Art

Craig Mattoli asked:


Most people, at least, in the West, know that art can have value.  After all, they have been reading about Van Gogh, Picasso, or Klimt paintings selling for millions of dollars for decades.  However, most people do not know that you do not have to be a millionaire to invest in and make money from art.  Art is simply another investment asset class that savvy investors include in their arsenal.  Therein lays the key to understanding.

The sad truth is, also, that most people who invest in the more common investment assets, like stocks and bonds, do not understand investment in those more common investments.  I always hear people talking about “playing the market”, yet, as any professional investor will tell you (it just so happens that there are so few that odds are that you never met one), although it is a game, it is not a game for novices.

The first person to formalize a mathematical framework for economics and finance was John VonNeumann, a mathematical physicist, who invented game theory as the basis for studying those fields, in the early part of the twentieth century.  Indeed, until the 1980’s, most of economics and finance sprang from this basis, and the focus was to assume, just like in playing dice with perfectly symmetrical cubes or flipping a so-called fair coin, that investment was a fair game: there was equal probability of gain or loss and the distribution of outcomes was the bell-shaped curve. 

Since the 1980’s the behavioral school has gained ground, in the theoretical realm, by assuming that since people are not perfectly rational, we should examine the actual behavior of people in business and investment situations.  Of course, that is something that investment professionals have been doing for centuries.  Dow and Jones, in the 1880’s, said, for example, that at market tops the professionals are already well out of the market.  After a crash, which will always happen because emotional human beings are markets, professionals quietly begin to buy.  Their buying, eventually excites technical market analysts’ technical market indicators, which are somewhat based on supply and demand analysis, in real markets, and technicians begin to buy and recommend buying.  Eventually, the general public catches onto this news, which is really very old news, and they jump onto the band wagon.  Everyone tells everyone how smart they are and how much money they made yester day trading on-line.  Meanwhile the professionals have begun to quietly exit the market.  A peak comes; a crash comes.  Then, all of those self-proclaimed investment mavens console each other and support each other in their ecstasy turned agony.  Some run to the authorities and claim that they were duped because they did not understand the complex nature of the mini-bonds that they bought: translation - they were so greedy when they were told that they could make unbelievable returns, and they did not want to hear about the risks.  Another lesson that the theoreticians finally came to admit after the stock market crash of 1987, which, statistically, should not have happened in the whole history of the solar system, was that the distribution of returns is skewed with a longer tail on the down side.

It will be beneficial to understand the basic framework of a market, investing, and basic economics.  Economics assumes that people are self-interested.  Its only fault is that it assumes that people follow enlightened self-interest: no greed, lying, or cheating.  Finance says that there is a difference between price and value: value is what someone thinks that something is worth, while price is the amount that someone actually paid for something.  People make markets.  A market is not, necessarily a place, like the New York Stock Exchange.  Indeed, many people do not even realize that the NASDAQ market is not like the NYSE, it is simply a network of dealers, connected by computers, who maintain bid and ask prices for NASDAQ stocks.  This is referred to as a dealer market or an over-the-counter market (OTC), as opposed to the NYSE, which is one physical exchange through which all orders to buy and sell are funneled.  In fact, many people do not even know that the NYSE is a very special exchange, in that all of the stocks on the exchange are assigned to specialists who are the only one that you can buy a particular stock from.  The specialist maintains an order book of bids and offers, and he has the ultimate in information about supply and demand for his stocks at any moment in time.  As part of his job as a specialist, he can invest his own capital, in his stocks.  All the other layers of the business that deal with the investing public, after that, are in marketing.  A stock broker, for example, is just trying to make commissions when he calls you with a hot tip.  Even at the level of institutional sales, salesmen, analysts and block traders are just trying to get commission dollars.  None of them risk their own capital.  There are also investment bankers who help companies raise capital by issuing new stocks and bonds, and there is a large market effort accompanying that.  An underwriter might risk his capital by agreeing to underwrite the deal at a price for leftovers and may support the stock, in the secondary markets, by buying for a month or so.

So, let’s look at the art market.  A market is where supply and demand sort out price and volume.  Art buyers, collectors and investors make up the demand side.  Retail investors are smaller buyers of art, while high-net-worth individuals, trusts, corporations and museums fulfill the role of institutional investor.  Art dealers act as brokers, dealers, and investment bankers for art.  They act as brokers by taking consignments for sale or request to buy from customers.  They buy and sell art for their own account as dealers.  By taking on new, undiscovered artists, by having shows for artists at galleries (much like the road show investment bankers do for IPO’s of stock), and by acting as agent or dealer for an artist, they fulfill a role, much like investment banker.  Ultimately, supply is limited, depending on the artist.  Once an artist is dead, supply is fixed.

Value begins, as in all of economics, with scarcity.   It is the same principle that drives the precious metals market, the crude oil market, and the art markets.  As with anything else, quality also plays a role in determining an appropriate price.  However, also, like with many other things, including any type of investment, marketing plays a major role.  Galleries, dealers, and art critics try to tell people what is good and what is bad art.  Sometimes, I wonder about their opinions.  Other times I have benefited, as in the sale of a table made of roots onto which birds were carved, and as one of only two found examples by this unknown folk artist from the 1800’s. Sale of the table brought over $4,000, back in the mid-1990’s.  These art market analysts play the same role as securities analysts, in the stock and bond markets.  They might even make buy and sell recommendations, and they might estimate values of artworks.  Since art is supposed to make you feel good, your basic starting point should be to look to buy things that you, personally, like, then, check out the price.

In the securities markets, smart investors value things on a comparative basis.  Instead of trying to figure out what prices or returns should be, stock analysts use comparative P/E ratio analysis, comparing one company to other companies, in the same industry, and comparing P/E’s of stocks and industries to those of the general market.  In bonds, the yield-to-maturity (YTM) of a bond is compared to current market YTM’s of bonds of the same company and to general bonds with similar maturity, coupon rate, and risk.  In the same manner, the value of works by an artist can be compared to one another and to those of other artists.  Normalization, in the context of paintings, involves an artifice: converting prices to price per square meter or per square inch.  One might make similar size normalizations for, e.g., teapot art and sculpture.  However, price per unit of size might vary over an artist’s work with larger ones, perhaps, trading for lower price per unit of size, and their more famous works trading at higher price per unit of size.

Having built a comparative pricing system for art, one can compare the prices of one artist to another and the average prices of one artist over, a school, a movement or a period by construction single artist or composite price indexes and looking at their evolution over time.  That also allows you to calculate returns since return is defined as the percentage change in price over time.  You can compare prices from galleries, which is the retail market.  The next layer of the market, much like in other investment markets, is an inter-dealer market.  The final layer is the auction market, which in some respects is like the exchanges, in the securities markets, but it is a stop-out market: a market of last resort for sellers.  The auction markets are more fragmented than the auction markets, in securities; they are not open every day, either, unlike their counterparts in securities.  Price information of one sort can also be garnered from the auction markets for artists for whom there are auction records.  There are also research and information services, in the art markets, mirroring similar services in securities and commodities markets. 

I bought my first piece by a famous artist, Joan Miro, in the mid-1980’s.  I was surprised to find that the price was only several thousand dollars.  By the time that I bought my third Miro, I had learned about and used information from the auction record to pay the proper price.  In succeeding years I bought art by many famous artists.  Although the art that makes the headlines makes it seem that all art is out of reach of the man on the street, you will be surprised to find out that art by many known artists, past and present, is not that expensive.  Another little known fact is the good returns that can be made in art, especially when one approaches the market with the tools and techniques as one would in any other investment asset market.  During my decades of trading art, in the U.S., I cannot recall a time when I lost money, and returns have always been exceptionally good, especially when compared to returns of other investment assets.  I can even recall times that I have continued to earn a profit, in art, even during downturns in securities and real estate markets.  

Now, we are investing in and have set up a dealer in Chinese art.  I moved to China four years ago to teach finance and economics at South China Normal University.  I have been immersed in the Chinese social and economic scene, and I have concluded that the best current market in China, today, is the not the export market or the stock market or real estate, but, instead, the art market.  Returns, in art, in China, have been above twenty percent per year over the last decade, in local currency, and the continued undervaluation of the Yuan versus foreign currencies, coupled with other socio-economic factors, make investment, in this market, appear to offer good opportunities over the next several years, especially for foreign investors.

Up through the 1970’s and early-1980’s, investment in stocks and bonds seemed outside the reach of the man on the street.  By the 1990’s everyone and their brother was trading stocks on-line through discount brokers.  Now that we are in the twenty-first century, the next time you think about art, remember that it is just like any other investment asset, like stocks, bonds, and commodities, it is not outside the realm of investment possibilities for the average investor.  Think of the analogies that we have laid out between art and securities investing and markets.  You can also find out more information about investment, art, China, and investment in art in China on various parts of our website. 

 

February 24, 2009 Craig Mattoli, CEO, Red Hill Capital, owner of Leona Craig Art, Guangzhou, China



DELMAR

Michiel Van Kets asked:


Australian Aboriginal art has experienced an exceptional increase in popularity over recent years and it’s not just limited to within the home-country. Internationally the art form is recognized as very unique form of art, it is admired overseas and respected by art critics worldwide. Of late, it has also sprung to the attention of not only art investors but also to the wider audience, as wise buyers realize its high potential in the marketplace. As international attention increases and art critics express their respect for Aboriginal works, all kinds of collectors and potential buyers are becoming aware of the solidness of this investment. This art form is described by renowned art critic Robert Hughes as “the world’s last great art movement.”Whilst steeped in what was originally viewed as ethnographic historics, the works produced are very often amazingly modern in design and colour and therefore aesthetically pleasing.

Aboriginal Art is currently seen as the trendiest art scene in Australia, by fat outselling any other type of non-indigenous art and accounting for around 60 percent display rate in renowned Australian Art Galleries. As sales via the major Auction Houses in Australian capital cities will confirm, Aboriginal art is a best seller. As the world is awakening to the unique beauty of Aboriginal Art, prices augment radically. Now it would be a very good time to invest, as prices are considerably rising, and wise investment will definitely guarantee excellent returns.

It is wise to always cautiously investigate before investing in any product and art is no different. Search in reference books, the internet, magazines, Australian public galleries and catalogues from companies like Christie’s and Sotheby’s that arrange auctions of Australian Aboriginal Art. It’s of importance to get acquainted with the artist’s reputation, his community, his productivity and the quality of his work.

Aboriginal art can be a wise investment for the future but one must choose wisely. Works formed by well-known and respected artists has considerably grown in market value considerably over the past few years and can achieve a substantial return if prudently selected. $1,073.600 for Emily Kame Kngwarrey’s “Earth’s Creation” in May 2007 was a couple of months later followed up by a impressive $2.4 million for Clifford Possum Tjapaljarri’s masterpiece “Warlugulong”, auctioned by Sotheby’s to the National Gallery of Australia.

Traditional Aboriginal Art varies widely across Australia making it easy for art investors to assemble a diverse collection. Although the expression of identity and dreams are universal themes within Australian Indigenous Art, designs, materials, prints, and colours wildly differ according to the community an artist belongs to. The desert artists in the main use acrylic medium, in a myriad of colours and techniques. In other areas such as the Kimberley in Western Australia and Arnhem Land in the Northern Territory, natural ochre pigment is used. In this regard, investors should be familiar with the communities and regions where the artists reside, and therefore the style of artwork produced. These are unique and individual artworks created by members of the oldest indigenous culture in the world. As an investor in or a collector of Australian Art, you are assisting in the building of Australian culture and you participate in the world’s oldest continuous cultural tradition.

An investor should thoroughly research the provenance of a work of art. Written documented provenance is paramount. This is normally via a Certificate of Authenticity provided by the seller, guaranteeing that the work is by the stated artist. Further details such as information on the story of the painting, a biography of the artist including their Collections and Exhibitions, the title of the painting, and other achievements normally come with a purchase from a trustworthy seller. Just providing images of the artist executing the artwork and holding the completed work will not prove authenticity, however they are of immense interest and again, the best suppliers of artworks will provide these photographs where it is possible. Reputable sellers will provide a Certificate of Authenticity which is of key importance, sellers often work closely together with the Aboriginal communities and the participating galleries and they should have no problem providing this.

Although the age of the artist is generally of no importance to the value of an artwork, investors have to understand the importance of social hierarchy within the structure of Aboriginal communities. Every member of an Aboriginal society is viewed and respected in regard to his age, status, achievements and who his tribal elders were. All of these aspects, including an artist’s track record and popularity should be taken into account by any investor who obtains to achieve an extensive and diverse portfolio of Australian Aboriginal artworks.

There are various possibilities in order to purchase. It’s of crucial importance that you trust the seller of the artwork in regard to the painting’s provenance before the purchase can proceed. A Seller will most likely be a gallery or an individual art dealer, in either case it is important to meet these people in person and check their references, selling approach and credentials. When purchasing on line, ensure there is a non-conditional money back guarantee if the artwork is not suitable for your needs or does not meet your expectations.

Purchasing directly from the Aboriginal communities might seem to be a good option but does not necessarily guarantee the artwork’s authenticity. Keep in mind, the Aboriginal artworks that have achieved highest prices through major auctions have not been obtained at art centres and provenance from a reputable dealer or gallery is also highly regarded. Here we have possibly the most important consideration of authenticity – the known association of the original purchaser of the artwork with the artist. Be aware of this scenario when assessing the value of works by well-known artists such as Emily Kngwarreye, Rover Thomas, Minnie Pwerle, Clifford Possum Tjapaltjari and Jack Britten.

One of the first considerations you need to do when choosing a painting is that you actually like the painting – you are going to have it on your wall – it should give pleasure to you. It is very fulfilling to invest in a work of art that you genuinely appreciate, especially after all the time and effort spent to learn about the roots and career of a certain Aboriginal artist. Rule of thumb is not to purchase your art quickly – enjoy the research and the knowledge of the artist you have gleaned from your trusted suppliers. In this way, collecting is not merely an investment – it is also a very personal and exhilarating and rewarding experience. Also research the careers of the European Masters - compare them with the Aboriginal artists. See which period of the artist’s career has produced the best and most sought after works. For instance, if one takes a look at an artist such as Van Gogh, ‘The Starry Night’ or ’Sunflowers’ raises far higher prices than many of his other paintings.

Once you are happy that you have found suppliers in whom you have faith, your personal favourite artists, their potential or past achievements such as works hanging in eminent and distinguished art galleries, museums or art collections, then you can be sure you have done your absolute best and you are ready to embark on a successful and rewarding project. Unique, resourceful, intense, and colourful Australian Aboriginal Art can be a magnificent investment that allows you to share and experience the stories and the worldview and of the Australian Indigenous communities. Check online today for a specialist gallery with Aboriginal paintings, artwork and artefacts on display. You will find an absolute mountain of information, and an incredibly comprehensive inventory of art from which to choose.



AUGUSTINE