Art as Investment

The popularity of art as an alternative investment has risen significantly over the years, specially so following the financial crisis of 2008 due to a prolonged downturn in the stock market, a slowdown in the economy and low interest rates. Art is an alternative investment avenue which is considered profitable albeit extremely risky.

Art as an investment has been debated for long, but the corporate scandals, stock market losses and low interest rates have helped it to re-emerge.

Critics say art can never be considered as financial asset as investing in art disregards the traditional yardsticks of financial analysis since they do not generate income streams (interest payment as in bonds, rentals as in real estate or dividends as in stocks) that can be discounted. It is a bet on the price appreciation (as in commodities) of something whose value defies financial logic.

Whilst some artworks have appreciated enormously in value over time (Tyeb Mehta), it is difficult to make a case for artworks overall.

Art market is illiquid, opaque and unregulated. Transaction costs are too high, sometimes up to 30% and may in fact wipe out the profits. In the short-term, the art market volatility is relatively high compared with other asset classes.

The value of an art piece, art lovers say, will never go down to zero and it will never do a Global Trust Bank.

For investment-quality art, the limited supply adds to the increasing demand, this would mean a definite price appreciation over the long run. The main attraction of art as an investment is its low correlation with other financial assets. Art has the ability to reduce the risk of a portfolio when combined with the other assets and Art combines passion and investment.

Even under purely financial aspects, art is a genuine contender for a portion of any sophisticated portfolio. Art as an investment cannot be overlooked for one unique reason, an ever-increasing demand coupled with an absolutely limited supply.

Valuing art is very different from valuing financial instruments. Each art is different and prices for individual works may be unpredictable and difficult to compare. Valuation is based more on human emotion than on anything else. Multiple bidders who like the same piece can make the sale price soar beyond all gestimates.

The key for art investing success, as in stocks, is predicting which works of art will increase in value. Investors who are not hesitant of high risk can make the biggest gains at the lower end of the market by investing in lesser known and new artists. The real problem though is that there are so many unknown or lesser known artists in the world and finding the one that will become the next Leonardo da Vinci, Michelangelo Buonarroti, or Vincent van Gogh can be next to impossible.

As each work of art is different and the markets are anything but transparent, evaluating quality and price requires knowledge of the market inside out and art markets are often cloaked by veil of secrecy. There is no official registration office or certification authority that can authenticate the ownership of individual artworks. Other transaction risks include absence of clear title, forgery, mislabeling, and auction fraud. Another risk of investing in art is the ever changing taste of the so-called progressive art circles and thus taste swings can devaluate a piece of art temporarily. The upper end of the market although does not carry this particular risk and masterpieces will never lose value.

Most people who have made money over the years by buying and selling art had not bought art as an investment. Nearly everyone associated with the art market will emphasize that investment should never be the sole or even the primary reason to buy art. Art lovers buy what they love and even though it might go through a temporary devaluation (relatively known artist) or might never command a high price (new artists), the intrinsic value of the work (deriving visual pleasure) will always be there.

Among other things, many art owners view art as a symbol of their social status. This is an attribute which has existed for hundreds of years and in all likelihood will continue till eternity regardless of the merits of art as an investment. It is this attribute associated with art that creates an ever increasing number of people willing to pay through their nose to differentiate themselves in the society that will make art a profitable investment.