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Structural Change in the Art Market

Original Fine Art Gallery — Thu, 24 Sep 2009 20:35:00 GMT

   Auction houses are growing the art market. Part of the beauty of art auctions stems from the fact that they allow art lovers to simply walk into an auction house, without having to demonstrate their seriousness to a dealer or gallery-owner, bid for a piece of original art and become its owner. Requirement: money. Not required: referrals, lineage, documentation of existing portfolio, etc. Damien Hirst’s wildly successful auction at which all but five pieces sold marked the first time that original artwork was auctioned without having passed through either a gallery or dealer’s hands. This signals a new level of efficiency and transparency in the art market. And with the increased number of venues for marketing and selling artwork, the argument against first consigning art to high-cost (50% or higher) brick-and-mortar galleries and dealers has acquired a new solidity.

   Poverty is not the cost of respect in any other industry or endeavor, however, it has seemingly been inculcated as such within the realm of art. Hirst himself refers to the 50% cut taken by galleries as “an extortionate amount of money.”

When Claude Monet hosted the first exhibition open to the public of Impressionist artwork in the 1800’s, in effect circumventing the prevailing juried system, it’s unlikely there were very many cheers from the establishment. However, the exhibition held on the Boulevard des Capucines undoubtedly altered the way that artists’ sold their work.

Under the old dealer/gallery system, a romantic notion was repeated often enough and allowed to codify as a truth, i.e. that artists must suffer to produce good art and that any state other than perpetual poverty for an artist translated to ’selling out.’ Not in any other creative or sports-related endeavor does this fiction exist, and it has survived only because of the prevailing inefficient sales and management structure under which the levers of power were tilted in favor of the middlemen.

   In the end, no industry is spared the power of the market - all are eventually mean-reverting. Hirst’s auction represents quite a few miles logged on the road to reversion.


You Know More Than You Think
   One of the things that sets art apart from other investments is the fact that despite the potential for any asset to decline in value, buying what you find beautiful is invariably a profitable strategy when it comes to considering art as an investment. Art is always around us but we often more easily utilize its more digestable forms, i.e. on mugs and such because we trust our taste and know instinctively what we like.

   The prescription for fear of anything is education, and fear of art is no exception. You have to do your homework - read art magazines, go to art shows, walk thru galleries, museums, and use the online price tracking services like Artnet.com, Artprice.com, MutualArt.com, and others. Alternatively, an art advisor can fast forward the process if you don't have the time and wish to feel more confident in your purchase.

Website: http://www.bestartinvestments.com/

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Culture as a Solid Investment

Original Fine Art Gallery — Wed, 09 Sep 2009 19:14:00 GMT

Excerpted from "Put Your Assets on The Wall"

“Man will begin to recover the moment he takes art as seriously as physics, chemistry or money” Ernst Levy

   Contrary to what many think, art does not have to be intimidating. However, even if its aesthetic elements prove daunting, consider art's other side. Throughout millennia, the economic environment has always been important for art, prompting its use throughout history as an asset. Arts' proven low correlation with the stock and bond markets make it an ideal diversification tool, and cement its value as part of a capital preservation and volatility reducing strategy. Add to these factors its positive role as a hedge against inflation, and the fact that over the past 50-years art has outperformed the S&P 500, and been particularly strong during rapid and sustained downturns, and suddenly its economic appeal overwhelms all else.

   Several ongoing structural changes increase the likelihood that arts' acceptance as an asset class will continue to grow, including the presence of a new, younger art-buying demographic. Composed of a burgeoning worldwide middle class, this group's decision-making process almost always includes a nod to the importance of design and is powering the embrace of art and design. As Patricia Martin writes in her book "RenGen," we are now shifting toward more of a 'deregulated market for art and ideas,' particularly as those things so long accepted as valuable are called into question. Simultaneously, the availability of heretofore secret pricing information via the internet is informing the public and removing an important layer of power from the dealer class. As a result, artists are increasingly going directly to auction, circumventing the inefficiency and bias inherent in the long-standing dealer/gallery model.

   This shift of power toward the producers and away from the middlemen is birthing a new degree of efficiency, and augmenting the acceptance and availability of this alternative asset just when the world needs it most.

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Insiders Are Selling: Don't Let The Door Hit You...

Original Fine Art Gallery — Mon, 31 Aug 2009 17:27:00 GMT

Insiders Are Selling: Don't Let The Door Hit You...

When corporate insiders, the ones who actually know the numbers, are selling as they are now, it's time for the retail investor to follow their lead and head for the exits.

TrimTabs reported today that its ratio of insider selling to insider buying rose to 30.6 - the highest level since the company started recording the data in 2004. What we're seeing today is a very high level of insider sales, coupled with a greater proportion of investment advisors recommending clients' get into the market (Investors Intelligence). Oh yeah, and I almost forgot to mention the over $105 billion in stock sales by companies since the end of April.

Investors are always heartened when they learn that a company is buying its own stock. When the flip side is true, concern is warranted and the happy talk about the markets' continued recovery on cable news shows must be taken with a bit more than a grain of salt. The combination of the latest data points indicate that it's time to take cover.

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Art as an Asset Class - Or, How Many Consecutive Down Days is it Going to Take to Get Your Attention? The Need for Alternatives III:

Original Fine Art Gallery — Wed, 19 Aug 2009 18:21:00 GMT

Art as an Asset Class - Or, How Many Consecutive Down Days is it Going to Take to Get Your Attention? - The Need for Alternatives IIIExcerpt from Put Your Assets on The Wall™
Website: http://www.bestartinvestments.com/
“Growth in the economy in this decade will be the slowest of any decade since the Great Depression.”
Paul Volcker, former Chairman, Federal Reserve, August, 2008

David Dreman and Eric Lufkin produced a study in 2000 titled "Investor Overreaction: Evidence That Its Basis is Psychological" which examined just why it takes so long for a stock to make a new low once negative information is out. Less favored, or known, stocks often get penalized despite favorable fundamentals. What Dreman and Lufkin concluded is that the facts are far less important than peoples' perception of a company or group of companies when it comes to stock performance.
In this same way many investors will remain locked into an asset class such as equities out of habit, despite all fundamental evidence to the contrary, artificially upholding the asset classes’ value 'til the very end, and ignoring the existence of viable and well-performing alternatives, often to their detriment.
Even investment professionals are vulnerable. Writer Mark Hulbert in a January, 2009 New York Times article reported that at the end of third quarter of 2008, the forecasts for the fourth quarter made by the 10 best and worst performing market timing newsletters produced dramatically more bullish forecasts from the timers with the better historical track records.

In a study done by former Federal Reserve Chairman Alan Greenspan and James Kennedy, in March of 2007 titled, “Sources and Uses of Equity Extracted From Homes,” the authors determined that the greatest driver of the nation’s growth in GDP, by far, was the equity extracted by U.S. consumers from their homes via mortgage equity withdrawals. Obviously, that activity has ground to a halt, consumer spending is falling sharply, causing earnings estimates for S&P 500 companies to continue on their downward trajectories. Prospects for the resumption of former levels of economic growth and productivity are anything but bright. After all, a market is only undervalued on a price to earnings basis when those earnings being forecast hold some validity.

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Central Banks Around the World Holding Onto Tangible Assets - Shouldn't You?

Original Fine Art Gallery — Fri, 07 Aug 2009 15:56:00 GMT

Central Banks Around the World Holding Onto Tangible Assets -

Shouldn't You?

In the seventeen months between October, 2, 1998 and March of 2000, the NASDAQ Composite Index tripled before declining by 42%, marking the bursting of the technology bubble. Surprisingly, despite the dramatic decline, investors continued for some time to put money into technology mutual funds in the belief that the valuation metrics they'd come to believe in would return. They didn't.

However, current economic challenges have motivated today's investors to demand actionable solutions to economic uncertainty and financial dislocation via proven investment alternatives. As a tangible asset, art not only satisfy an intangible aesthetic call, but also plays an important role as a store of value at a time of heightened volatility in other asset prices, just as it did in 2000.

Furthermore, data compiled by Mei/Moses show that when stock markets fell during World Wars I and II, art outperformed the S&P during most of those years, and in the case of WWI, by 1920 had risen to 125% of its 1913 value (versus 94% for the market). Further, while the S&P 500 increased 67% during the Korean War (1949-1954), art was up 108%, and during the Vietnam War (1966 to 1975) when the S&P 500 fell 27%, art rose 256%.

However, art's outperformance of the equity markets is not confined to times of war, but surpasses the more traditional investment vehicles as well when the markets are roiled by a troubled economy, exactly the situation we find ourselves in today. For example, in 2000, the U.S. economy was facing many of the same conditions as it does today: declining retail sales, reduced capital spending and tightening bank credit standards. The peak in the Dow Jones Industrial Average that occurred on March 10, 2000 was followed by a loss of close to $3 trillion in market value and an overall loss for the year above 10%. Results for art were much different however with the Mei/Moses Index gaining 16%. Far from being a luxury, it can be argued that art is an essential component of any portfolio.

Website: http://www.bestartinvestments.com/

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Do You Really Know Your Risk Profile?

Original Fine Art Gallery — Thu, 06 Aug 2009 14:50:00 GMT

Do You Really Know Your Risk Profile?

In a recent post on Reuter's, Felix Salmon states that art is never a sound investment. Specifically, he writes: " I have a rule of thumb for both paintings and houses: would you buy it at this price today if you knew that you could only ever sell it for $1 in the future? If the answer is yes, then go ahead and buy. If it’s no, then think very hard indeed before buying. Houses don’t generally go to zero, of course — not outside Detroit, anyway. But the thought experiment is still worth running, because it helps to crystallize the degree to which you’re implicitly speculating on the housing market when you buy a home."

A stock or bond investor is implicitly speculating on a company's continuing earnings generating capability which itself rests on a whole host of assumptions. Those assumptions, that the company will continue to be able to attract buyers for its products and services, that it will be able to sell those products and/or services at continually expanding profit margins, that a competitor(s) will not enter the market eroding a significant portion of their market share... I'm sure you get where this is going. If the past eighteen months have demonstrated anything, it's that earnings and cash flow projections are rooted in hope. Salmon states: "But if you’re buying as an investment, in the hope that your property will rise in value, it might be worth taking another look at your risk profile." Most people simply aren't aware of the true nature of their risk profiles when their portfolios are composed largely of equities and bonds, otherwise, they'd choose to invest elsewhere. Tangible assets perhaps.

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Performance That Isn't Painful: Art's Outperformance of Stocks

Original Fine Art Gallery — Tue, 04 Aug 2009 16:46:00 GMT

Performance That Isn't Painful: Art's Outperformance of Stocks

Non-traditional assets are assets nonetheless. The data show that Art dramatically outperformed stocks in 2007 and 2008, with the only comparable period being the bubble period of 1990. It has also outperformed stocks for the most recent 5, 10 year and 50 year periods. Stocks outperformed over the last 25 years. And the best part is, lower-priced work performs the best.

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Need for Investment Alternatives II: 401K Investors

Original Fine Art Gallery — Mon, 03 Aug 2009 21:32:00 GMT

Need for Investment Alternatives II: 401K Investors

Overweighted in Equities? Well, according to data from the Employee Benefit Research Institute, of investors with 401k's, 25% of participants between the ages of 56-65 had at least 90% of their money in stocks, and

nearly half had at least 70%.

With its impressive long-term growth track record, low correlation with the stock and bond markets, and proven ability to hedge inflation, most of these investors ought to be taking a look at Art.

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The Need for Alternatives

Original Fine Art Gallery — Wed, 29 Jul 2009 21:05:00 GMT

The Need for Alternatives: Put Your Assets on the Wall™

I think it's safe to say that current conditions are redefining what's a safe investment - the kind of return that the S&P 500 has

provided over this period is not the kind that either individual or institutional investors can live with long-term:

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Just How Liquid Are Traditional Investments?

Original Fine Art Gallery — Wed, 29 Jul 2009 20:31:00 GMT

Just How Liquid Are Traditional Investments?

A relative lack of liquidity versus other, more traditional investments is an oft-cited obstacle to investment in art. However, somewhat alarmingly, even investors who've always looked upon their 401K investments as safe, albeit subject to the gyrations of the market, are finding unwelcome surprises. The Wall Street Journal is reporting that some fund managers have frozen participant investments, preventing them from withdrawals just when the funds are needed most, namely after layoff or at retirement. Managers claim that withdrawal restrictions are necessary due to market conditions and the resulting illiquidity of certain plan investments. Others, simply impose lock-up terms citing their fiduciary responsibility. Therefore investors lose not only the ability to alter their investments, but suffer ongoing losses while funds are being held captive. So, which one is really the less liquid - art or 'guaranteed' pension funds?

Website: http://www.bestartinvestments.com/

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EXCERPT from "Put Your Assets on the Wall™" - The Risk is in Staying With the Herd

Original Fine Art Gallery — Wed, 22 Jul 2009 19:45:00 GMT

EXCERPT from "Put Your Assets on the Wall™"
The Risk is in Staying With the Herd

“The French, known for their mistrust of banks, are not just stuffing money into mattresses in these anxious days of recession and miniscule interest rates. They are also putting their cash into cows.”
Steven Erlanger, New York Times, May 11, 2009

Those things we're instinctively moving toward, those ideas and activities inspired more by right-brain thought, are also where our greatest economic benefits are most likely to be discovered. Art may not be cows, but it’s a heck of a lot more portable.

When it comes to investing, the field of behavioral finance holds particular insights into our choices. Especially in matters of personal finance, our behavior tends to have the main hallmarks inherited from our time on the playground of wanting to fit in, to not be different from the herd, hence our comfort with having our investment performance measured in terms of relative gains and losses. Most investors have come to feel somewhat content as long as their mutual funds or other investments turn in performance that beats one of the benchmarks like the S&P 500 or the Dow Jones Industrial Average.

Investment research from Morningstar shows that in 2008 equity mutual funds that posted losses of 27% were in the top 5% when it came to performance. Many investors look at that and despite realizing losses close to a third of their portfolios in a single year, take perverse comfort from having beaten the benchmarks. But is that really the best way to evaluate an investment's performance? Better yet, is the 'risk' of acting differently worth the losses incurred by not doing so?

Website: http://www.bestartinvestments.com/

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Why You Should Diversify

Original Fine Art Gallery — Sat, 04 Jul 2009 01:08:00 GMT

Why You Should Diversify

"Your currency is likely to become my problem" Former Chinese Vice Premier Zeng Peiyan in a speech, July, 2009

The list of shaky, dollar holding creditor nations continues to grow. Surplus countries like Russia, China, Kuwait, Brazil, Switzerland, and as of July, India, are openly revealing their intention to diversify their nations' currency reserves out of the U.S. dollar, in light of the U.S.' rapid accumulation of debt in just the past six months. "The major part of Indian reserves are in dollars - that is something that's a problem for us." (Suresh Tendulkar, Chair of India's Economic Advisory Council, July, 2009)

Meanwhile, the S&P 500 stock Index is now trading at a record P/E ratio in the 120's, not only because of a run up in stock prices over the past few months, but because of a dramatic diminution of corporate earnings. Emphasize dramatic. What accounts for the fall? Well, when spending by consumers accounts for 2/3 of a nation's economy and those people suffer not only declines in the value of their homes, their largest asset, but also rising levels of joblessness, that spending can come to a sudden stop, as it has in the U.S. Given the fundamental source of the spending reduction, it would be foolish to expect a resumption in anywhere near the short-term.

As a result, the majority of businesses are unable to reliably forecast a return to former levels of sales and profitability, meaning that these reduced levels of corporate earnings are neither one-time nor short-term, and in most cases, changes in corporate strategy won't solve the problem. Instead, corporate leaders will address earnings shortfalls with more layoffs, compounding the spending and production conundrum, further elevating the price/earnings ratio, and rendering the datapoint even more irrelevant as a way to gauge value.

As unattractive as current bank rates of return are, the stock market by comparison is today loaded with unacknowledged risks. Tangible assets like art are far more transparent with a degree of stability that many financial institutions, and even some AAA-rated government debt, can only dream about.
Website: http://www.bestartinvestments.com/

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PRESS RELEASE - "Put Your Assets on the Wall™"

Original Fine Art Gallery — Wed, 01 Jul 2009 20:35:00 GMT

FOR IMMEDIATE RELEASE

Contact: Capucine Price cappyart@gmail.com

312.203.0644

Put Your Assets on the Wall™

How Buying What You Love Can Get You the Return You Need

By Capucine Price

“Put Your Assets on the Wall™” details art’s unique history as an alternative for growing and preserving wealth.

Today, art inspires a significantly higher degree of confidence than many of the nearest AAA-rated financial instruments.

“Put Your Assets on the Wall™” is a must read for anyone who is grappling with the quandary of how to invest in an era witnessing the ongoing dramatic decline in fortunes of traditional investments. “Put Your Assets on the Wall” presents the timely analysis that demonstrates art’s superior investment performance during inflationary and other periods of financial upheaval throughout history. If investment methodology has one fundamental truth to tell, it is that proper asset allocation is the most important single investment decision an investor can make.

In the midst of the current financial crisis, it’s clear that most savers and investors are overweighted in equities, despite recent experiences of the highest levels of volatility ever recorded. It may seem strange that a 14-year veteran small-cap value fund manager would say that, but in “Put Your Assets on the Wall™” Capucine Price uses the metrics of traditional investments to teach people about art as an alternative asset class, and a way to diversify one’s portfolio and hedge against volatility.

In “Put Your Assets on the Wall,” former small cap value investor turned art entrepreneur Capucine Price helps people to gain an understanding of:

Strategies to optimize portfolio performance

The role of alternative assets in a portfolio

How to inveset regardless of portfolio size

Why less expensive art outperforms

ABOUT THE AUTHOR

The writer is a veteran portfolio manager, co-owner of CapucinesBoulevard.com, and the author of “Put Your Assets on the Wall.” The author applies her background and expertise in investment management, specifically in small capitalization value stocks, to the world of art. Before heading into cyberspace, Capucine helped spearhead William Blair & Co.'s development of a value investment discipline and related products for institutional and mutual fund investors.

Website: http://www.bestartinvestments.com/

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The Case for Tangible Assets Becoming Overwhelming

Original Fine Art Gallery — Wed, 03 Jun 2009 02:49:00 GMT

In an article in Bloomberg today, it was revealed that the country's third largest insurance company, Northwestern Mutual Life Insurance Co, is diversifying into gold for the first time, EVER. Diversifying to the tune of $400 million in gold, to date, because of gold's history as a store of value. The Company's CEO stated, "In the Depression, gold did very, very well...we have stocks in our portfolio that lost 95 percent."

If an enterprise as conservative as an insurance company is jumping into tangible assets, isn't it time you did too? Art has a proven history as a store of value, especially during wars and recessions, and doesn't have to sit in a safe!

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Art Is and Always Has Been an Asset

Original Fine Art Gallery — Tue, 07 Apr 2009 16:37:00 GMT

Salmon Re-Writes Art and Financial History - Art Is and Always Has Been an Asset

In his blog of April 2nd, Felix Salmon interprets UBS' decision to shutter its art-advisory division as a positive presager of the death of the idea of art as an asset. Specifically, he writes:

UBS was always well placed to be the last man standing in the inevitable shakeout of art-advisory departments in investment banks. It had the most rich clients, and it invested by far the most money in pushing itself as the only bank which could manage both dollars and Diebenkorns. So this announcement is pretty shocking — but also a little heartening, to those of us who love art for its intrinsic rather than its monetary value.

Salmon's position flies in the face of centuries which have witnessed the happy coexistence of art's aesthetic and financial benefits and begs the question: Since when did intrinsic artistic value negate intrinsic economic value?

Today, art inspires a significantly higher degree of confidence than many of the nearest AAA-rated financial instruments. Salmon's argument seems more in tune with that sector of the art world cognoscenti intent on keeping those economic benefits from accruing to anyone outside of a tightly prescribed buying and selling circle. Such a stance contributes to keeping art at the level of a discretionary whim, a Saturday afternoon indulgence rather than an economic or any other necessity.

Let's take a look at what actually unfolded at UBS. To date, the bank has posted six consecutive quarters with tens of billions in asset writedowns, watched its stock price decline from $36 a year ago to $10 today, and has had its debt placed on credit watch by at least one of the major credit rating agencies. UBS' efforts to sell some of its major assets carry more than a whiff of desperation, it's cut thousands of jobs, and the bank itself has been rumored to be for sale.

All of the above combine to leave little in the way of the reputational capital required for the inspiration of confidence in wealth management clients. So the announcement of UBS' exit from the art-advisory business is really not shocking at all. Salmon's imputation of his own agenda onto the actions of a diversified financial institution in the current economic climate is amateurish at best. Art as an asset didn't implode, UBS did.

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Emerging Artists Are the Best Place to Put Your Money

Original Fine Art Gallery — Thu, 30 Oct 2008 20:38:00 GMT

Emerging Artists Are the Best Place to Put Your Money

In the past fifteen months, pension funds have suffered approximately $2 trillion in losses. Over the past five years, the S&P 500 has lost 5%, and is flat for the past ten. With analysts continuing to revise their earnings expectations downward on an almost everyday basis because, despite the daily trickle of negative economic news, the modeled implications of the negative impact on our consumer society of this loss of wealth is almost too much for the popular business press to publish.

David Dreman and Eric Lufkin produced a study in 2000 titled "Investor Overreaction: Evidence That Its Basis is Psychological" which examined just why it takes so long for a stock to make a new low once negative information is out. Less favored, or known, stocks often get penalized despite favorable fundamentals. It's the classic Growth vs. Value phenomenon. What Dreman and Lufkin concluded is that the facts are far less important than peoples' perception of a company when it comes to stock performance. It's all about the psychology. Not so far from the results outcome reported recently by the real estate website Zillow.com which found that, despite widely reported year-on-year declines of 16% in average home prices, residents in the Northeast U.S. continue to overestimate their homes' value.

What, you may ask, does any of this have to do with art? Well, in the same way that stock market investors get into the habit of attaching too much worth to their favorite stock despite all fundamental evidence to the contrary, artificially upholding its value 'til the very end, art enthusiasts too often 'place their bets' based upon name, or brand, recognition, when it is more often than not the lesser-known artists who are the better value.

Two economists at NYU's Stern School of Business, Jiangping Mei and Michael Moses, have developed one of the most respected art indices. Their work centers around an examination of the auction results of over 11,000 sales transactions. Interestingly, in research reported in the magazine Registered Rep, they found that in over 4,500 cases it was not the most expensive paintings which provided the most return for investors, but those at the lower end of the pricing scale.

As society grows more comfortable with the idea of art as a legitimate investment vehicle, the necessity of appropriately guaging the potential posed by emerging artists versus the few known, hot commodities increases. Emerging artists lack the price premium, and therefore the risk, of the more established, "growth" artists. Notwithstanding his works' aesthetic appeal, the time to have bought Damien Hirst was when he was relatively unrecognized, or in investment parlance, when there was actually alpha relative to the art market.

Like any other inefficient market, the opportunity exists in the art market to realize outsized gains via active management of a portfolio. When it comes to value investments, the greatest gain is always realized by buying the stock whose price is the furthest below its intrinsic value. As a group, emerging artists fit squarely in the value camp, with equally strong prospects. Why assume that a tiny minority of artists, blessed with the impremateur of a small pool of art dealers, would produce the only art worthy of collectors attention and investment?

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