Are you thinking of buying art purely for investment?It’s a good diversification strategy for wealthy people

In the fall of 2018, Banksy’s work “Love is in the Bin” was sold for US $ 1.4 million.

The original buyer is now expected to sell his work for over $ 5 million. This represents more than 250% of the return on the original investment.

What if, instead of the arts market being the only area of ​​deep pockets, everyday people could buy stocks of expensive works of art and sell them as they please?

That’s what the new platform, Masterworks, is aiming for.

Art investment funds have been around for over a century. However, Masterworks has added a new twist to the old practice in that the platform allows individuals to buy a share of a particular artwork in units of $ 20. Investors can then either sell these shares in an easy-to-use secondary market or wait for Masterworks to sell their work and receive proportional returns.

I have been teaching economics and art courses with art historian Nancy Scott for nearly a decade. In this course, you will spend time discussing the history and profitability of art investment, both in theory and practice.

For those who are thinking of buying art purely for investment purposes, understand how art investment funds have traditionally worked and whether experts believe it is a good investment. Is important.

French pool their resources

The early art investment fund was called “The Skin of the Bear” (La Peau de l’Ours) and was based in France in the early 20th century.

The name comes from a French parable that includes the saying, “Don’t sell bear skins before you actually kill them.” This is equivalent to “Don’t count chickens before hatching” in French. This hints at the facts. Investing in art can be a dangerous endeavor.

Partially intended as a means of supporting emerging Post-Impressionist artists such as Picasso, Matisse and Gauguin, the fund was run as a syndicate for a small number of partners to donate the same amount each to purchase a collection of paintings. rice field.

Andre Rebel, a businessman, art critic and collector, managed the fund and arranged the sale of the paintings. After the painting was sold, he received 20% of the selling price of his work. The artist received 20% of the fund’s profits in addition to the money received from the first sale. The investor then receives the rest at the same rate.

This concept (returning a portion of the selling price to the artist) is known as the Droit de Suite, or the artist’s resale right. This version is now legal in most parts of the western world except the United States.

This first art fund was successful. It created a demand for new artwork, supporting innovative Impressionists and contemporary artists, while at the same time bringing significant benefits to former investors.

Not all funds are equal

Another well-known investment in art was made by the British Rail Pension Fund.

The fund was established in 1974 to manage a small portion of the company’s employee retirement benefits. The purpose was to buy and then sell the work of art for 25 years. The fund generated 11.3% compound interest each year, but the actual profits were much lower due to high inflation for most of the period.

Other notable art funds have failed. The Banque Nationale de Paris art fund sold its investment at a loss in 1999, and a fund run by British art dealer Taylor Jardine Ltd. did the same in 2003. The UK Department of Trade has determined that the Barrington Fleming Art Fund was closed in 2001. It is set under invalid circumstances. Also, Fernwood Art Investments, founded by former Merrill Lynch manager Bruce Taub, could not even be launched after Taub was found guilty of embezzlement of investor funds in 2006.

Nevertheless, there are still operating art funds such as Antea and The Fine Art Group. Of course, banks and auction houses have long described investing in art as an appropriate diversification strategy for wealthy people.

But what do economists say about art as an investment?
Is it really a “floating craps game”?

Economic theory suggests that, by definition, investing in art may offer lower returns than investing in stocks. Because it is considered a passionate investment. As with investing in sports souvenirs, jewelry and coins, part of the return to investing in art should be the intrinsic enjoyment of the object itself. Total returns consist of monetary returns and enjoyment of ownership.

The monetary benefit of investing in these financial instruments should theoretically be greater than the monetary benefit of investing in the arts, as stocks do not provide the value of this enjoyment to most people.

However, it is important to actually analyze the numbers.

One of the first papers on the monetary benefits of art investment was published in 1986 and was written by the late prominent economist William Baumol.

title? “Unnatural investment: or art as a floating craps game.”

Baumol estimated that long-term inflation-adjusted returns on 300 years of investment in art were only 0.6%. Since then, some researchers have estimated higher returns. For example, according to a study by Yale University finance professor Will Getzman and economists Jumpin May and Mike Moses, inflation-adjusted rates of return were 2% in 250 years and 4.9% in 125 years. Estimated revenue depends on time period, sample, and methodology.

In addition, these surveys do not include transaction fees. This can be significant when it comes to art, thanks to the large fees charged by auction houses or private dealers to act as an intermediary. Also, sample selection is not taken into account. Paintings that have plummeted in value often cannot be sold at auction.

However, studies by both Getzman and May and Moses estimate that stock market performance does not appear to correlate with the return on artistic investment. Therefore, investing in art as a way to diversify your portfolio may have several advantages.

Art for everyone?

However, the masterpiece is a little different from the traditional art funds mentioned above. Investors buy shares in a single work of art rather than investing in a fund that contains multiple works of art. Entry prices are much lower and investors will not be trapped in the fund for a specific period of time as long as there are buyers who are willing to share the artwork. Investors can make a profit just by selling high-value stocks, without waiting for the artwork itself to be sold.

But like traditional art funds, investors in art stocks sold by Masterworks make money when the price of artwork goes up and lose money when it goes down.

Ultimately, Masterworks seems to be innovative and fun. This format is likely to appeal to the younger generation of investors, many of whom may have started small investments through apps such as Robin Hood.

This site was easy to navigate and could provide some fun-even I wanted to get involved in buying some stocks.

But should you want to get rich from investing in art? Probably not.

Moreover, unlike the Skin of the Bear, it does not always benefit up-and-coming artists. Masterworks focuses on proven and established works by artists such as Banksy, Andy Warhol and Claude Monet.

That said, Masterworks can bring an investment in art to a large audience. However, be careful. Art is a risky investment.

Are you thinking of buying art purely for investment?It’s a good diversification strategy for wealthy people

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