Felix Salmon

I’m not sure what’s more offensive, the SWAG acronym (it stands for Silver, Wine, Art, Gold), or Patrick Mathurin’s lede in Monday’s FT:

The art market defied the economic gloom to return 11 per cent to investors in 2011, outpacing stock market returns for a second consecutive year.

No, Patrick, it didn’t. Art doesn’t have returns, it just sits there, being expensively insured. It pays no dividends, and it can’t be marked to market, since the only way to find out the market price for an artwork is to sell it. Even the auction houses have no real idea what any given artwork is worth: look how many pieces fail to sell at auction, or sell for multiples of their estimate. For instance, Roy Lichtenstein’s I Can See the Whole Room . . . and There’s Nobody in It! sold at Christie’s in 1988 for $2.09 million, double its estimate of $800,000 to $1.2 million.

Besides, who are these “investors” who purportedly saw an 11% return in the art asset class in 2011? It’s not people who own art generally: a lot of people own art, but it’s not generally worth anything — we couldn’t sell it, for cash, if we needed to. A tiny sliver of the art world deals in works which really do have resale value, but it’s not true to say that even they went up in value by 11% in 2011, not with all the survivorship-bias and other problems in the Mei-Moses index Mathurin is citing.

Besides, Mathurin seems to be very bad at calculating returns even when he knows the sale price. That Lichtenstein, for instance, was sold again in 2011:

There were record auctions for paintings such Roy Lichtenstein’s I Can See the Whole Room . . . and There’s Nobody in It! which sold at Christie’s in November, making gains in excess of $40m for its seller, who bought it for $2m in 1988.

Again, no, Patrick, it didn’t. For one thing, the hammer price on the painting was $38.5 million, and it’s really hard to make a gain of more than $40 million when your gross income is no higher than $38.5 million. And then there’s the fact that Christie’s slapped a guarantee on the painting, almost certainly at $35 million. What that means is the seller only got 70% of the excess over that amount.

So the total amount going to the seller — assuming zero seller’s premium — would be $35 million plus 70% of $3.5 million, which comes to a total of $37.45 million. Subtract the $2.09 million purchase price, and you get a total capital gain of $35.36 million. Which is, admittedly, a lot of money, but it’s a good $5 million short of Mathurin’s $40 million.

And incidentally, if $2.09 million becomes $37.45 million over the course of 23 years, that works out at an annualized return of just over 13%. Again, that’s very good, if not spectacular. But that’s your winner. Set it off against your losers — and you’re always going to have more losers than winners — and your total art return is going to be substantially lower. If you bought $2.09 million of Apple stock in 1988, it would be worth more than $80 million today. But you didn’t just buy Apple, you bought lots of other stocks as well (even assuming you were buying stocks at all in 1988), and overall they didn’t do nearly as well. Single datapoints, as a rule, mean very little.

But if Mathurin can wheel out his Lichtenstein, I’ll wheel out my 2008 Lafite:

The greatest loser was Chateau Lafite 2008, which peaked in January 2011 at £14,043 a case and whose last average trade price, this month, was £8,108, a fall of some 45%.

I’m all in favor of buying art and wine, but they’re not investments. There’s never any shortage of wine shills and art shills who will talk about them as asset classes when they go up in value. All those people should be ignored. And there should be an absolute ban on talk of how the art market “returned 11 percent to investors” and the like. We should be getting smarter about this stuff — and, in fact, the art and wine press is quite good on such matters. It’s just the financial press which perennially falls down.