Art is not an investment

It’s been a while since I set my foot in the art dealer’s field. I get to meet different art collectors. “What’s the most important about collecting art?” They always ask. There is so much that I can talk about when it comes to collecting. Here I’ll share with you some of my thoughts and experiences, in the hope that readers will have a better idea especially when they have their eyes on particular works. 

  1. Art is not an investment.

Each artwork is one of a kind. Even when two pieces are created by the same artist, each one of them is inherently unique. Other more complex factors might as well contribute to determining its price. Art market sets itself apart from, stock market, bond market, etc.

Transparency plays a major role in investment, as fair trade ensures fair return. Lack of access to art market information influences the demand for art investment. Time might just better be spent on other things worth investing, like stocks.

If someone says an artwork to have high appreciation potential, based on what factors does he or she make such statement? Is it because of the artist behind the artwork? If one finds out the artist to be in fact a prominent one, with a sound sales history, this alters the value and of course, the price of the artwork. But if the artwork shows such potential, why would anyone wish to let go of it? Is it then because of the people who are only interested in what’s new and hot and on-trend? Tracing back to the Tulip Mania in 1637 when the price of tulips outgrew its worth, we all know what followed. So, what would happen if that artist is not going to be the next big thing?

Different formulas are applied to the worth and price of an artwork respectively. The numbers we normally see on newspaper, the record USD450 million for Leonardo da Vinci’s Salvator Mundi, the counterpart to the Mona Lisa in 2017 for example, says only the price but not much about the meaningful value of the artwork.

Remember, the auction sale of the work is determined by the last two people bidding on it. It is likely that there is no one other than these two people who actually think this artwork is worthy of such high price. In other words, it is likely that there is no one in the future who would spend the same or more to collect that artwork.

The value of an artwork will for sure increase or decrease over time, for a number of reasons. Consider the value does have the potential to increase, it does not, however, justify the cost of investing your money. If we think of this as two sides of the same coin like gambling, then there’s winning on one side and losing on the other. After all, it’s up to you to risk and try.

The performance of the DJIA market index over the last 30 years has shown a rise of 1,137% (11 Oct 1990 – 12 Feb 2020). Unless you have a sharp eye and constant luck, art investment does not typically lead to high returns like ETFs.

This leads us to think about what determines the stock’s valuation. The company’s operating model, its growth, assets and liabilities, and future productivity. Stocks are productive assets that have the ability to produce dividends and generate profits. An artwork, however, has no productivity in its own right. It is merely an object that will never produce another artwork. An artwork will still be the same artwork after 500 years, with all the wear and tear that might instead depreciate its value. Let us not forget that the current valuation of the artwork should not refer to its past valuation. Even when the artwork or other works by that artist has shown a rise in value before, it does not necessarily mean that it will continue to rise in the future.

When it comes to investment, the law of demand does not seem apply. While the law of demand states that the price and quantity demand of the goods are inversely related to each other, in the cases of stock market and art market, however, the rise in price follows with the rise of people who show interest. The fact is that, blindly believing in and following these numbers can easily fool people into thinking that things will always get better and forgetting that change is the only constant.

Sadly, there are collectors who choose to disbelieve the fall in value when the price of the artwork has already dropped and insist to sell at an even higher price than their previous purchase price. Sometimes, things just don’t work out.

An artwork can add a finishing touch to your space and bring pleasure for living, but it simply will not go beyond than being that artwork. Who then determines how much an artwork is worth? The market, or the decision made by some established, brand-name galleries? How many buyers are interested? If this artwork is to be sold, how many people will be willing to bid on it? Do these people determine the artwork’s value?

A while ago there was this art fund – people would jointly invest in an artwork and share the returns delivered by the fund when the artwork was sold. The idea behind this is to trick you into believing or false hoping that there will always be the next buyer who is willing to purchase at a hefty price. This is like playing the oriental sic bo game – you are simply betting whether the total of the three dices would show 4-10 (small) or 11-17 (big). If there is anyone who suggests to you this fund, think twice and ask yourself if you are willing to go all in for this gamble. The bought-and-sold history of an artwork influences the rise and fall in its monetary worth, while the meaningful value of the artwork retains. This is not an investment, but a speculation.

A collection of artworks can make up a series worth owning. For an art series developed by an artist across different time periods, the value of the whole series is higher than that of individual artworks combined. But again, price and value are still two different concepts. Working in this industry, I never use an investment approach to advice on artworks. I simply share and define the value and meaning of the artwork, helping collectors build a deeper understanding of art. Seeing art as an asset or as an investment is a high-risk endeavor that I personally find it more like a dice roll. Is an artwork really worth a hefty price? I leave this entirely up to you to decide.

Bosco Hong
CEO of Art Sleuth