The following is a chapter from The Art of Investing in Art, a book I’ve been writing since 2010, which will finally (hopefully) be published this coming spring.
The Three Mortal Sins of Investing in Art –
and the Collectors That Are Guilty of Them
He was once a protégé of mine. He had a natural genius for business, and over the course of twenty years, I watched him build a billion-dollar financial empire. Then he retired. And to celebrate, he bought himself some expensive toys, including a yacht and several exotic cars. They were all too over-the-top for my tastes, but considering his net worth, well within reason for him.
One day, I received an email from him. He told me he was starting an art collection and attached photos of several of the pieces he had bought.
He had bought art in the past, but it had been purely decorative stuff. He hadn’t paid much for it, and he’d had no expectations that any of it would appreciate.
Now he was spending a lot more money. And his intention was, indeed, to buy art as an investment. But based on the photos he’d sent, I was concerned. What he was buying did not meet my definition of investment-grade. It was, at best, speculative. And he was never a speculative investor!
Though the pieces he’d bought had a visual appeal, they were vaguely derivative of the works of more established artists that had been collected by museums and major art collectors eighty and ninety years earlier – which means the kind of art that would almost certainly be rejected by the power brokers that collectively determine what schools of art and what artists among those schools would one day rise to the level of museum-quality investments.
There was yet another reason I felt I should put a damper on his enthusiasm. The qualities he liked in the pieces he bought were, in a sense, too accessible. For example, the subjects were attractive in a too contemporary way.
Since my friend had only a beginner’s exposure to art, he saw these qualities as fresh and interesting. But if he continued with his newfound passion, he would inevitably be exposed to enough of it that his enthusiasm for the pieces he was buying would wane. (I knew this from my own experience.) And when that happened, he would be doubly disappointed. He would no longer “love” the art he bought, and he would be faced with huge losses on it if he then decided to sell it.
I expressed my concerns very gently at first, hoping to have a more nuanced conversation with him later. But he informed me that he had hired an “expert” to guide him, which I took to mean that he didn’t want my advice. So I said nothing. And I secretly wished him luck.
There are general principles of investing that can be transferred from one asset class to another. But there are also differences. Fundamental differences. And if you are not cognizant of them, you can make mistakes. Sometimes serious mistakes.
I have made lots of mistakes in the thirty-plus years I’ve been buying and selling investment-grade art. I could probably fill an entire book about them. But most are versions of these three:
1. Thinking you can build a valuable collection simply by buying what you like. (A myth that is perpetuated by many dealers.)
2. Buying art on a whim (which usually means while on vacation).
3. Buying work produced by contemporary artists that have suddenly become “hot.” (A mistake that wealthy people often make.)
The “I Buy What I Like” Collector
Buying what you like isn’t a bad way to build a collection, so long as you think of the pieces you are buying as commodities. By “commodities,” I mean things like cars or computers that you don’t expect to be able to sell for more than a fraction of what you paid for them.
But if, in addition to being something you enjoy looking at, you want to see your art collection appreciate over the years, you must think of it the way you would think of any other financial asset.
So, when dealers advise you to trust your instincts and buy what you like, be suspicious.
They will tell you that art is meant to be enjoyed. Yes, they want you to love anything you buy from them. But there is another, more cynical, reason they say it.
They have learned through experience that novice art buyers often experience buyer’s remorse, usually within twenty-four hours of putting a new purchase up on their wall. If they bought it because they liked it, even if it was more expensive than they felt comfortable spending, they can brush their doubts aside. But if they feel that the dealer talked them into it – maybe by suggesting (truthfully) that it would be a good investment – they won’t trust that dealer to make any further recommendations.
There is another problem with the “buy what you like” approach is that I alluded to earlier. What is beautiful to the novice often looks derivative and obvious to an experienced collector. The more exposure you have to art – looking at it, studying it, buying and selling it – the more likely your preferences will change.
You might, for example, love the $5,000 Peter Max you bought at a fundraiser for your kid’s school in year one of your collecting journey. But ten years later, you may be embarrassed to have the thing on your wall. (I’m perhaps unfairly selecting Peter Max as the exemplar here. His work has merit, but it was so commercialized because of his earlier success that it became a caricature of itself long before it had a chance to inch its way up into museum-grade acceptance.)
The Impulse Buyer
Impulse buyers usually have, at best, a passing acquaintance with art and little interest in building a serious collection. They buy most of their art when they are traveling or on vacation as “mementos.” And, in fact, billions of dollars’ worth of art is bought each year on cruises and in destination galleries.
That’s why you find so many art galleries in touristy places like Vail, Palm Beach, Key West, Forte di Marmi, and San Miguel de Allende. And you’d be hard put to find a luxury resort of any size around the world that does not have at least one.
Tourists tend to buy whatever “name brands” are promoted by the on-site dealers. On cruises, for example, you’ll see, large-edition lithographs by the likes of Marc Chagall and Salvador Dalí, or limited-edition pieces by Thomas McKnight, Thomas Kinkade, Romero Britto, and Itzchak Tarkay. At most resort galleries, you’ll see much of the same.
The impulse buyer, by definition, knows nothing about the status of these artists among the institutions and influential people that determine the investible value of art. His objective is to hang pieces on his wall by “known” artists that he can impress his friends with. So, his focus is on the signature, which the dealer assures him is genuine. And he assumes he’s getting a good deal because he’s smart enough to negotiate a 20% discount.
I have no argument with people who buy art this way – just as I have no argument with the “I buy what I like” collector. But, again, this isn’t the way to build a collection that could appreciate over time.
The “Art Basel” Enthusiast
The Art Basel collector knows that buying “what you like” and buying on impulse are a waste of money. He is wealthy, knows a fair amount about art in general, and is in the market to buy “serious” art with serious investment potential.
He sees himself as cutting-edge, a groundbreaker, a trendsetter, which, in his mind, means buying the hottest artists appearing in the hottest art exhibitions – and Art Basel is the very hottest.
It is one of the best-known and best-promoted art fairs in the world. Every year, it stages exhibitions in multiple cities, including Basel, Switzerland (of course), as well as Miami, Hong Kong, and Paris. Tens of thousands of the top 1% of the 1% show up, dressed in their finest trendy fashions, to stroll through mega-tents and convention centers and gawk at the grossly overpriced art.
You can’t blame the dealers for their prices. After all, it’s expensive to rent a booth at Art Basel. And yet, because the dealers do so well, the demand for these booths has always been far greater than the supply. (Most of the dealers return every year.)
Since it was started in 1970, Art Basel has led the way in exhibition-based vending. Today, there are dozens of other shows that take place simultaneously and adjacent to Art Basel that feed off its enormous draw but cater to slightly different market sectors. In Miami, for example, there are at least a half-dozen, including Art Miami, whose focus is more on established artists, and Design Miami, which features mostly commercial-grade art.
As a group, these exhibitions have become the primary markets for contemporary art sales worldwide. They are, as advertised, fun to go to. Ultimately, though, they are designed to separate the arrogant from their money – people that are happy to pay double what a piece is worth simply for the bragging rights.
