Fine Art As a Long-Term Investment* 

“There’s something to be said about the art-industrial complex, the collectors who recognize that your work has some sort of future economic value.” – Kehinde Wiley

 

In 1989, a triptych by Francis Bacon sold for $7 million.

In 2013, a similar piece by Bacon sold for almost $140 million. Assuming the two pieces are roughly the same (a fair assumption), that amounts to a profit of more than $130 million in 24 years.

In terms of compound annual growth, it equates to a bit more than 13%. And that’s better than the stock market’s annualized return (just over 10% annually) for that same period.

In my first essay in this series, I made the broad case for why you should consider investing in art: If you invest wisely, you can do very well by earning a return on your money that is about as good as stocks but with a lot less volatility.

Today, I’m going to explain why so many ordinary, “amateur” art lovers – people who are not necessarily financially savvy – have, nevertheless, seen their art holdings appreciate amazingly, leaving them and their heirs immensely rich.

Let’s begin with this…

 

A Fundamental Difference 

There is an important difference between the psychology of the usual stock investor and that of the usual art collector.

The stock investor is motivated by a desire to build wealth. He buys stocks hoping they will grow in value and thereby contribute to his net worth. The art collector is motivated primarily by an emotional attachment to art and art collecting. She may hope to see her art collection appreciate in value, but her motivation in buying art is more complicated.

When I started buying Coca-Cola stock, for example, I didn’t buy it because I liked the taste of Coke. And I certainly didn’t ask for a stock certificate so I could hang it on my wall. I bought shares in Coca-Cola because I believed they would appreciate in value while paying me good dividends for as long as I held them. I bought them to help me grow my wealth.

When I bought my first watercolor by Diego Rivera, I was aware that I was buying the work of an important 20th Century modernist painter. But my motivation for buying it wasn’t its potential for appreciating. It was the desire I had to own it, to have it and keep it, and to display it and look at it.

I bought it because I had fallen in love with Rivera’s artistry and his place in art history. I wanted to show my friends – by hanging his work on my walls – that this master painter was, in some way, a part of my life.

 

The Sorry Psychology of the Individual Investor 

Although investors buy stocks for the clear and single purpose of increasing their wealth, they don’t do nearly as well as you might think.

According to countless studies, individual investors – even the “sensible” ones who buy serious companies like Coca-Cola – make far less on stocks and bonds than they should. This is also true of mutual fund investors and even of people who invest in index funds.

Index funds are mutual funds that track the market. So how can investors do worse than the market if they are investing in the market?

The reason, these studies show, is in their psychology.

Individual investors have a tendency to sell their stocks when  prices are dropping and buy into the market when prices are rising. This, everyone knows, is not the way to optimize a stock market portfolio. These investors violate good sense because of their emotions. But they are not attached to the stocks per se; they are attached to the fluctuations of their pricing.

In other words, they are no different than art collectors in their tendency to let emotional attachments rule them, but they attach their emotions to the wrong thing.

 

Art Collectors Are the Same but Different 

That explains why so many stock investors generally do so poorly. But why is it that some art lovers – even those who have, as I said, no financial acumen at all – often make gobs of money collecting art?

To answer that question, we must first understand something about the value history of fine art.

According to Kyle Sommer of JPMorgan Chase, “Art tends to move in slow and long-term cycles. Looking at performance on a risk-adjusted basis [returns divided by standard deviation] over the last 50 years, the Mei Moses World All Art Index matched that of the S&P 500 index. On a 25-year basis, the Mei Moses World All Art Index looked relatively strong, outpacing the MSCI EAFE as well as the S&P 500.” [The MSCI EAFE is an equity index that measures the performance of markets outside the US and Canada.]

So, one answer is that the ups and downs of art markets tend to be less dramatic than those of stocks. As a result, there is less opportunity for art collectors to overreact to price fluctuations, buying when they should be selling and selling when they should be buying.

But a more important answer is that art collectors are fundamentally less likely to make irrational buying/selling decisions when there happen to be fluctuations.

And that is because, as I said above, they form emotional attachments to the art itself. Their core desire is  to hold and keep the art object so they can enjoy it. Profiting from it is, at best, a secondary consideration.

If you know any art collectors, you have seen the truth of this in action. Art collectors love everything about collecting art. They love buying it at auctions, in galleries, and at exhibitions. They love putting it up on their walls and showing it to their friends. They love learning about it. And they love looking at it.

But if and when an opportunity to sell it comes up… that, they do not love.

I discovered this truth about yours truly when I opened my first art dealership – Morgan Fitzgerald Fine Art – nearly 30 years ago.

The first piece I put up for sale was a landscape by a mid-18th century French painter. I had bought it years earlier for $2,500. Its market value had doubled and I was offered $5,000 for it by a fellow collector. I should have been happy to complete my first sale at this price, but I was mortified. I told him my asking price was $7,500… and he quickly came back with a $7,500 offer. That convinced me that I should never sell the piece. It hangs on the wall of my library today.

No, art collectors don’t like selling their art. If the value of a particular piece goes up, they feel vindicated in their decision to buy it and their attachment to it becomes stronger. And if the price goes down, they feel upset not with the object or their decision to buy it but with the art market! (“These idiots don’t realize how great this painting is!”)

We collectors of art like the idea that the pieces we buy will appreciate because it makes us feel smart and it justifies our spending habits. But we don’t like selling our paintings and drawings and sculptures because we value the pride and pleasure they bring, and we don’t want to give that away.

That is our saving grace. And that is why so many amateur art collectors see the value of their collections rise so high. Our attachment to the thing rather than its price makes us natural  long-term investors. And long-term investing is always the smart, safe way to build real wealth.

 

* This series of essays gives you an advance look at a new book that I’m working on, based on my experiences over the past 40+ years as a collector and investor in fine art.  

 

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