Long-term investors usually want and seek for ways to diversify their dynamic portfolios, but how might they do this you may ask?
Usually investors who play the market like to invest in different exotic assets. Some prefer to place their stash of cash in jewels, while others prefer to stock up on rare coins, or perhaps suburb fine wines. While I enjoy a tasty glass of wine from time-to-time, I cannot claim myself to be a wine connoisseur by any means.
However, I can claim to be savvy when it comes to art and this is another class of assets that is gaining in popularity recently - that of high-end fine art. Not only can fine art enhance your home décor and evoke powerful emotions, but it can also appreciate simply by hanging on your walls.
Of course, as with most markets and investment opportunities myths do arise and fine art investment is no different. Myths about investing in the potentially lucrative fine art market typically become the strong arm gatekeepers restraining the average person at bay so to speak - myths like "I don't understand, or know anything about art", or "Investing in fine art is only for the super-rich" legitimate yes, but I should state most of these concerns can be broken down with a little research and knowledge - after all, knowledge is power.
So, whether you love paintings, or admire sculptures, they are both a great deal when it comes to the investment side of this business, but that’s not all; the marketplace plays a critical role in every type of business and in this case, the art market comprises a marketplace, of sellers, buyers, and trading commodities (works-of-art and services related to various arts).
So, if you want to buy, or sell high-end fine art, it is important to understand the art market economics. However, do not be stressed, it’s more, or less similar to other markets in economics, but also has significant factors that make it unique.
So, let’s take a savvy look and breakdown the core essentials of what the market/business of investing in high-end fine art is all about.
If you genuinely love art, then it is a great business you can invest in. However, it’s important to keep in mind that it’s a risky venture with an elusive market. Therefore, it is particularly important to conduct vast research if you want to reap greatest profits and keep losses in check.
Original Art vs. Limited Edition Prints
Original works by an artist are of course are the best and most highly sought after and valued pieces in the art world, but even a print, especially a signed and numbered limited edition can be worth something, but how do you know if your art print will appreciate in value?
Gicleés. (pronounced zhee-klay) is the highest quality print available today. The resolution of a giclée is far superior to other types of prints, and this fact is certainly represented in its price. Many dealers classify these prints as “museum quality” and even give you a certificate of authenticity. However, it’s important to note that it’s still just a copy of the original.
Reproductions. Posters, also known as reproductions, are copies of original works without a limited run of printing. These are great for art collectors on a budget, but are not worth much as far as investment value goes.
The Economic Model of the Art Market
Hybrid in nature, the fiscal model for art goes beyond normal supply and demand. Fine art is based on a prediction model where buyers and sellers take into consideration cultural ideals along with past and present forecast monetary expectations.
Further, this market, or business structure is largely described as the kind where:
Artists do not create art primarily for sale.
The buyers have no clue about the value of art they are purchasing
Middlemen usually claim reimbursement for products they have not seen and to buyers they have not dealt with.
More crucial to note that you will be dealing with a marketplace that is not transparent. That said, the data for private sales is unavailable in the system yet it stands for about half of the trades in the market.
Size of the Market
Unlike the security exchange market with millions of clients and firms, the art market comprises a limited range of private collectors, large corporate, and museums as principal players and it’s not organized like a security exchange market with measures of products, or standardized data.
In the case of the art market, the transparency and data availability for private transactions which accounts for almost half of the transactions in the marketplace is unavailable systematically and due to these limitations on the art market as compared to the security exchange market as a result of:
Art is not fungible
Reliance on art valuation on the enthusiasm and advice of specialized market analysts and this has led to the dictation of the market size with a higher chance of some art being undervalued, or overvalued.
Your timing of the market will determine the fortune you could make on the art business. That said, the art market travels in cycles year around with spring and autumn being the peak for auction houses. This promotes a seasonal market rather than a continuous marketplace.
However, it should be noted that this is different when it comes to private sales. With private sales, you can trade throughout the year, but in this case, they are not publicized unlike auctions, thus they rarely affect the overall art market unless they are well-known purchases via a celebrity perhaps.
Despite the precise timing for the art market, you still need to watch out for art valuation. The valuation you have for autumn auction may differ from that on a spring auction and this is because of the significant impact the financial market fortunes on a given season that can affect the marketplace of art in the following season. Also, the equity markets have a considerable impact on the art market.
Important to note that when volatility occurs in the financial market this creates a significant impact on art market volatility as well. For instance, the 2008 to 2009 art market contraction, when sales in 2008 were $803.3 million almost half to that of November 2007 that was $1.75 billion at Christie’s, Sotheby’s, and Phillips de Pury & Company.
At times art has transitory fissionability with an impact on its value. Therefore, what sells best at a given time may be superseded in short by new ideas and styles in the market.
For example, an "Untitled" Basquiat from '82 forged from oil stick and spray paint — sold recently at Sotheby’s for a ‘Mind-Blowing’ $110.5 Million at Auction. Well over the expected $60 million.
Types of Market
There are two principal types in the art market- which are the primary market and the secondary market and it should be stated that both of these marketplaces have a huge role if you choose to trade in fine arts. For instance, the primary market is where you will find new art that has never been on the market before. Usually supplied by the artist directly.
While the secondary market is where you will find art with at least one, or more prior selling histories. Therefore, once a given art has been sold on the primary market it automatically moves to the secondary market and the value of the art from the primary market sells hugely impacts its value when in the secondary marketplace.
It is also important for you to note that supply and demand have a huge impact on the secondary market than the primary market and this is because the work is new and it’s mostly contemporary art with no history and data for predictive analysis.
As a result, it is more difficult and speculative to evaluate such work. Therefore, when dealing with primary market art, the primary value will be consultants, dealers, galleries, alpha consumers, and agent promotion.
Where Do You Purchase Art as an Investment?
Deciding where to buy your investment art will greatly depend on whether you want to pay a set price for a piece, or play in a bidding war of a high-end auction.
An auction is an exhilarating place to be, especially when two or more bidders want the same piece – but make sure not to get caught up in the moment. If you want a piece because you absolutely love it, a higher price may be justified. However, if you are a collector, or investor, be sure to weigh price, value, and condition, and adjust your bid accordingly.
Compared to an auction, a gallery is a much more relaxed environment to view, evaluate, and decide on your purchases. The majority do not charge a buyer’s premium, so the amount on the price tag is close to what you eventually pay. Some galleries focus mainly on the primary market, dealing with newer artists. Other galleries tend to focus on the secondary market, reselling artwork without necessarily having any ties to the artists themselves.
Many galleries do both. However, you should know what a gallery’s slant is before you walk through the doors. Art galleries are also unique in that they frequently work with artists, helping them grow, building up an inventory of their work, and assisting them as they try to realize their potential.
Barriers for Entry into the Market
Like most markets, the fine art market has several barriers for entry. Obviously, it goes without saying that the art of famous artists is more valued than those who are unknown, and this would most likely be because of the difficulty in predicting the absolute value of unknown artists' work.
Due to the high barriers of entry into the art market, this reduces the supply of fine art available and of course as a result basic supply and demand takes over - thus driving up the value of available works of art. This is a great deal if you are dealing with the secondary market however it still raises questions of transparency and efficiency.
With the enforcement of higher barriers for market entry, this creates a smaller size of art producers with access to the auction market and as such, there is higher predictability and reliable valuation for you as a consumer, or collector. However, these barriers also negatively impact the artistic diversity which also affects the buyer's pool size.
Because of this dynamic, you need to consider the vogue artwork before deciding to buy it or represent the artist. It is important to be very selective in this case if you want to end up with saleable work. These concerns are essential when dealing with primary market art or works of art from emerging artists.
Currently, this practice is also common among gallerists as they determine which art to sell, or a buyer to sell it to. It is a great form of gatekeeping that secures price points from potential speculation dangers.
The art market has been under intense criticism especially with 2007 to 2012 world financial crisis and this is due to a lack of transparency in this market. It utilizes the Byzantine technique of valuation and perceived of being unethical due to structural inadequacies in this marketplace and according to the debate in 2009 between the art market valuation setting members on the argument that “the art market is more unethical than the stock-market”- those supporting the argument won.
In particular, the “Chandelier Bidding” was noted as a questionable practice while considering ethics. According to the debaters, this technique is a common method, or practice of trade in the market of high-end art. It basically involves the auction house bidding on behalf of the seller while using unidentified bidders just to raise the prices of the product. And all this happens since the reserve price of the seller is unknown to the bidders or kept secret.
So, is the business of high-end fine art a great investment?
The answer greatly depends on your investment goals. Nonetheless, it is a great deal if you have sufficient investment if you have an eye for fine arts and willing to take a risk.
So whether you are a new, or experienced investor, the business of high-end art can be quite rewarding, but this will only occur after thorough research and understanding of what the prestigious and sometimes elusive market of high-end fine art is all about.