Wednesday, June 24, 2020, Delray Beach, Florida


From My Work-in-Progress Basket

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Passion is a popular emotion these days. We are encouraged to be passionate about our careers, our hobbies, and even our ideas. Like most popular ideas, this one is mostly wrong. On the risk/reward scale, it ranges between dumb and dangerous. But there are some noteworthy exceptions.

One of them is art. Let’s talk about that.

 

Why It’s Okay to Fall in Love With Your Investible Art* 

“They say you cannot argue taste. Of course you can. It is one of the most rewarding conversations two people can have.”– Michael Masterson

When investing in real estate, it’s generally a bad idea to become emotionally attached to what you are buying. When considering the purchase of a rental property, for example, you should determine what to pay for it by studying market rates for “comparable” properties in the area, not by some subjective feeling about how “cute” the place is.

The same is true for stocks or precious metals or digital currency. Buying and selling decisions should be based on market metrics. Innumerable studies have shown that when investors fall in love with individual assets or asset classes, they tend to do poorly in terms of long-term gains.

It also makes sense for art investors – especially new and amateur investors. If you want to give yourself the best chance of getting optimum, long-term returns, you should make your buying decisions based on verifiable data, not on how much you love the piece.

That goes against the most common advice art brokers and dealers give their clients: Buy what you love.

They do this for two reasons:

When a buyer loves a work of art, he is much less likely to be critical of its value. It goes like this:

“I love that!” he exclaims.

“You have great taste,” the broker assures him.

“How much is it?”

“It costs $X. But it’s a great piece and a good value.”

So that’s reason number one. When the buyer loves a piece of art, it’s easier to sell it to him.

The second reason is that when an investor loves a piece of art, he’ll be more likely to keep it. His attraction to it was validated by the broker. (“You have good taste.”) And his decision to buy it creates what psychologists call confirmation bias. (He wants to believe he made the right decision.) So if, in the future, the investor discovers that the piece is worth less than he paid for it, he’ll be more likely to believe that the lower valuation is wrong than to question the integrity of the broker that sold it to him.

Does this mean that the art investor should never fall in love with the art he buys?

My answer is yes and no. Or, rather, no and yes.

You should not allow your love for a particular piece to influence the price you are willing to pay for it. You should, as I said, make that decision based purely on verifiable market data. But after you have bought a piece at the right price, you can fall in love with it. Because forming an emotional attachment to a well-priced piece of investment-grade art will work in your favor.

Let me explain.

When I buy investment-grade art, I am looking primarily for value. I’m looking to buy a piece that is priced at or below its current value – as determined by current auction prices for similar works by the same artist. It doesn’t matter whether I like it or not. My decision is based on the numbers, not on my feelings.

After the buy is made, I put my investment mind aside and allow myself to fall in love with the piece. And interestingly, most of the time, I find that I do.

Falling in love with well-bought, investment-grade art makes it more difficult to sell it when an offer is made. This creates a bias towards holding the art for a long time. And that is definitely the way to optimize your ROI as an art investor.

When I bought my first piece of investment-grade art, an oil painting titled Invierno (Winter) by José Clemente Orozco, I had a reasonable expectation that it would increase in value. I knew that Orozco was one of the three most important muralists of the 20th century, that his production of small oils was limited, and that the market for Mexican art was heating up.

But I also liked the image. The three figures, standing outside in the cold as if they were waiting for something, intrigued me. I liked the way the artist used quick, strong brushstrokes. I liked the somber hues.

I bought this painting in 1991 for $18,000. It’s been appraised by two of the major auction houses at between $125,000 and $150,000. That’s an average annual appreciation of 7% to 8%. But I wouldn’t sell it for twice that price because (a) it’s a rare piece (an oil painting by a modern Mexican master), and (b) it still makes love to me every time I look at it.

Let me give you another example…

I have an oil painting in my office by a Pakistani artist. I bought it almost 30 years ago from a neighbor who was in financial straits. He sold it to me for $3,000. He told me it was worth more than that. But since I didn’t know the artist, $3,000 was as high as I was willing to go.

I liked it immediately. It was a large, abstracted image of a woman seated under the outstretched hand of a man. The bodies were aqua green. The background was black. The way one figure curled around the other appealed to some tender part of me. And yet, the impression was almost stark. More like an etching than an oil on canvas. The artist’s technique – drawing into wet paint with the hard end of the brush – was new to me. I was smitten.

I didn’t know who the artist was when I bought it. And perhaps the man who sold it to me didn’t know either. Or perhaps he did but didn’t realize that he was a rising star. Several years later, he tracked me down and offered to buy it back for $5,000. I demurred. A year later, he called me back and offered me $10,000. This continued on and off until I turned down $50,000.

By that time, we both had done our research and knew its market value.

I could probably sell it today for $60,000 wholesale. Or retail it and try to get $90,000. But I haven’t the slightest desire to do so for the same reasons I’m holding on to the Orozco.

Had I invested $3,000 in a stock index fund back then, it would have been worth about $50,000 today. In this case, my emotional attachment to this wonderful piece of art has given me a profit of between $10,000 and $40,000.

One last example:

In 2008, I bought a large painting by the CoBrA artist Jacques Doucet from a dealer in Amsterdam. (See “Did You Know,” below.) I didn’t particularly like this piece at the time. Its gloominess was more than even my usually gloomy temperament could connect with. But it was a strong painting, and I felt that the price I had negotiated – $20,000 – was a good one. I bought it and installed it in our “entertainment” room, a largish room we use for parties.

In 2016, someone called my partner at Ford Fine Art and offered to buy it for $40,000, doubling my money in 8 years. That was a nice 9% annualized return. In fact, the offered price was at a  premium because the buyer “loved” the image.

Meanwhile,  I had fallen in love with that painting. I couldn’t bring myself to sell it. So I turned down the offer, and I’m glad I did. I’m happy to have that painting in my collection so I can enjoy it now. And I expect that it will continue to appreciate at 8% to 10% annually.

The point is this: When it comes to holding for the long-term, it is easy to do with investment-grade art because you do fall in love with it. But with stocks and bonds, it’s not possible to have the same attachment. Instead, you get emotionally attached to its pricing.

And that makes you a bad investor.

The financial industry understands this. That’s why brokers and the investment media bombard investors with the real-time value of their stock holdings. The moment a stock drops, the investor knows it. He sees that big red loss on his account statement. For most investors, this creates anxiety. And frequently, they rid themselves of that anxiety by selling.

But investment-grade art is less reported upon. Therefore, the value is less subject to the emotional whipsaws of investors (and computer-based investment programs). Prices change from year to year, not day to day. This reduces the ups and downs in valuations. More important than that is the fact that most art investors, like me, are reluctant to sell their art for decades.

I believe this is the main reason I’ve done as well as I have with the better part of my collection. And it’s the reason I recommend investment-grade art to anyone interested in investing in art.

Falling in love with it is not a bad thing.

You get to have your cake and eat it too.

* 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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Fun and/or Interesting

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CoBrA was an avant-garde art movement (1948-1951) characterized by spontaneity, experimentation, and primitive images. The name was derived from the cities the CoBrA artists came from: Copenhagen (Co), Brussels (Br), and Amsterdam (A).]

A Word to the Wise

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prescind (verb) 

To prescind (prih-SIND) is to withdraw attention. As used by Nicanor G. Tiongson: “Those who subscribe to the theory of art for art’s sake believe that they can prescind from the realities of their society and create art without any ideology, as pure aesthetes.”

Worth Watching

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“COVID-19 Never Grows Exponentially” – a video from Stanford University’s Michael Levitt on “fitting data,” an advanced strategy for machine learning and AI that demonstrates that COVID-19 did not ever grow exponentially. Watch it here.

Readers Write

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An email from TS:

Please keep writing these great essays. I love the investment ideas, but you prove over and over that there’s more to success than just making money.

 

Monday, June 22, 2020, Delray Beach, Florida


Notes From My Journal

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“Testosterone is a rare poison.” – Germaine Greer

 

Do Sex Hormones Determine Our Thoughts?

Let’s talk about hormones.

I have just come up with a theory. But before I present it, you should know this:

It’s well established that testosterone is the primary hormone that generates the emotions that have been traditionally described as masculine: confidence, competitiveness, aggressiveness, and even arrogance. Countless studies show that men with higher-than-average testosterone levels tend to exhibit these characteristics regardless of the circumstances they find themselves in and regardless of their chosen careers.

Likewise estrogen, the “female” hormone, generates emotions such as cooperativeness, compassion, and the nurturing instinct.

Both men and women produce testosterone and estrogen. But, typically, the average adult man has about seven to eight times more testosterone than the average adult woman.

Here’s an interesting fact: Testosterone levels change after a win or a loss. They drop during and after a loss and rise during and after a win. But the degree and the duration of change differs with the individual. Some experience a great and longstanding drop or rise. Some experience a change that is less dramatic and enduring. By measuring those changes through blood tests, researchers found they could predict what a competitor would likely do about the next competition. Losers that had large drops in testosterone were less likely to compete again, compared to those that had more moderate and less enduring drops.

Another interesting fact: According to Business Insider, testosterone levels can predict how people in the financial community will fare. Traders and financiers with higher-than-average testosterone levels – both men and women – tend to rise faster and make more money than those with lower-than-average levels.

Studies have shown that CEOs – both men and women – tend to have higher testosterone levels than is typical for their sex. (There’s even a rumor that Wall Street companies search out women with higher-than-average testosterone levels because it means they’re more likely to take on risk.)

In one study, researchers found that “young male” CEOs (younger than 45) were “more likely than older [male or female CEOs] to both initiate and kill M&A deals.” They noted, “Young male CEOs appear to be combative… [as] a result of testosterone levels that are higher in young males. [Average testosterone levels drop significantly as men age.] Testosterone… has been shown to influence prospects for a cooperative outcome of the ultimatum game. Specifically, high-testosterone responders tend to reject low offers even though this is against their interest.”

Some other facts:

* High testosterone levels are common among those that advance in other professions, too, such as politics, the military, and even academia.

* There is evidence that testosterone levels are higher in individuals with aggressive behavior, including prisoners (male and female) that have committed violent crimes.

* Researchers found that men with increased testosterone “were 27% less generous towards strangers with money they controlled.”

Neuroscientists generally agree that emotions and thoughts are not biologically distinct. One affects the other. And both exist in specific areas of our brains that are stimulated by our sex hormones.

So my theory is this: Testosterone and estrogen affect the way we think and the sort of thoughts and ideas we prefer.

One example…

My fellow book club members and I were having a discussion about the sort of books we like to read in our club as compared to the books that our wives like to read in their clubs. There is an obvious difference. Our wives prefer to read fiction, and they read only fiction in their clubs. We read half fiction and half non-fiction, though a good third of us read the fiction selections grudgingly.

On those occasions when we and our wives have read the same books (fiction), we preferred the darker novels like Heart of Darkness and No Country for Old Men, whereas the women preferred novels like Vanity Fair and The Goldfinch.

When it comes to genre fiction, the women preferred historical fiction like Wolf Hall, whereas we preferred crime stories like The Killer Inside Me.

Of course there are exceptions and degrees. Within our group, there was a stark divide between those that liked Where the Crawdads Sing and those that abhorred it. Those that liked it were generally more accepting of literary conventions. Those that disliked it saw it as a thinly disguised romance novel.

I was thinking of the people that write for my publishing companies, and I could see a difference there, too. The male writers tend to be more contrarian and confrontational when they write advocacy pieces, and they gravitate to subjects like economics and investing, where conflicting opinions are common. The women tend to be more compassionate and consensus seeking in their writing, and they gravitate towards subjects like travel and natural health, where the emotional content is less volatile.

Again, there are exceptions.

But it does seem that an imbalance in the testosterone/estrogen ratio in favor of testosterone stirs up contrarian, unconventional, even strident, trains of thought and a preference for non-fiction writing that emphasizes such thinking. And an imbalance in the other direction stimulates ideas that are more conducive to consensus and a preference for non-fiction writing that is more accepting of conventional norms – even if those conventions are presented as radical or revolutionary.

I’m generalizing, of course. Some of the best women non-fiction writers I know are contrarian thinkers. And some of the most successful male writers I know advocate ideas that are mainstream and conventional.

But does that refute my theory or support it?

I remember reading a book by Deborah Tannen, a linguist, about the way men and women talk about their experiences. According to Tannen (based on a bunch of studies she did), men tend to present their experiences as examples of how well they fare in competition. Women tend to present them as opportunities for bonding.

One chapter of the book looked at the way husbands and wives talked about vacations they had taken together. The men overwhelmingly reported them as successful, whereas the women told stories about problems they’d encountered. Tannen theorized that the reason for this discrepancy was that, for men, any admission of problems with a vacation they had spent time and money on was tantamount to admitting failure. For women, it was a way to evoke sympathy.

I’m sounding terribly misogynistic, so I should probably drop this theory right now. But I’ll end with a question…

Since we know that the sex hormones (testosterone and estrogen) have a proven effect on emotions, and we know that emotions are inextricably connected with our preferences in many areas (career choices, leisure activities, etc.), why wouldn’t these same hormones also affect the way we think – our preference for certain kinds of ideas?

But before you answer that… have your bloodwork done and compare your hormone levels to the averages.

 

 

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A Word to the Wise

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strident (adjective) 

Strident (STRY-duhnt) means harsh, insistent; excessively and unpleasantly forceful. As I used it today: “It does seem that an imbalance in the testosterone/estrogen ratio in favor of testosterone stirs up contrarian, unconventional, even strident, trains of thought and a preference for non-fiction writing that emphasizes such thinking.”

Fun and/or Interesting

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“A study on infectivity of asymptomatic SARS-CoV-2 carriers” is one of several recently published studies which found that people that have COVID-19 but are asymptomatic are significantly less likely to transmit it than people that have symptoms. To read it, click here.

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