Weird art-valuation justifications of the day, Sarah Thornton edition

By Felix Salmon
February 8, 2012
Sarah Thornton has an interesting theory on why art prices keep on spiralling upwards:

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Sarah Thornton has an interesting theory on why art prices keep on spiraling upwards:

The burden for the stinking rich is what to do with their money. There is currently no interest to be earned on cash, so they can’t leave it in the bank. The property market is nearly paralyzed and, for these globetrotters, the drawback of real estate is that it is tied to specific currencies. A Mayfair flat sells in pounds, but the Francis Bacon painting that hangs on its wall could sell in Hong Kong dollars and take up residence on a yacht in the South Pacific. Like historic or extra-large diamonds, works by artists with international recognition are a hedge against volatile currency fluctuations.

Fifteen years ago financial advisers were not in the practice of recommending that rich people diversify their portfolios by buying art. Now it is the norm. While buying emergent art is high-risk, speculative investment, acquiring established masterpieces is perceived as the opposite – a back-up in hard times. If all goes wrong in the world, if the eurozone cracks, the Middle East erupts in war, and a tsunami hits Manhattan, that rare, portable 1964 Marilyn by Andy Warhol will still be worth something.

This would be a lot more convincing if Thornton actually named or quoted any of the financial advisers who are reportedly “recommending” buying art as an investment. Because I’d love to talk to one. Art’s a dreadful investment: it’s got a negative carry, it’s highly unpredictable in terms of value, there’s no reason whatsoever why prices should go up rather than down, and, of course, you can put your elbow through it at any time.

In my experience, the only people who ever recommend that rich people diversify their portfolios by buying art are people who are going to make money, somehow, from the deal: people selling art investment or advisory services. Everybody else is generally pretty sensible, and sticks to saying the simple truth: Buy art because you love it, not because you think it’s going to rise in value.

More generally, the stinking rich are, as a rule, swamped with bright ideas from people guiding them on what to do with their money. They all have family offices, replete with highly-paid investment managers: The alternative here is not to simply leave the money in the bank, earning no interest. (More likely, they own the bank, take other people’s deposits, and lend them out at a healthy profit.)

And the idea of art as “a hedge against volatile currency fluctuations” is just bonkers; I’m not at all surprised that the line appears in a column for the Guardian, rather than in Thornton’s normal home of the Economist. If you have billions of dollars and you want to hedge against currency fluctuations, then — and I hope you’re sitting down for this — you hedge against currency fluctuations. Options and swaps and futures and forwards and the like are as commoditized as they come in the foreign-exchange markets, and much easier and cheaper to buy and sell than any major artwork.

Thornton’s wrong, too, about the intrinsic value of a 1964 Marilyn by Andy Warhol. If it was worth 10% of its current value a few years ago, it can be worth 10% of its current value in a few years’ time, too. Admittedly, 10% of its current value is still “something”. But that hardly makes the Warhol a remotely sensible investment. The whole point of art is that it has no intrinsic value: that its financial value is a magical number which is some highly variable function of how much various incredibly rich people love and covet the work.

But she’s right about this aspect of why the two big auction houses are doing so well these days:

Christie’s and Sotheby’s are superlative marketers who are getting better at funnelling demand for objects by a small group of well-tested artist brands.

The key word here is “brands”. CNBC’s Zac Bissonnette recently wrote to me saying that what he hates about contemporary art is the way in which “you can just put it there and all your friends will know what it is. People might as well hang a Nike swoosh over their couches.”

Zac’s exactly right about this: the one thing that pretty much all ultra-expensive art has in common is that it’s instantly recognizable as the work of a given artist. (And that goes for Cézanne as much as it does for Jeff Koons.) Fine art has become the billionaire’s-club equivalent of a Louis Vuitton bag, slathered in logos. It’s not connoisseurship which drives values, so much as recognizability. Which in turn helps to explain why the most prolific artists (Picasso, Warhol, Hirst) are also the most expensive: the more of their work there is, the more exposed to it people become, the more they’ll recognize it, and therefore the more desirable it is.

I do hold out some small hope that the Chinese art market will provide a correction to this syndrome — there, I’m told, the value of an art work is (at least sometimes) much less a function of its recognizability as the work of a certain artist, and much more a function of the way that it can fit itself into a long artistic tradition.

Once upon a time, the western art market worked that way too: there were genres, and artists worked within them, and then would be judged on how well they painted within the constraints of that genre. Those days, of course, are over now. But that doesn’t mean for a minute that the value of a Warhol is somehow forever. As with any other investment, what goes up can always go down.


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Don’t you think it makes more sense to buy the art you love, and the investment return becomes incidental? If you really have an eye and know what you’re doing, you can make money.
You could ask Roy Neuberger if he were alive – of the firm Neuberger & Berman – er

His collection is housed at SUNY in Westchester, and that combined with the Pepsico grounds across the street make for an entertaining cultural visit.

He certainly had more fun than any of the boors that are using art as an “investment”.

Posted by RichL40T | Report as abusive

Well I know someone who bought a Warhol print of Marilyn in 1971 for $1000 and sold it in 2000 for $115,000. Twenty nine years intervened but I think it was not a bad investment. You can calculate the annual rate of return for me if you would like. PS: He didn’t particularly like it when he bought it but he knew because so many people found Warhol’s art “silly and awful” that it was probably a very good investment.

Posted by Chris08 | Report as abusive

“he knew because so many people found Warhol’s art “silly and awful” that it was probably a very good investment.”

In what world does that make sense? Explain please.

Posted by Fuddleducker | Report as abusive

What’s the big deal? Most of what people buy as “investments” are just another form of gambling. You buy a thing or a piece of paper in the hope that someone in the future will pay you more for it. It doesn’t really matter if it’s art, gold, stocks, or beanie babies. Sometimes it works and sometimes it doesn’t. People make up all sorts of justifications for what they do, convince themselves it has less risk or better potential returns than other options, or more safety because of some perceived “instrinsic” value (though if you can’t eat it or burn it, even this is a pretty malleable metric). But in the end, nobody knows what the future will bring.

Posted by Moopheus | Report as abusive

I have a suspicion that art prices have a high sensitivity to interest rates. Meaning that even if they did exhibit the other properties that Sarah Thornton feels are good hedges, it is only with the trade-off of other risks. Of course, we haven’t even gotten into liquidity and market risk yet (which presumably would a arise if ” If all goes wrong in the world, if the eurozone cracks, the Middle East erupts in war, and a tsunami hits Manhattan.”) Much like residential property and vehicles I think people should view art as a consumption good, whatever resale it happens to have is just icing on the cake, not the primary reason to own it (Apple products would a great example of this). That said, I’d much rather own a Van Gogh or Picasso than the equivalent worth in gold at least my bad investment would be nice to look at.

Posted by alex.weiner | Report as abusive

When I try hard to come up with contrarian but reasonable rational arguments in defense of what she’s saying, I keep bumping into the idea of commodities as an alternative. Even if you’re looking for diversification of a small amount of your portfolio away from the usual sorts of investments, some combination of natural gas and gold seems to dominate art on any dimension.

Posted by dWj | Report as abusive

I don’t think it has anything to do with “investing” at all.

Rather, you simply have a group of super-rich people who have more money than they know what to do with, who are used to being able to buy anything they want, are highly compeititve, and who are therefore not price-sensitive at all.

When you have people in a market who will pay whatever it takes to get something they want, prices can go up pretty fast in a hurry.

Posted by mfw13 | Report as abusive

mfw13, “price sensitivity” can actually reverse for trophy goods — no matter how beautiful the painting, you don’t earn bragging points if you bought it for $1000 from an unknown artist. Ideally everybody should understand exactly how much you paid for it, without your needing to crassly tell them. Art auctions are ideal for this!

And yes, that kind of behavior tends to drive prices up in a hurry.

Posted by TFF | Report as abusive

“If all goes wrong in the world, if the eurozone cracks, the Middle East erupts in war, and a tsunami hits Manhattan, that rare, portable 1964 Marilyn by Andy Warhol will still be worth something.”

This one really cracks me up. Just the opposite. When things REALLY go wrong, your art will be worth very little. Just talk to the wealthy families in Germany who in 1945/46 ended up bringing their art and antiques to a local farmer in exchange for some potatoes. A lot of farmers did very well in those years.

Posted by TSTS | Report as abusive

“As with any other investment, what goes up can always go down.”

True. Trading is inherently a zero-sum game, with the overall price increase driven by the general increase in worldwide saved/invested wealth.

What differentiates investments is the income flow they generate:
* Bonds generate interest payments, and a lump sum principal payment at some future date.
* Stocks generate dividends and share repurchase (and a corporation isn’t precisely a fixed asset — they can grow).
* Art is pretty to look at.
* Real estate generates rent or a supply of housing.
* Gold just sits there in a safe deposit box.

Posted by TFF | Report as abusive

While contemporary and super-high-value art (like Warhol) are highly speculative, there are thousands of 19th and 20th century artists in the $5,000 to $250,000 price range whose auction prices are stable, predictable and logical. 1930′s and 1940′s oil paintings by the popular Cape Ann / Gloucester Impressionist Emile Gruppe (harbor and winter scenes priced at $5,000 to $25,000) are just one of many examples of beautiful and affordable art that will probably appreciate over the next 10 to 20 years, although prices peaked at about 25% higher 7 years ago. As art goes into the seven and eight figures, it’s much more like The Emperor’s New Clothes where powerful dealers and influential critics artificially influence prices and often create thin and highly volatile markets. Learning about art, visiting museums and studying auction records is the best way to understand what is worth buying at relatively low risk and with a reasonable expectation of making a profit over longer periods of time. You will enjoy our new book The Art Hunters Handbook. It’s about how to find valuable art at garage sales and flea markets, but it can also point you in the right direction if you’d like to be an independent-minded, well informed art collector who does not follow irrational trends.

Posted by TheArtHunter | Report as abusive