As I plunge into writing this, images of the art pieces I possess already flood my thoughts. Even calling them ‘art pieces’ feels a bit too grand of a statement and somewhat alien to a person (me) who doesn’t at all consider themselves an ‘art enthusiast’.

To-date, I’ve bought every single piece of artwork in my home because I like them. I never once framed them in the context of an investment opportunity. But did I miss a beat?

Let’s dive in to understand the merits of investing in art.

‍Topics covered:

• Art in numbers
• Art investing terminology - everything you need to know
• Returns and performance
• How art is valued
• Risks when buying art as an investment
• How you can get started

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TL;DR

OK, so first off, art is an enormous asset class, valued at over $1.5 trillion (for reference, that’s about half of Microsoft’s market cap).

And unsurprisingly, art can, for some, be a lucrative venture. Artprice estimates global market returns at 9% and Masterworks recorded an annual return of 14% vs S&Ps 9.5%

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However, the estimates account for only a small proportion of the art market and have major caveats. Tracking the performance of the market can be challenging and in turn lead to significant risk, especially for newbies to the art market.

It’s easy to get caught up in the headline returns analysis, but the very quick tip is, don’t do that. I’ll explain more below.

Art also remains opaque and dominated by individual and often super wealthy investors. The market is shaped by small groups of connected insiders who act as gatekeepers.

It’s largely controlled by galleries and dealers who commit with astonishing discipline to keeping artwork prices predictable and pegged to signals of quality like the prestigiousness of the gallery selling the artist’s work.

And that explains why I never see a price tag at a fancy gallery 🫠

If you’re thinking of investing, you should expect to invest time and effort to establish a baseline from which to make judgements. This might be more challenging in art than other asset classes because its value is intangible - I mean who’d think a banana taped to a wall, as per above, would fetch $120k?! But, it did.

On a serious note though, investing in art could work very well if you’re a genuine art connoisseur and want to combine your hobby with investing.

But opportunities certainly exist for newcomers to the art scene, too - there are more and more accessible entry points to get to grips with the market through art funds and fractional share ownership. More on that later.

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Art investing terminology you need to know 🤔

• Blue-chip artists: these are renowned and established artists e.g. Hockney, with a solid track record of sales, recognition, and market demand.
• Provenance: provenance refers to the documented history of ownership and authenticity of an artwork. It provides information about previous owners, exhibitions, and any relevant certificates of authenticity.
• Limited edition: Some artworks, especially prints or sculptures, are produced in limited quantities. Limited edition pieces are often numbered and signed by the artist, and their scarcity can impact their value.
• Primary market: The primary market refers to buying artwork directly from artists or their galleries. Investing in the primary market means acquiring artworks when they are first released, usually at the artist's original price.
• Secondary market: The secondary market refers to the resale of artworks. It involves buying artwork from previous owners, art dealers, or auction houses. Prices in the secondary market are influenced by factors such as demand, provenance, and an artist's market performance.
• Art market indices: Art market indices track the performance of the art market as a whole or specific segments of it. These indices provide insights into overall market trends and can be used as benchmarks for evaluating the performance of art investments.
• Appraisal: An appraisal is a professional assessment of an artwork's value, usually conducted by an art appraiser or an auction house specialist. Appraisals are important for insurance purposes, estate planning, or understanding an artwork's investment potential.

The Numbers

As I mentioned already - the art market is huge! This study by Deloitte estimated the global value of art and collectibles held by ultra-high net worth individuals at $1.5 trillion. But bear in mind that’s just for UHNW folks, this is not including investors outside of this categorisation.

Following two years of growth, sales in the art market slowed in 2023. A backdrop of increasing interest rates, stubbornly high inflation, wars, and political instability filtered down into more selective and cautious buying at the high end of the market, which had been pivotal to the revival of sales after the COVID-19 pandemic in 2021 and 2022.

A divergence in the performance in some of the largest markets created a more stable trajectory, but global sales still fell by 4% year-on-year to an estimated $65 billion.

Despite the fall in value, the volume of transactions grew year-on-year, increasing to 39.4 million (up by 4% on 2022).

Transactions had fallen sharply by an estimated 23% to 31.4 million in 2020 during the pandemic, but increased by 19% in 2021, and again marginally by 1% in 2022 to 37.8 million.

The uplift in 2023 was due to the relative buoyancy in the volume of transactions at lower price levels, for both dealers and auction houses. This again differentiates the performance of the market from some other slowdowns in previous years, when there tended to be fewer sales, with those at lower levels taking the brunt of the decline as risk-averse buyers reverted to the high end or the often cited ‘flight to quality’.

In 2023, however, the figures imply that some buyers were still keen to participate at lower levels, with the pullback being directed at the high end where volumes tended to be lower.

Sales Volumes in the Global Art Market

Annual Growth in Sales by Value in the Global Art Market

Returns and performance

This is where things get quite distorted; tracking performance is a challenge to say the least.

To provide an apples-to-apples comparison, art market indices track repeat sales of the same work (similar to the Case-Shiller Home Price Index as Morgan Stanley explains here).

For example, Masterworks created an index based on “all live and online auction sales at Sotheby’s, Christie’s and Phillips for artworks that previously sold at public auction, going back roughly 200 years.

However, this approach is subject to a few biases.

It only captures the performance of relatively valuable art which is sold at auction. Secondly, it can incorporate survivorship bias: if an artist falls out of fashion or a work that declined in value is never resold, the decline is not captured.

And one another quirk: sometimes auction houses buy back artwork at a guaranteed price if the auction fails. Seeing this price reflected in the index. This is technically correct, but ultimately doesn’t reflect a work’s real market value.

All this being said, indices are meant to mitigate the substantial opaqueness in the market, so they’re certainly worth a look if you’re thinking about investing in high value artwork.

Popular Art Indices:

• Sotheby's Mei Moses
• Masterworks
• Artnet

Artprice 100

Over the past 18 years, this leading index for the 100 most important artists in the market reflects an annual price appreciation rate of 8.9%, while the S&P 500 returned 3.4% in the same time frame.

According to ArtPrice, the index is assembled objectively using its extensive database of over 6,300 auction houses and weighted by an artist’s average performance over the last five years.

The index is adjusted annually, just as with a stock index, and newly successful artists join while those who are no longer relevant are excluded.

Important: remember about the biases I spoke about earlier - Unless you’re operating in the UHNW (Ultra High Net Worth) space and investing in historically successful artwork pieces, then I would take the ind with a pinch of salt.

How fine art is valued

1. Artist reputation: the reputation and significance of the artist play a crucial role in determining the value of their artwork. Established artists with a strong track record, critical acclaim, and historical significance often command higher prices compared to emerging or lesser-known artists.
2. Artistic merit: the artistic quality, creativity, and innovation demonstrated in the artwork influence its value. Pieces that are considered groundbreaking, masterful, or representative of a particular artistic movement tend to be highly valued.
3. Rarity and scarcity: the scarcity of an artist's work can significantly impact its value. If the artist has produced only a limited number of artworks during their lifetime, the demand for their pieces may exceed the available supply, driving up their value.
4. Artistic medium: different art mediums, such as painting, sculpture, photography, or printmaking, can have varying levels of demand and value. The historical significance, craftsmanship, and technical skill involved in creating the artwork also affect its valuation.
5. Condition and authenticity: the condition of the artwork plays a vital role in determining its value. Original artworks in excellent condition without significant damage or restoration tend to be more valuable. Additionally, ensuring the authenticity of the artwork through provenance and expert authentication enhances its value.
6. Market demand and trends: market factors, including current trends, collector preferences, and economic conditions, influence the value of fine art. If there is high demand for an artist or a particular style, it can drive up prices in the market.
7. Auction results and sales history: auction records and previous sales of an artist's work can provide insights into the market value of their art. Exceptional auction results or past sales at reputable galleries can positively impact an artist's valuation.
8. Subjective factors: personal taste, cultural significance, and the emotional impact of the artwork can also influence its perceived value. Collectors, museums, and art enthusiasts may be willing to pay a premium for pieces that resonate with them personally or have cultural relevance.

🚨 Risks when buying art as an investment: 🚨

Illiquid & Long Term Asset

Investing in artwork is similar to real estate or classic cars, they are highly illiquid assets that cannot easily be sold for quick cash. It is often difficult to find a buyer for any collectible, including highly valued art. It can be especially difficult to find a buyer on short notice.

💵 Costs and Fees

Investment worthy pieces of art rarely come with a small price tag. Of course, there are art investment funds and fractional shares of artwork that allow an investor to add art to their portfolio without the million dollar price tag - more on this below.

Costs can include handling, storage, and insurance, which can all come with high fees.

Art investors often plan on holding onto pieces for a long time, in order to let it appreciate in value. In the meantime, the investor would have to pay for maintenance and restoration.

Counterfeits & potential for destruction

The collectibles market is flooded with counterfeit items, and unless an investor is well versed in appraisal, it would be easy to fall prey. There are ways to help avoid getting duped including:

• Examine the certificate of authenticity
• Research the edition number
• Check the materials

Lack of Information

There is no shortage of information when it comes to investing in stocks, bonds, or other traditional assets. Because these are publicly traded assets, the public market offers extensive information. The same isn’t true for art. Information exists, but it is often limited as many transactions are private sales.

Aside from lack of open access to information, it can also be hard to find comparables (comps) when considering an art investment. If a comparable piece of art appraised at $15,000, it doesn’t necessarily mean that one you own will appraise for the same amount.

Art is often one-of-a-kind, making it hard to always find an exact comparison.

👩‍💻 How you can get started

OK so there’s a few ways to get started.

Online auctions

Online auction houses for art operate similarly to traditional auctions but take place on a digital platform. Participants register and browse through an online catalog of artworks. During the auction period, registered users can place bids in real-time or set proxy bids. The highest bidder wins the artwork, subject to meeting any reserve prices (minimum price the artwork must reach for it to be sold) set by the seller.

Here’s just a sampling of some online destinations if you want to get bidding:

1. Artsy
2. **Singular Art**
3. Artnet
4. Christies

2. Art Funds and Fractional Shares

The easiest way for a beginner to invest in art, especially without a lot of starting capital, is to buy fractional shares. With fractional investing, an investor buys interest in a piece of artwork along with other investors.

How this works is a platform, like Masterworks, buys a piece of artwork, and an individual investor can purchase shares of that item. After buying shares, investors are entitled to a percentage of the proceeds when the artwork sells.

3. Art Fairs

Art fairs bridge primary and secondary markets. Many galleries and artists exhibit at fairs such as Frieze or Art Basel, where they seek to showcase their most in-demand artists or striking new work at their stand. Depending on the gallery or dealer who is exhibiting, the artworks may be sold for the first time, or be re-sold.

Finally, let’s end with a quick anecdote from Kathryn Tully who writes Priceless. As she recalls:

Back in 2003, my friend’s wife bought him Laugh Now, a Banksy screenprint of a monkey wearing a sandwich board with the slogan ‘Laugh now, but one day we’ll be in charge’.

It was for sale for £150 at Santa’s Ghetto, a pop up store for alternative Christmas gifts near London's Carnaby Street, organized by the artist collective Pictures on Walls and billed as “A festive extravaganza of cheap art and related novelty goods from low-brow artists and trained vandals”. It featured works by number of graffiti artists and illustrators, including Banksy and 3D, also known as Robert del Naja, co-founder of the band Massive Attack.

£150 seemed quite a lot for a print, but Banksy murals had been popping up all over Old Street in London where my friend worked at that time, so his wife thought it would make a great present. Plus the print was one of an edition of 150 and signed.

Towards the end of 2020, my friend spoke to a Banksy dealer and told him about the print that he’d had hanging in his house ever since. The dealer said that if he wanted to sell it, my friend’s monkey print was probably worth £150,000

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Thanks so much for reading! 👋🏼

Jason

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DISCLAIMER: None of this is financial advice. Finbrain is strictly for educational purposes.

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