Blue Chips of Art
Which artists to buy to ensure long-term profit?
Blue chips equals cheating
I remember doing a project for a Finance class at the university, where the aim was to create a portfolio of 20 stocks, which would have the highest profit along with the tolerable risk. We had to assess the company earning-potential based on the historical data, create a well-diversified portfolio and then trade the stocks if their current performance is not satisfactory (by reading news and analyzing value graphs).
Obviously, adding blue chips into the portfolio was prohibited, as it would maximize the chance of getting highest returns without showing our true skill as financial analysts. Nevertheless, my team cheated in a different way — we “bought” the stocks after the fact, when the trading floor results were already known and then backed the decision up with an argument that suited our choice. If only this was possible in the real world!
Yet, the idea of certain companies performing better than the others with a guaranteed low risk really fascinated me at the time. I learned that the term “blue chip” refers to the company that is very strong financially, with a solid track record of producing earnings and only a moderate amount of debt. To spot such a company (apart from googling the corresponding lists by major newspapers) one should look for a business with a strong name in its industry and dominant products or services. Typically, these companies are large (international) corporations that have been in business for many years and are considered to be very stable.
Return-wise, blue chip stock is qualified as a high-quality and usually high-priced stock. It is high-priced due to public confidence in company’s long record of steady earnings. Investing in blue chips, such as IBM, Exxon Mobile or Apple means guaranteed profit in the long run, since these companies are not over-priced, hence deserve their market value.
Blue chips and “blue” artists
When making an analogy with the art market, one can compare the industries with artistic styles: realism, impressionism or modern art. Every industry is associated with a certain return on the stock market, for example, contemporary art (read IT) is booming now. As for the companies analogy, artists must represent them in the art world. One is a well-known figure in the market, and every broker wants to have a piece of the pie. Another is a young promising artists, and investors are risking by going for a “black swan”.
So, which names of the art market guarantee a long run profit, if we make an assumption that art investment is mainly long-term venture?
Some of the artists names pop up in our heads with the first mention of guaranteed returns, like Salvador Dali. A story tells that a man of modest wealth when introduced to Dali has bought a collection of the tiles that the master has painted for a pool. He ended up buying 60,000 of those tiles, which could cover a half of the football stadium. When he grew old, the man has sold 40,000 tiles in private sales and auctions over the years, for as much as $2,300 for a set of six, and over €500 for just one. In the interview he replies:
“Look at me 40 years ago, sitting right next to the big master. Whatever he sells to you, when you can afford it, you buy it. You don’t think twice. It’s like being offered a piece of cake by the inventor of sachertorte. You don’t turn it down, even if you’re not into cakes.”
Identifying “blue” artists, as we may call them, is relatively easy, when you are confronted by a living legend. However, there are different examples of blue chips, which reveal themselves after the artist’s death. I would like to share with you an intimate family story of Lisanne Skyler about her art-collecting parents’ acquisition of a rare Warhol Brillo Box. In the documentary she tracks the path of their pop art sculpture from the $1,000 purchase price in 1969 to its 2010 appearance at Christie’s New York where it soared to $3.3 million with premium.
For the sake of our research, it is interesting to pay attention to artnet Analytics that plotted the price performance of Brillo Boxes against the S&P 500, finding that they consistently outperformed the benchmark index. The movie also highlights that the price went up after the death of the artists, which brings us to the notion that “blue” artists depend on the public perception and readiness of the masses.
Scientific view on “blue” artists
So far, you may accuse me of being subjective about the choice of artists for the blue chips list. Therefore, in order to bring some statistical significance, let us look at the research on the topic. As a matter of fact, art returns and corresponding factors are typically analyzed by geographical market, so it is rather difficult to compare those.
For instance, among Australian modern and contemporary artists (analysis of 30,227 transactions in the timespan from March 1973 to June 2003) four have shown significantly higher values, namely Russel Drysdale, Brett Whiteley, Rosalie Gascoigne and Rover Thomas [1]. These names are associated with a percentage price increases from 364,58 up to 492,05, which is really impressive!
In the analysis of Canadian art sales from 1968 to 2001, the highest selling artists are Tom Thomson, William Berczy and Frank Carmichael, with the respective percentage price increase of 468,68, 240,69 and 212,35 [2]. However, authors make a remark, that the ranking is not necessarily statistically significant, as the standard errors are reported relatively to one of the artists (A.Y. Jackson) and the number of observations available varies from 1 to a maximum of 1246 for Jackson.
From theory to practice
What implications can one make from these individual stories and research? First, the name of the artists does matter in the price of the art piece. Second, for a mature market and established names, an analysis of prior performance is obligatory, just as in stock market! Thirdly, if you have a chance to buy works of a legend-alive artist, don’t hesitate. Finally, with some promising new names, start-ups of the art world, you need to take a leap-of-faith. What if it is your Brillo Box or Air B’n’B?
[1] Warthington, A. C., & Higgs, H. (2006). A Note on Financial Risk, Return and Asset Pricing in Australian Modern and Contemporary Art. Journal of Cultural Economics, 30(3), 73–84.
[2] Hodgson, D. J. & Vorkink, K. P. (2004). Asset Pricing Theory and the Valuation of Canadian Paintings. The Canadian Journal of Economics, 37 (3), 629–655.
