Article

Ultimate Guide: Art as an Investment Strategy

June 23, 2022

Since 1857, the United States has experienced 34 economic recessions & depressions.

Economic downturns result in higher unemployment, lower wages and income, and lost opportunities. Moreover, it means a significant impact on private capital investments and economic opportunities.

US stock market snapshot:

  • 1982 Recession: stocks fell 23% from peak to trough
  • 1990 Recession: stocks fell 26% from peak to trough
  • 2001 Recession: stocks fell 38% from peak to trough
  • 2008 Recession: stocks fell 53% from peak to trough

Although most indices bounce back up in the long-term, it is wise for investors to look for ways to minimize losses. Institutional and retail investors have numerous opportunities to diversify portfolios to hedge losses during economic declines; such as treasury bonds, gold, and dividend stocks.

Interestingly, in every economic downturn, there has been one asset class that has consistently kept (and, moreso, increased) its value - artwork.

However, less than 1% of Americans (compared to 56% of Americans who own stock) have money in an art-related asset class. Given its uncommonality, art is a “wildcard” investment, but let’s delve into why, and how, art is a valuable & important investment strategy for any investor.

Art snapshot:

  • In 2019, art collectibles and wealth were $1.7T
  • In 2020, global art sales were $50.1B
  • In a 2021 survey, Deloitte found that 86% of wealth managers believe there is an argument that art should be included in wealth offerings

Source: Masterworks.io

What Makes Art a Good Investment

How can something like art sustain and increase value while everything else, specifically in the short and medium term, goes in the opposite direction?

The short answer: scarcity, true “irrevocable” value, and supply & demand.

‍What does that mean in a practical sense? 

Let’s look at an example and compare art with a publicly-traded company - both of which can be invested in.

Publicly-traded companies continually transform and shift shapes. Executives come & go. The company name changes. Ownership & stock transfers from one investor to another. The founder dies. New products are introduced and low-yielding ones are left behind. Millions & billions are raised. Bankruptcy occurs. A merger or acquisition event takes place. Employees get hired, fired, and leave. Stock value goes up. Stock value goes down.

The composition of any company undergoes changes. Of course, processes & principles are passed down to maintain its “soul”, but the elements within any company are fundamentally replaceable. With the exception of one company (General Electric), no publicly-traded companies exist today that also existed 100 years ago.

What does this mean? It means companies aren’t scarce. Valuable, yes, but that value can quickly transition as the composition & soul of companies transfer from one place to another.

It is also why the average hedge fund’s tenure is 12 years - especially at young funds, partners get frustrated at splitting dividends with others who aren’t pulling enough weight, and go to start their own fund.

The bottom line is that investors must keep a keen eye on this thing called “change”. Who’s leaving? Is the company innovating and keeping up with trends? What changes are taking place? Ultimately - how is the composition of this company fundamentally changing? I may have put $1 million in Company X two years ago - but how different is company X today?

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Art, on the other hand, floats above the waves of change.‍

Why?

Original, individual pieces of art are - quite literally - irreplaceable. When something is irreplaceable, it inherits the property of true scarcity, or rarity. 

Unlike companies, an original painting will always be that painting.  For example, the Mona Lisa is not a work in progress or something that continues to evolve - it was finished in 1516 by Leonardo da Vinci - and it is not dependent upon external factors to “exist” or be alive.

Risks with Investing in Art

Of course, investing in art isn’t all fun & games. 

Let’s take a look at art as an investment strategy by first highlighting some issues that increase risk:

  • Valuation: valuing art is more of an art than a science (no pun intended). It is not as methodological as pricing a stock.
  • Illiquidity: buying & selling is not guaranteed nor is it a quick process.
  • No dividends: a painting on a wall does not produce dividends, so the profit (or loss) is only made once a sale occurs.
  • High barrier to entry: Although companies like Masterworks are democratizing art investments, it requires a good chunk of capital.
  • Fraud: illegitimate players in the industry.

How to Invest in Art

There is a unique advantage art has above any other asset class, that goes beyond just a financial decision. For example:

  • Enjoy it while it’s displayed in your home or office. Show it to your guests, family, & friends.
  • Easily transport it. Moving homes? No problem - you can package it & move it around and about.
  • Pass it along to future generations after your passing.

There are 3 main ways to invest in art: 

  1. Commission your own art
  2. Work with an expert broker to buy an original piece
  3. Fractionalize securitized artwork

#1 - Commission your own art


The unique benefit of hiring an artist to create something one-of-a-kind based on your request is that you do not have to browse thousands of art pieces to determine which one might be the right investment.

To start, brainstorm some ideas of what you think might be valuable. If you need help, contact us.
Pro tip: the master behind the masterpiece is a big factor in appraising artwork. Choose an artist that has a long & vetted background.

Popular commissions as an art investment strategy:

- Portrait painting
- Abstract painting
- Contemporary sculpture


#2 - Work with an expert broker to buy an original piece


One of the most popular art investments is working with an auction horse, such as Christies. An art broker can help determine which original & authenticated art piece might be a good investment for you.

Check out this course from Christies on how to invest in art:


This course offers students the opportunity to develop an understanding of Art as an Asset Class, a recent, 21st Century phenomena, with surprising roots in earlier periods and cultures.
This course provides a history and understanding of the how and why art became broadly accepted as a separate financial asset class, with practical knowledge for understanding types of art investments, and their role in modern portfolio theory and as a hedge in times of rising inflation; how art is and is not correlated with other asset classes, the risks and rewards of art investments, the role of liquidity in the market, and the risks of black swan events and market dislocations.
Additionally, we will cover why some art investment vehicles have been successful and others not. The course will address art financing, the types of it available in the marketplace and under what terms and conditions.

#3 - Fractionalize securitized artwork


Masterworks is the only platform that lets you invest in multi-million dollar works of art by artists like Basquiat, Picasso, Banksy, and more.

From Masterworks:


Masterworks is the first platform for buying and selling shares representing an investment in iconic artworks. Build a diversified portfolio of iconic works of art curated by our industry-leading research team.
According to Artprice, the value of blue-chip art has outpaced the S&P 500 by 180% from 2000–2018. We estimate, based on a Deloitte report, the total value of privately held art to be $1.7 trillion.