The idea of bitcoin was that supply would be limited but demand, in theory, infinite. That’s how it works when you invest in fine art, too.
Supply of fine art is limited by the deaths of artists and the number whose reputation makes them worthy of collecting. Demand seems infinite with new sources of wealth appearing from China and India, Russia, the Middle East, and America’s stock market.
Auctioneers have been trying to “commodify” art for over a half century. Art has been created for the market since the Renaissance.
Once an artist’s reputation is established, their work becomes a commodity whose value grows with time. Events like the current pandemic can create panics that yield great bargains. But even in normal times, you can invest in fine art to receive a yield as good as stock and bonds.
Invest in Fine Art: The How and Why
Art is more like real estate than stocks. It’s not liquid. It’s an asset class for money you don’t need back. Its promise is that time itself will yield a return.
That doesn’t mean it’s not commodified. The Artprice100 index, first created in the late 1990s, measures the value, at auction, of leading contemporary artists. It’s designed to show investors how money put into fine art can be a superior investment.
Owning art doesn’t mean you have to sell, either. You can borrow on up to half a collection’s value, and banks are eager to lend. But this only holds for so-called blue-chip art, works by people (often dead) with established reputations.
The fattest returns, and biggest risks, are found in buying living artists whose reputations are still being established. Creating these reputations is the most important role played by auction houses. They explain, curate, and make markets in artwork that may still be affordable for an average investor.
This is the dream every new art investor is sold. Buy who you like, create a collection, follow the new, and your heirs will collect the financial results. It does happen, just not as often as advertised.
The Pandemic Market
If you have both cash and time, 2020 is a great opportunity to invest in fine art.
Before the pandemic, the work of top artists was skyrocketing in value. Just 25 artists accounted for nearly half the market. It was a bubble that was bound to pop. In a $64 billion art market, names like Damien Hirst and Jeff Koons became cloud stocks, while most art held little or no value at all.
The pandemic popped the bubble. The closing of physical art galleries, fairs and auctions resulting from the pandemic created a panic among sellers. An industry desperate for new suckers (uh, investors) has since been flogging the field as an entry into the elite, not just of markets but of society. After all, they will point out, Treasury Secretary Steve Mnuchin’s father Robert Mnuchin became an art dealer.
Is There a System?
The next big trend in art investment may be the “Art Investment Fund,” pools of money like hedge funds that both buy and sell on behalf of investors.
Machines may have taken over the stock mutual fund market, but these new funds are in their infancy. If you don’t know art, and only see it as an asset class, they may offer a chance to get in on the ground floor of something different.
Or you can just buy what you like.
Personally, I like James Dean.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of the environmental thriller Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.