I’ve never forgotten the details of my first purchase of an original oil painting, “Going Home” by cowboy artist Jimmy Cox in 1978. The scene is a panorama of a barren, West Texas prairie at dusk, the sky filled with a smattering of light cirrus clouds glowing purple from the setting sun. Three weary cowboys on their exhausted horses are in the forefront of the painting, the effects of their long workday evident in the slumped shoulders of the men and drooping heads of the horses.
While I’ve purchased other paintings and bronze sculptures over the intervening years, no piece of art has replaced my affection — even love — for that painting. It has occupied center stage in my offices for almost 40 years. The scene reminds me of my early childhood in Texas, the satisfaction of physical work, and the persistence required to build a future in any place. I recognize my father, grandfather, and uncles in the riders’ postures and expressions.
Art has always moved us and evoked memories and dreams of other times and places. British playwright George Bernard Shaw is alleged to have said, “You use a glass mirror to see your face; you use works of art to see your soul.”
Unsurprisingly, some are eager to monetize our attraction to fine art, viewing it as a new investment class alongside stocks, bonds, and gold. Investment-grade art can deliver an annual return of 10% or more, according to its advocates. Some say its movement is counter-cyclical to the movement of equities and thus can stabilize a portfolio during periods of volatility. Laurence Fink, CEO of Blackrock Financial, one of the world’s largest fund managers, claimed in a Bloomberg interview that contemporary art is a “serious” asset class and “one of the top two greatest stores of values internationally.”
Is fine art an appropriate investment for everyone? Should you forego the purchase of a stock or bond to buy a painting or invest in an art fund? How does ownership of art differ from traditional investments like stocks, bonds, real estate, or gold? Let’s take a look.
Why Art Attracts Us
Jean-Luc Godard, French film director and father of the New Wave film movement, claims, “Art attracts us only by what it reveals of our most secret self.” Art is the physical expression of thoughts and emotions. Creating artwork is intensely personal, with the artist expressing his unique perspective of the world — both real and imaginary — around him.
Research by neurobiologist Semi Zeki of the University College in London found that viewing art triggers a surge of dopamine — the chemical neurotransmitter that makes us feel good — in the brain. The feelings associated with art, Zeki found, were similar to those associated with romantic love.
Fine art — paintings, sculptures, drawings, photographs, and prints — transcends time and space. The perfection of physical beauty captured by Michelangelo’s “David,” the angst of Edvard Munch’s “The Scream,” and the mystery behind the Mona Lisa’s smile have fascinated viewers for centuries. However, purchasing art to make money is a relatively modern development.
Fine Art as an Investment
For centuries, the ownership of fine art was limited to society’s elite. Only the wealthy — aristocracy, churches, governments, and very successful tradesmen — could afford to purchase or sponsor a piece of art. Displaying a painting or sculpture in a private setting was physical evidence of one’s status. Steven Pritchard, writing in Culture Matters, notes that as early as the Renaissance, ownership of art signified “status, influence, power, and wealth.”
The economic growth that began in the post-WWII years expanded the number of Ultra High Net Worth Individuals (UHNWIs) and transformed art from a niche market into a global trade. Thomas Seydoux of the Christie auction house noted in a 2014 interview in The New Republic, “When I started out, 30 years ago, millionaires had boats and jets — but didn’t necessarily have any art at all. For the very wealthy today, it’s not fine not to be interested in art.”
The growing demand for fine art quickly attracted the financial industry, which sensed that there were profits to be made by servicing these new, unsophisticated buyers. A study by Deloitte found that financial firms’ fine art services now range from specialized advice to full services that include initial research, transaction facilitation, valuations, inheritance and philanthropic planning, and lending.
Art funds, modeled after the successful experience of the British Rail Pension Fund with fine art ownership, proliferated in the first decade of the new century with 50 funds active globally. By the end of the decade, only 12 funds remained in business. In 2015, Private Art Investor posted 16 private art funds, many offered by the same managers with a specific fund dedicated to a specific type of art.
Todd Levin, director of New York-based Levin Art Group, advises that “an art fund is a very expensive proposition, due to the overhead costs eating away at one’s profit margin.” Melanie Gerlis, author of “Art as an Investment?: A Survey of Comparative Assets,” agreed, noting that “art is not a liquid enough asset to produce the sort of returns that an investor would want.”
Many fine art enthusiasts disagree, pointing to the highly publicized art sales of auction houses like Sotheby’s and Christie’s. As Deloitte notes, “The supply of best works of art will always be limited and tends to appreciate in value over time. Especially for deceased top-artists as paintings are lost, or bought by museums and collectors.” Madelaine D’Angelo, founder of the data-based art advisory company Arthena, asserted in a 2017 article in TechCrunch that investment in art “offers impressive returns without being too tied to the ups and downs of the stock market.”
Types of Investment-Grade Art
The vast majority of art produced over the ages is lost in the flotsam and jetsam of time, destroyed or forgotten and left to fade away in musty attics or dank cellars. The rare pieces that survive generation after generation are the ones that capture and transmit the essence of human experience, distinguished by the artist’s skill, subject, and setting. These works are considered investment-grade art and fall into one of the following categories.
These widely recognized works created by the world’s greatest artists (or “Old Masters”) are owned by museums and a few private collectors. When a piece becomes available for purchase, it often sells for tens or even hundreds of millions of dollars. A recently discovered Da Vinci, “Salvator Mundi,” sold for $450.3 million in 2017, Picasso’s “The Women of Algiers” brought in $179.4 million in 2015, and Van Gogh’s “Portrait of Dr. Gachet” sold for $2.5 million in 1990.
Priced at $250,000 and up, these paintings are the product of established, well-recognized names in the art world whose works have won numerous awards and are featured in private museum shows. These artists are deceased, ensuring that the supply of their work is limited. Blue-chips are favored by the UHNWIs who engage consultants and regularly participate in major auctions. The works of artists such as Francis Bacon, Helen Frankenthaler, and Gerhard Richter are included in this category.
3. Mid-Career Living Artists
Equivalent to a growth stock in securities, the works of this group have been recognized with awards and are usually found in private collections and a few museums. These artists are represented by the most-respected galleries, and prices for their works start around $50,000 but can reach into the millions. Collectors consider Nicola Tyson and Rudolf Stingel as part of this group.
4. Emerging Artists
This group is composed of younger artists just beginning their careers whose works typically sell for $10,000 or less. Collectors expect that the most significant financial gains will arise from this group if they fulfill their early promise. While their art is not in museums, their potential is recognized by critics and art magazines like Frieze and Artforum. Joel Mesler of New York’s Mesler Feuer art gallery names artists such as Loie Hollowell, Brad Troemel, and Tony Lewis among the art world’s up-and-comers.
Purveyors of Fine Art
If you’re looking to start a fine art collection, there are a few different avenues you can turn to.
1. Art Auction Houses
Art auctions have been used to sell art objects since the late 1600s. The two best-known houses, Sotheby’s and Christie’s, were founded in 1744 and 1766, respectively, and are considered the most-prestigious auction venues today. However, there are many other places where aspiring art collectors can find pieces. The auction process as a sales channel for artwork is widely available, with auction sponsors ranging from regional and local art dealers.
While sellers and buyers can remain anonymous, the “hammer price” of a piece — or the price for which it is sold, as signified by the bang of the auctioneer’s gavel — is public knowledge and is used by appraisers to estimate the value of similar works. The final price paid by a buyer does not include fees and charges added on by the auction house.
Before an auction, an auction house typically estimates a range of prices at which a piece will be sold. In some cases, the auction house may guarantee — either directly or through a third party — a minimum purchase price for the art to the seller. In other cases, sellers may establish the minimum price, or “reserve,” for their art that must be met before a sale to be completed. Works that do not sell at an auction are referred to as “bought in.”
2. Art Dealers
In the early 20th century, British art dealer Joseph Duveen made a fortune (and earned a British title) by selling Old Masters acquired from cash-poor European aristocrats to American nouveau riche. America’s captains of industry — Morgan, Gould, Rockefeller, Carnegie, and Clark — filled their newly built mansions with paintings and sculptures to proclaim their financial success and demonstrate their new status on the world stage.
The wealthy aren’t the only ones who benefit from art dealers. The works of Impressionists such as Manet, Renoir, Monet, Degas, and Cézanne remain popular today, with sales of their paintings reaching tens of millions of dollar. However, without the support of French art dealer Paul Durand-Ruel, these artists might have faded into obscurity.
According to Philadelphia Museum of Art curator Jennifer Thompson, Durand-Ruel purchased “over 1,000 Monets, 1,500 Renoirs, 800 Pissarros, 400 Sisleys, 400 Cassatts, and about 200 Manets.” While the public disliked and often ridiculed these paintings, the art dealer supported the artists with stipends and loans for years, despite the lack of interest in Impressionism. Monet claimed, “We would have died from hunger without Durand-Ruel, all we impressionists.”
3. Direct Artist Sales
Many new or emerging artists forego the sponsorship of an art dealer and sell works directly to buyers. This can be a great way for collectors on a budget to get their hands on pieces by up-and-coming artists.
New York couple Dorothy and Herbert Vogel — a librarian and a postal worker, respectively — scrimped and saved to buy small works by emerging Minimalists in the 1960s and 1970s, paying just a few hundred dollars for each. Over the next 40 years, they amassed a collection of 2,400 pieces worth hundreds of millions of dollars. They subsequently donated their collection to the National Gallery of Art, which offers free admission to the public. Lucio Pozzi, one of their favorite artists, explained, “They were artists, and the collection was their work of art.”
Risks of Investing in Art
Before investing in any asset, you should consider your short- and long-term financial goals and risk tolerance. Your financial position and investment experience should also play a part in your analysis. Finally, identify if you will be an active or passive investor. If you intend to be an active investor, you should be prepared to gain the expertise and experience necessary to independently research and make decisions on your investments, including when to buy or sell. Passive investors rely on independent experts to advise them on such decisions.
Financial advisors agree that fine art is unlike traditional investment vehicles such as stocks, bonds, and commodities. As a consequence, any monetary return from investment art is uncertain. Every potential buyer of art for investment should consider the following drawbacks of the endeavor.
1. Uncertain Rates of Return
Art publicists and newspaper editors are fond of stories in which the average man finds a long-lost, dusty painting in the attic or purchases a discarded piece in a neighborhood yard sale and discovers it’s worth millions. While such tales fill every collector’s heart with hope, the likelihood of it happening to you is lower than your likelihood of winning the lottery twice in one year. There are a few reasons for this.
Financial returns from fine art vary from year to year. For example, the average annualized return for the S&P 500 was about 11.69% from 1973 to 2016. The annual rate of return for art assets is uncertain, with different results produced by different indexes. The Blouin Art Sales Index, a measure often used by art dealers, estimates a 10% annual return, slightly less than the S&P Index. However, researchers at Stanford Business School analyzed sales data and found the result was closer to 6.5%. When Gerlis calculated the average compound return on investment-grade art held for five to 10 years, she concluded it was around 4%.
What accounts for the wide variation in results? The calculations of returns are limited to a small database of public sales and omit private transactions, which make up more than half of the investment-grade art market. These indexes also ignore the pieces of artwork that fail to sell at auction each year.
As author and art critic Georgian Adams explains in “Big Bucks: The Explosion of the Art Market in the 21st Century,” “If 10 Warhols are offered for sale, nine are bought in, but one triples its estimate, then performance indices would record a fine result.” This does not present collectors with an accurate idea of how much any individual piece of art is likely to command.
No Annual Return
Unlike stocks or real estate, art does not generate any income for its owners — unless you’re a dealer or charge admission for people to view your piece. The only opportunity for most people to profit is to sell the art for more than its purchase price.
Possessing an investment-grade work of art involves much more than taking the piece home and hanging it on the wall. As a proud owner, you’ll want to display your collection to highlight its beauty and protect its value with special lighting, dedicated space, and environmental controls.
Insurance premiums to protect your pieces from theft, loss, or damage can amount to several thousands of dollars per year, and the insurer may require extraordinary security measures —such as 24/7 video surveillance — to keep the artwork safe. Periodic appraisals are necessary to maintain full protection if the art appreciates. Special packaging and procedures may be needed when the work is moved or transported, including to and from an art dealer or auction house.
2. Lack of Transparency
Most investments are highly regulated, but the art market — which includes dealers, galleries, art fairs and shows, and auctions — has almost no regulation or oversight. Beauty may be in the eyes of the beholder, but the value of art objects is arbitrarily set by a loose collection of galleries, art critics, and consultants who determine prices and control buyers. The majority of sales are private, unreported transactions or are conducted in public auctions where dealers can rig prices by inflating bids.
Potential for Fraud
This lack of information regularly leads to forgeries and scandals, which have fooled even the best-known dealers, auction houses, and museums. The extent of fakes in the art world is unknown as most cases involving fakes or disputed works are settled privately between the seller or auction house and the buyer of the fake.
- Knoedler & Company. One of New York’s oldest and most-venerable galleries, it sold $70 million of fake Pollocks, Motherwells, and Rothcos to a trusting client, leading to its closure in 2011.
- Christie’s. In 1995, the auction house sold the fake “Girl with Swan” purportedly by German artist Heinrich Campendonk, along with other forgeries, for several million dollars. According to The New York Times, the auction house also sold a fake Marc Chagall in 1997 for $450,000. When this was discovered, Christie’s rescinded the sale and returned the purchaser’s money.
- Art Museums. Even the most-famous collectors of art in the world, including New York’s Metropolitan Museum of Art and the Louvre, are not immune to carefully crafted fakes. Robert Walsh, a former art dealer, notes in a Salon article that George Demotte, infamous as the “world’s greatest faker,” sold at least six fakes to the Met. Michael Glover of Great Britain’s Independent newspaper claims that at least 20% of the paintings held by world-class museums are fake.
Proof of Authenticity
Provenance — the history of the ownership and transfers of an object — is especially important in the art world. This documentation should include the name of every auction house, dealer, gallery, or collector who owned the piece, as well as physical proof of their right to sell it.
In addition to proving authenticity, provenance serves as evidence that the person in possession of an item has the legal right to sell it. Finally, the identity of former owners can affect the market price; a painting owned by a British royal is valued higher than if it were held by an undistinguished owner.
Don’t confuse provenance with an appraisal; appraisers base their figures on the assumption that a work is authentic. Investigating provenance requires different skills, training, and significant background and experience with the particular artist. The most-credible experts will have published papers, taught courses, or cataloged essays about the artist. Relatives, employees, and descendants of the artist are usually also accepted as qualified authorities.
3. Excessive Transaction Fees
The fine art market reflects the reality of free markets; when supply is less than demand, prices rise until equilibrium is reached, and vice versa. There is no “fair” price for a piece of art, merely the price on which a buyer and seller can agree. The agreed-upon price might not be the amount that the seller pays or the buyer receives since additional fees are typically added to or subtracted from the sale price.
Art dealers typically mark up pieces by 50% to 100% or more and are not required to inform buyers of the markup. One art dealer, Yves Bouvier, justified a $24.5 million premium to his client on a Modigliani painting purchased for $93.5 million on the basis that “he was acting as a dealer, that this was clear to both sides, and that he was entitled to make what he could.” His client sued him for fraud, complaining that the overcharges were more than $1 billion over the purchase of 38 paintings.
Auction houses like Sotheby’s and Christie’s also add fees onto the hammer price. These fees, which are sometimes negotiable, include a premium of 12% to 25% based on price, seller’s commissions, online bidding fees, insurance and storage fees while in the auction house’s possession, and third-party costs. Some auctioneers charge a “buy-back” fee of up to 5% of the item’s reserve price if no sale occurs.
A favorite strategy of dealers representing emerging artists is to require buyers to purchase works by other artists in order to acquire the desired piece, according to Mesler. He told Wealthsimple magazine that to buy a painting by a truly hot artist, “There’s going to be a give-and-take exchange with galleries, where maybe you want to buy a couple of other artists from their program that are not as hot. That’s the way galleries stay in business.”
4. Illiquidity & Lengthy Holding Periods
According to research by the Smithsonian American Art Museum, there are more than 400,000 artworks in public and private collections worldwide. Figures compiled by the Bureau of Labor Statistics found that there are more than 27,100 painters, sculptors, and illustrators in the United States alone, each one producing original pieces using a variety of media — such as oil, watercolor, and gouache — and surfaces, such as paper, canvas, and wood. Subject matter and styles further differentiate one piece from another. Since each piece of art is unique, a specific work typically appeals to a select group of potential buyers.
Buyers are often fickle, especially those who purchase with the intent of easy profits. A painting by Lucian Smith that initially sold for $10,000 in 2011 fetched $389,000 at auction in 2013; his more recent works, however, sell in the $10,000 to $25,000 range, according to Bloomberg. Jeff Rabin, principal and co-founder of Artvest Partners, an independent art advisory firm in New York, says in The Wall Street Journal that collectors should love the pieces they buy because there’s no guarantee of a secondary market, so they may be stuck with them.
Even the experts can be fooled into thinking a piece will be worth much more than it actually sells for. Art dealer and collector Niels Kantor purchased a painting by Hugh Scott-Douglas for $100,000 that was valued at only $18,000 to $22,000 at auction two years later. “I’d rather take a loss,” he says. “Feel like it can go to zero. It’s like a stock that crashed.” The bottom line is that there is no surety you’ll be able to sell your art when you want to or receive the price you expect.
The high spread between the cost to the dealer and the final price paid by the buyer leads to extended holding periods before appreciation in price overtakes the initial markup. Many dealers suggest a minimum holding period of 10 years or longer, especially for new or recently discovered artists. It can take generations for the art world to come to appreciate the genius of a particular artist; Vermeer, Gauguin, and Van Gogh are representative of the many artists who were considered failures in their lifetimes. As Enrique E. Lieberman, president of the Art Fund Association, told The Wall Street Journal, “You generally have to think in terms of a five- to 15-year plan in order to realize profits.”
5. Expert Knowledge Is Required
The term “investment-grade art” was coined to identify a specific art object “that is considered by professionals to have a good chance of at least holding its value, and probably increasing,” according to Wealthsimple.
Quartz notes that the art investment industry “has developed an intricate signaling process where the approval of a handful of galleries, collectors, and museums, determines what is good and valuable.” Galleries justify this practice with the claim that they’re protecting the artist from the whims of the market.
Knowledge of the players and relationships in the shadowy network of sponsorship is essential if you intend to buy art for appreciation. Art dealer Marla Goldwasser notes in Quartz that, while you may be able to get an equally attractive piece on the street from an unsponsored artist, you will miss out on the investment value and social prestige that accompany a gallery-sponsored object.
Consider the example of Algur Meadows, a Texas oilman who trusted two little-known French art dealers who convinced him to buy dozens of paintings in the mid-1960s. These works included paintings purported to be by Gauguin, Dufy, Chagall, and Bonnard. However, when he attempted to sell some of them, they were discovered to be fake.
Meadows subsequently rebuilt his collection, dealing only with the most-reputable dealers and relying on the advice of William Jordan, the first director of the Meadows Museum at Southern Methodist University. The lesson to be learned? Venturing into the fine art world without a trusted guide is akin to gathering mushrooms with a blindfold — you might pick a full basket, but woe to those who eat your harvest.
All evidence points toward the conclusion that buying fine art solely to reap a future profit is likely to be unsuccessful. Traditional investments such as stocks, bonds, real estate, and gold have more transparency, better regulations, and higher liquidity than art. The transaction and ownership costs for these are also much less than the markups and premiums paid in the art world. Heed the warning of Shane Ferro, an economics reporter for Business Insider and former art market reporter at Artinfo: “Buying art is gambling in an illiquid and shady realm dominated by a handful of players who are almost guaranteed to know more than you.”
In my case, Western-themed art fell from favor in the mid-1980s as oil fortunes plunged due to a decline in the price of oil. Furthermore, the artist who painted “Going Home” never reached the acclaim and popularity expected from his early talent. If I were to sell my favorite painting today, I would be lucky to get half of my purchase price.
Nevertheless, I would buy the piece again. I’ve derived almost 40 years of pleasure from viewing it, and I’m sure my son will appreciate the art when it becomes his. In the end, art should be acquired for the joy it gives you; any gain in value is a bonus.
Do you own any pieces of artwork? Did you buy them to make a profit or to please yourself?