Using Fine Art as Investment

Mark DiPietro
Finance Editor

Here are some realities we as investors must consider. Inflation is unnaturally high. Interest rates, whose rock bottom nature over the past year partly caused the inflation spike, are slowly creeping back up with revised strategy from Powell and the Fed revealed in the recent FOMC meetings. All these traditional markers of instability in addition to the uncertainty of a looming European armed conflict. In other words, the economy is in hard times and harder times seem on the horizon.

Therefore, a prudent modern investor must make use of all financial opportunity to keep assets safe and to yield as much profit as possible. A financial investment that is oftentimes overlooked is the purchasing of fine arts. An unlikely pairing of words for some represents incredible opportunity to others.

One might ask, what kind of return can one earn off art? The reality is that art should be treated as a commodity, albeit a complex commodity. The value of the asset goes up over time in relation to the risk tolerance of investors of the day, similarly to something like gold or lumber. Except, where gold and lumber have inherent and predictable value, art has an added dimension of variable value tied to the reputation of the artist and popularity of their other works. That’s because every piece of art is unique and there is no standard to how valuable a piece is from this dimension.

Pieces can be broken down into three separate categories, with three separate investment qualities. First, there is art that is original and created in the present day. The artist is probably unknown to the general world but when you purchase a piece it is an original. This can be extremely risky, but it can also yield very high results. On one hand, the artist’s anonymity presents inherent risk. If their work is phased out of popularity or viewed as unimportant as time goes on, the piece does not gain appropriate value and the high present value does not translate into a higher proportional future value. However, if the artist becomes world famous, whether within their lifetime or post-mortem, then the piece’s resale value will far out strip the original purchase price.

The second category is the print, or duplicate market. Whether created by the original artist or a different entity, pieces of art will sometimes be duplicated. Since the duplicate is not unique and there is more of the same in the market, the law of supply and demand tells us that they will be inherently less expensive than original works. However, the benefit is that truly valuable duplicates that can be used as investment are only made of well-known pieces, removing that risk of the unknown respectability of the piece. There is a lower price tag but also a lower return over time.

The third category are original pieces from well known artists. These are one-of-a-kind works from artists that have already achieved world fame and considered revolutionaries of their time. This is Velazquez, Van Gogh, or Da Vinci’s of the world. These come at extremely high prices so the returns on them are generally lower, but their values will almost certainly not drop over time for they are cemented in history as industry shifting talents. There are even a few living artists that fall into this category like street artist Banksy, whose works sell for prices comparable to these giants of the past. The only notable risk of these works is if things are dug up from the past that would cause modern day uproar like ties to slavery or other controversial topics.

Vincent Van Gogh sold only 1 painting during his lifetime (Photo courtesy of the National Gallery)

A real-life example of these three categories is Vincent Van Gogh. Van Gogh created around 900 works in his lifetime, making him one of the most prolific artists in history. But the Dutch painter only sold 1 single work during his lifetime. If one was an investor in the late 1800s, Van Gogh’s work would be in the first category. Buying a Van Gogh was extremely cheap, and the painting’s value was very near to the value of the paint, wood, and canvas that made up it’s physical characteristics. Flash forward to today when Van Gogh’s works sell for tens of millions of dollars. Even duplicates will sell at a hefty price tag. Putting his work into the second and third categories. Even work from an artist like Andy Warhol who enjoyed immense respect and fame in his living years (meaning hefty present day price for work commissioned) has only increased in value at rapid rates since his death, resulting in massive returns despite large entry point price tags.

These three categories of pieces present investors with a variety of options. While the first category seems very risky for some, with the proper knowledge of the modern art market one can make reasonably sound decisions that could result in incredible returns for future generations. The second and third options seem daunting to get into, but ETF style instruments have been created recently to allow average investors to buy “shares” of works from an artist like Van Gogh for the price of a common stock. This allows investors to enjoy the benefits of these “blue chip” works without the necessity of millions in dry powder. Plus, tax benefits are present for works currently on display in public museums, making the investments even more beneficial.

“Love Is In The Bin” by Banksy quadrupled in value after the publicity stunt (Photo courtesy of Artsy)

In conclusion, it is clear that fine art can fit well in even the most common investor’s portfolio. Oftentimes, these works are inflation resistant and retain value quite well, with opportunities of heavy returns. Additionally, the world of art is an interesting and sometimes wild places that is always evolving and entertaining. A humorous anecdote that illustrates this point is with the aforementioned Banksy. He sold a piece called “Love is In the Bin” with a complimentary “special” frame. As soon as the piece was sold, the frame sprung to life and began shredding the multimillion-dollar piece. However, a malfunction stopped the painting from completely shredding, leaving it half torn. The performative stunt has become one of the most famous of the art world and the half-shredded piece ballooned to quadruple the value of the whole original.

 

Contact Mark at mark.dipietro@student.shu.edu

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