Nine Quotes about Art as an Investment

Cash money.

Whether you’re a collector, a dealer, or just an observer, the art market can be a confusing place. Right now, since we’re in yet another art bubble, it’s a very expensive confusing place. Like most expensive confusing places, it’s full of people who want your money, and who would like you to believe that giving it to them constitutes a wise investment.

So, to commemorate the launch of artnet’s new art market index and the eruption of ill-advised bright ideas that’s sure to follow, we’re here to remind you that art will probably never make you any money.

Here are nine published statements from economists who have studied the art market professionally, with numbers and math and everything, categorized into four general lessons to be learnt from academia.

1. Art is a terrible investment, unless art investment is your full-time job.

Mandel, B. (2009) “Art as an Investment and Conspicuous Consumption Good”

“The empirical literature measuring average art prices is extensive, and the estimated long-run real return on art is quite low.”

…

“These studies find that art often underperforms relative to equities and bonds. While there have been stunning individual success stories in art investment, long-term average returns are lower than for equity and, in several cases, the mean real return of “risk-free” government bonds exceeds that of art, implying a negative risk premium.” [Ed.: That is, investing in art is less safe than investing in bonds, and also less profitable.]

Worthington, A. and H. Higgs (2003) “Art as an investment: short and long-term comovements in major painting markets”

“Unfortunately, little empirical evidence exists concerning short and long-term price linkages among differing art and financial markets and the concomitant prospects for portfolio diversification. The evidence that does exist is generally mixed.”

Goetzmann, W.N. (1993) “Accounting for Taste: Art and Financial Markets over Three Centuries.”

“While returns to art investment have exceeded inflation for long periods, and returns in the second half of the 20th century have rivalled the stock market, they are no higher than would be justified by the extraordinary risks they represent.”

Agnello, R. (2002) “Investment Returns and the Risk for Art: Evidence from Auctions of American Paintings”

“In contrast to the anecdotal evidence on returns, economic studies of painting investment have not supported claims of financial success.”

Melnik, A.L. and S. E. Plaut (2008) “Art as a Component in Investment Portfolios”

A small but growing body of academic research has addressed the question of whether art  should be a part of an optimal investment portfolios and, if so, to what extent. Frey and  Pommerehne (1989) examine an interesting sample that stretches over 350 years and conclude  that painting investments yielded on average a 1.5% real return, less than financial assets. In other recent papers, such as Renneboog and Van Houtte (2002), the conclusion has been that it should be at most in very small proportions and indeed may well be absent altogether from optimal portfolios (or even shorted).

2. If someone uses the term “masterpiece” to refer to a work of art, it has probably already peaked.

Ashenfelter, O. and K. Graddy (2002) “Auctions and the Price of Art”:

“The evidence clearly suggests that, contrary to the view of the art trade, “masterpieces” underperform the market.”

Moses, M. and J. Mei (2002) “Art as an Investment and the Underperformance of Masterpieces”:

“There is strong evidence of underperformance of masterpieces, meaning expensive paintings tend to underperform the art market index.”

3. If anything works, it’s probably buying and holding.

Landes, W. (2000) “Winning the Art Lottery: The Economic Returns to the Ganz Collection”:

“As the title “Winning the Art Lottery” implies the Ganzes turned a modest investment in art over a 50-year period into a collection worth more than $250 million. Yet the term “lottery” doesn't quite capture the journey they traveled or the way they succeeded. They didn't hit the jackpot overnight. Rather they spent a good deal of time and effort searching and acquiring art over many years. And like long-term investors in general, they had enough confidence in their purchases that they followed a “buy and hold” strategy. Occasionally they exchanged works for other works but they rarely sold art. They held only three of the 83 sampled works auctioned in 1986, 1988 and 1997 for less than 10 years. They held seventy-three for more than 20 years.”

4. Art market bubbles occur “whenever income inequality rises quickly.”

Goetzmann, W.N., L. Renneboog, and C. Spaenjers (2009) “Art and Money”:

“Taken together, these results demonstrate that it is indeed the wealth of the wealthy that drives art prices. This implies that we can expect art booms whenever income inequality rises quickly. This seems exactly what we witnessed during the last period of strong art price appreciation, 2002-2007. Indeed, in many countries with  large numbers of art buyers, income inequality has risen significantly in those years, mainly due to strong increases in managerial compensation. Andy Warhol, for one, would probably have applauded this evolution: “I don’t think everybody should have money. It shouldn't be for everybody—you wouldn't know who was important” (Warhol, 1975).”