Art is not an investment, part 872

By Felix Salmon
January 12, 2012
SWAG acronym (it stands for Silver, Wine, Art, Gold), or Patrick Mathurin's lede in Monday's FT:

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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.


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I mostly agree, especially your point about marking art to market, which is impossible. But when people buy art, they do choose to buy it as an alternative to an investment, as they would with any luxury good. But unlike most other luxury goods (cars, yachts, etc), art can also go up in value (whether or not it does), which I think puts it in an alternative investment category, albeit a very non-transparent, illiquid category.

Posted by MelanieGerlis1 | Report as abusive

While you may be correct about art, you are not correct about wine. You call Chateau Lafite Rothschild 2008 the greatest loser, which has fallen by 45% since its peak. What you failed to mention is that when it was released onto the market in 2009, it was valued at a little under £2,000. As it is now worth in the region of £8,000 a case, those who invested in this wine 2 years ago have seen a return on investment of in the region of 400 per cent – and that is taking into account the 45% fall. You also fail to mention that from January 2009 to July 2001 the Liv-ex 100 fine wine index rose by more than 70 per cent. The recent dip in the market of 15 percent is paltry in comparison.

Posted by Margaux | Report as abusive

Of course I meant January 2009 to July 2011 – not 2001!

Posted by Margaux | Report as abusive

This whole entry seems rather strained. Is not paying dividends and not being able to be marked to market really sufficient to disqualify something as an investment? Seems like that would preclude a lot of stuff in a lot of people’s investment programs, including plenty of so-called “real assets.” My guess is that there’s a conflation here of a value judgement–purchasing art is not a *sound* investment–with an analytical point–purchasing art cannot not fit the *definition* of an investment.

Posted by alexh | Report as abusive

Whether Felix thinks it can be marked-to-market or not, the Federal Government thinks so. That’s why they require the market value of artwork in estate valuations.

“A cynic knows the price of everything and the value of nothing.”

Posted by Publius | Report as abusive

Probably a more accurate title for this article is “Most art is not an investment”. Just like buying stocks, you have to learn how to navigate the market if you want to come out a winner.

Posted by PrivateDealer | Report as abusive

Well this is certainly a silly post. I have been in the art market for 30 years now. This article does not make any sense. ?

Posted by artisan555 | Report as abusive

sorry that is absurd and ill informed. i trade for myself, my family and my clients and have an identifiable track record. come by i will show you.

Posted by schach | Report as abusive

dear schach
as an art collector agreeing with this blog and a 20 year trader in financial assets i would love to see your “identifiable track record”.
u can send it to funinbed09 at
thank you in advance

Posted by artcollector | Report as abusive

I do not know about art but certainly wine can be marked to market. When we look at statistics such as production and consumption growth (or a lack of) we can establish or at least forecast prices.

Posted by blackbulls | Report as abusive