Investing in Art has become popular in recent years, thanks to the rise of alternative investments. Its proponents highlight its historical performance. I will analyze the idea of investing in art and give you my opinion about it.
The onset of ultra-low interest rates after the economic crisis that began in 2008 led to an increased interest in alternative investments. These include real estate and private equity investments.
However, more niche investments such as art, collectibles, classic cars and even whisky are also in the category of alternative assets.
This is because companies have appeared with the goal to promote and facilitate these types of investments.
These companies allow us to buy and sell fractions of works of art by famous artists online. For example, we can invest in a fraction of a painting by Picasso. One of these platforms is MasterWorks (non-sponsored link).
The two main selling points these platforms use in order to convince people about investing in art are art’s historically high returns, as well as its low correlation with other asset classes.
Correlation is an indicator that measures the degree to which the prices of two assets move together. A low correlation is good because, if we are losing money in one asset, the other asset may be performing well.
In principle, high returns and low correlation sound like a very attractive proposition. But there is no guarantee that what has happened in the past will happen again in the future, so it is advisable to be cautious.
In the next few sections, we analyze the main features of investing in art:
If we want to know at what the stock price of Apple, Nike, an ounce of gold or Bitcoin are, we just have to Google it, and we will find out answer. There are millions of websites and applications where we can find such information. In other words, there is a lot of price transparency in these markets.
Transparency is a positive feature, as it gives everyone access to the same data. Therefore, in transparent markets, it is difficult for some investors to take advantage of others because they have access to superior pricing information.
However, what is the price of a certain painting by Monet? No one can tell us for sure.
There are experts dedicated to appraising works of art. But these appraisals are just estimates. The real market price can be higher or lower. In fact, at an auction, the price is set by the person who is willing to pay the most
But that does not mean that the price paid is fair or correct. It is just what one person wanted to pay for the painting. Consequently, there is no guarantee that that person would be able to sell the painting at the same price if they wanted to.
That lack of transparency and difficulty may be an obstacle for experts within the art business. For amateurs investing in art, it is a very real problem.
Such lack of price transparency can cause us to buy at prices well above what would be prudent. Or sell at prices well below what could be considered fair market value.
Art is not a Productive Asset
When we decide to invest in assets, we have the option to choose between productive and non-productive assets.
Productive assets are those that produce things. Companies produce goods and services and can therefore make a profit. Real estate can be rented out to people and businesses and so generate returns. Things like gold, cryptocurrencies, and art do not produce anything.
There is nothing wrong with buying non-productive assets. We simply need to be aware of it.
In general, non-productive assets do not generate any cash flow. They do not pay us dividends, interest or rent. Often, non-productive assets even cost us money, if they need to be insured and in a safe place. For example, a multi-million-dollar work of art.
As a result of that, the only way we can make money if we invest in art is by selling it in the future for a higher price than we paid for it. And there is no guarantee that art prices will continue to climb forever.
Liquidity is a concept that many investors fail to fully grasp. Although it is very simple.
Liquidity is about how easy it is to turn an asset into cash, so we can use that cash for something else. Stocks are usually very liquid assets: we can sell them in a matter of seconds, since there are millions of active investors in the stock market, at totally transparent prices, and get our cash almost instantly.
On the other hand, if we own a property, liquidity is much lower. It will take weeks to find a buyer, given that the pool of real estate buyers is much smaller, and carry out all the legal procedures. And the only way we could speed up the process would be by selling at a lower price. Therefore, it is said that real estate has low liquidity.
The same thing can happen in the art world. Investing in art is a very niche concept. Consequently, it can be difficult to find buyers willing to pay what we consider a fair price. This is especially true in times of economic and financial crisis, when our need for liquidity may be greater.
Such situations related to liquidity can lead us to have to fire-sale some of our assets, making our realized returns much worse that we had previously anticipated.
Virtually everything we do in life has an opportunity cost. This applies to individuals, businesses and even governments.
The opportunity cost tells us that if we do one thing, we will not be able to do another. Or we will be able do to less of another thing. That is common sense. Resources and time are limited, no matter how much time or resources we have.
If we work long hours, we will have less time to rest. If we read a lot, we will have less time to watch television. If we spend a lot of money on consumption, we will have less money to invest. And if we invest in art, we will have less money available to invest in other things.
Therefore, when deciding whether it is a good idea to invest in art, ask yourself the following: What else could I invest in? Is art really the best investment available right now?
You may realize that, after considering all things we have discussed in this analysis, investing in art may not be the optimal choice. You may prefer to invest in stocks, real estate, gold, silver, Bitcoin or something else.
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