instead of art!

Todd Gibson has now written two posts on "why art isn't a great long term investment". They concluded like this:

Well managed hedge funds will return 15-20% CAGR over a lengthy period. While the return on this little Joan Mitchell painting has been about as good (on a pure percentage basis) as could possibly be, when time is taken into consideration by looking at CAGR the return isn’t amazing. It did beat the market by a wide margin, but a smart asset manager can do significantly better.

About the best you can do is claim that art is a venture capital-type investment. A few pieces, if you know how to pick them, may provide outsized returns. Many more may mirror the market. The majority, though, will barely keep pace with inflation—if even that.

The first post seems to say that even if your art manages to beat "the market" by a wide margin, it still isn't a great long term investment, since there are hedge funds out there which have done even better than that. The second seems to say that if the majority of your pieces keep pace with inflation, a bunch of them mirror "the market", and a few provide outsized returns, then that's a suboptimal outcome.

Most people would be overjoyed to "beat the market" or to have made investments which "provide outsized returns" – not Gibson. He is only happy, it would seem, if all of his investments beat the market, and if he can meet or beat the returns of the world's best hedge fund managers – just by investing in art.

All I can say is I'm very glad that I'm not Todd Gibson's asset manager.

Posted by Felix at 0:23 EST

Comments

Hi there,

Read your last post - on art and money - and completely agree with what you said.

I'm currently editing an arts journal review called the roundtable review - http://www.roundtablereview.co.uk, where people can address similar issues (not just in art but in literature, poetry, etc.)

I wondered if you'd be interested in checking it out?

All my best,

James

Posted by: James Topham at 13:23 EST, May 19, 2006

Hey, my asset manager loves me. Last time we talked, she told me I was one of her favorite clients.

And where would any of us be without our straw men?

OK, OK. So not my best work. I'll be the first (or am I the second now?) to admit that.

But the main point I was trying to make still holds: one should not have the expectation that art will provide a notable financial return.

I was trying to show two things in those posts. First (with the Mitchell), that even what appears to be a monumental return on a pure percentage basis isn't outside the range of what either a good, proactive asset manager or a computer managing an index-linked portfolio can do when the magic of compounding is taken into consideration. And, second, even great pieces of art selected by the best art professionals may not notably increase in value over time. If Dorothy Miller couldn't always pick an emerging star whose work is going to go sky high, what makes someone else think he can?

Buy it because you love it and you want to live with it. Not because you think you'll be able to flip it for a profit.

Posted by: Todd Gibson at 19:49 EST, May 19, 2006

- the Mei/Moses index does have survivor bias. The DJIA and S&P 500, on the other hand, have historical returns which include stocks which are dead, delisted, merged, or removed from the index over time.

- Hedge funds just don't make 15-20% any more

- this article is sorta kinda related, and neato

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=872735

- here's a closely related piece on art performance http://papers.ssrn.com/sol3/papers.cfm?abstract_id=311701

Posted by: vj at 1:07 EST, May 20, 2006

Of course the DJIA and S&P500 have survivorship bias. Do you see any dead or delisted stocks in either of them? When a company is withering and dying, it's removed from the index and replaced with a company which is growing and thriving. Bethlehem Steel isn't in the DJIA any more, while Microsoft and Merck and Wal-Mart are. Do you really think that the long-term performance of Microsoft and Merck and Wal-Mart is indicative of the long-term performance of three stocks picked at random?

And I love the way that Todd can't give up his precious straw men even in the comments: he now seems to be disproving the notion that some people have that they can "always pick an emerging star whose work is going to go sky high".

But I should say that although his arguments might be weak, I don't disagree for a minute with his conclusion. Buying art with the intention of selling it at a profit is foolish.

Posted by: Felix at 10:06 EST, May 20, 2006

Oh, to be numerate.

Posted by: Franklin at 18:20 EST, May 22, 2006

I've found that art makes a great *short-term* investment. I buy what I like, because I want to hang it, but with limited wall space I've often ended up selling older work from my collection to finance and make room for newer work. So far I've always enjoyed about a 400% profit or better on work sold within the first 3-4 years.

I'm not the kinda guy who could enjoy looking at framed stock certificates, nor am I the sort of person who is ever likely to invest money in the market… When I have spare capital it either goes into art purchases, business infrastructure or launching a new line of my own design products.

So yeah, maybe there's a case that art is not a good long range investment (I'm not really convinced). There's definitely a case that aesthetics are a bettter reason to buy art than investment. But I kinda feel like I can have my cake and eat it too, since I've so far never had a piece in my collection that didn't appreciate in value quite quickly.

Posted by: john t unger at 10:37 EST, May 23, 2006

Does anyone know of an individual or group who has actually attempted to start an art hedge fund? If so, how can they be reached?

Posted by: Matthew at 21:44 EST, July 18, 2006

Matthew, there have been periodic attempts to start up art investment funds. I'm not sure that it would be possible to start up an art hedge fund, however, if by hedge fund you mean something which is meant to be market-neutral and which can make money when the market is falling by going short rather than long. How would one go short art?

Posted by: Felix at 7:09 EST, July 19, 2006

I'd like to have a lot more wall space! I just cannot bring myself to selling any of the art I have collected over the last say 5 years. Much of the art I enjoy is actually abandoned (believe it or not). 3 years ago I completely gave up on investing in stocks. All investments I make now involve art or art related. The enjoyment I get from it and the potential rise in value of the works speaks for itself.

Posted by: Michael Storrier at 8:04 EST, August 02, 2006