The sticky business of art

How do you value it? How do you price it?

There is a prevailing belief, particularly in the upper echelons of the contemporary art world, that art makes a great investment. (For a good overview see Caslon Analytics art fund note.) However, research shows that in the overwhelming majority of cases, art is neither a good nor efficient investment. (This is discussed at length by authors Alan Bamberger, Don Thompson and Sarah Thornton.)

While successful sales are lauded in the media, for every success there are far more untold failures. Author Don Thompson notes that in fact, the Mei Moses Index, used for tracking the value of museum-quality art, excludes works that auction houses have refused for resale which means that only successful artists – those with rising values at auction – are counted. That is like looking only at stocks from the S&P 500 Index that have increased in value and concluding that investment in shares is a good thing. Thompson goes on to say that most art will not appreciate, and there are high transaction costs such as dealer markups, insurance, taxes, capital gains. Eighty percent of art bought from local dealers and local art fairs will never resell for as much as the original purchase price.

Recent research by the Stanford Graduate School of Business on the value of art as an investment validates Thompson’s assertions. They discovered that the returns of fine art have been significantly overestimated and the risks underestimated by those who stand to gain of positioning art as a viable asset class due to selection bias. The bias resulted from returns based on indices built on repeat sales of fairly illiquid assets that are not sold at random. Why did this bias occur? As Thompson observed, the pieces that sell are the ones that increase in value. In other words, the “average” is calculated based on above-average sales, thereby greatly exaggerating the rate of appreciation for the majority of art. The study observes that from a pure financial perspective, passive index investing in paintings is not a viable investment strategy once selection bias is accounted for.

Study author Arthur Koreweg concludes:

In short, buy paintings if you like looking at them. You can hope that your children will sell one or more of them later for a gain — but paintings are primarily aesthetic investments, not financial ones.”

Do you think this holds true? Would you be dissuaded from buying art if you thought it would never appreciate?

On the flip side is pricing art.

Pricing art is one of the most subjective commercial activities attempted. If you compare it to fashion, it can be argued that branded designers (like branded artists) can command a higher premium because of the history and reputation behind the name. But oftentimes an article of clothing’s price is also influenced by the quality of materials, hand vs. factory made, scarcity and uniqueness. Original art can be judged (sometimes) by skill of execution; however, quality of materials is often a non-factor (or, on the opposite end, think of art made of garbage), and the vast majority is hand-made, scarce and unique. Needless to say, pricing art can be a challenge.

The Guardian newspaper recently asked auctioneer Philip Hook what sells in the world of fine art. First, if you are an artist whose work constitutes part of an artistic period/style deemed of increasing significance by the art world (e.g. German expressionists), or if you’ve had a major exhibition at a local, neighourhood gallery… like the Tate in London, your prices will increase. If you have a back-story that can be romanticized – like unhappy love affairs, consorting with models, madness (but not illness – god forbid! – which buyers associate with reduced quality), rebellious behaviour, convicted felonies – your price point increases. If you can die young before you can cash in on your greatest success, even better! High recognizability is valued (that’s a Warhol!). Other tips to increase likelihood of selling are pretty women vs. gloomy, old men; sunny landscapes vs. gloomy; calm seas vs. rough; scenes of life vs. death; blue and red vs. other colours; and beautiful vs. ugly nudes. Condition and provenance (who has previously owned the work) will also factor. Finally, there is the question of “wallpower” – the visceral impact that makes people want to own it… kinda like Justice Stewart’s definition of porn: “I know it when I see it.”

There are tricks (methods) to valuing art, even by inexperienced collectors at the emerging artist level. Alan Bamberger in The Art of Buying Art goes into great detail about how to make an effective purchase. He reminds buyers that when purchasing a work of art, one does not buy an isolated item: one is buying a portion of an artist’s total output which has to be evaluated in terms of that output. This evaluation should involve familiarizing oneself with the artist’s total output, including talking to dealers, collectors and other experts, and looking for clues (awards, write-ups) of what the artist does best (think a Henri Moore sculpture vs. painting). The individual piece should be assessed for its physical (is it signed or reproduction) and executional (composition, technique, subject matter) originality, and whether the art is major or minor. (Major works are better composed, more original, more detailed, better executed, more complex and larger in size. Takes more time and effort to conceive. But don’t confuse major with good and minor with bad, or major with bigger and minor with smaller. The best examples of any artist’s work are referred to as “major” – Alan Bamberger.)

Perhaps the truest test of a piece’s value, at least to you, is to compare it directly with other pieces of the same price range intended for the same purpose. A good reason to look forward to the launch of

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