Sunday, March 16, 2014

"The Pros and Cons of Investing in Art"

The problem for the average centi-millionaire is you have to deal with pros and you have to avoid cons.*
(see what I did there?)

From the Wall Street Journal:

Making money on art is challenging and the risk of losses can be significant.

"Three Studies of Lucian Freud" sold for $142.4 million last year. Agence France-Presse/Getty Images
Investors might be forgiven for thinking high-end art is a good bet for those with enough money to get in on the action.

Art auctions generated a record $12 billion in sales word-wide in 2013, up 13% from the prior year, according to, a market-research firm based near Lyon, France. "Three Studies of Lucian Freud," by Francis Bacon, fetched $142.4 million, making it the most expensive artwork ever sold at auction, while Andy Warhol's "Silver Car Crash (Double Disaster)" went for $105.4 million, a record for the artist at auction.

Some of the bidders are avid collectors, including Wall Street billionaires such as Leon Black who say they are motivated by passion, not profit. But others are investors who seek assets that don't move in lock step with stocks and bonds.

"The new moneyed rich are looking for alternatives to help hedge their bets against any loss in value of their money and the rising risks of concentrating too much of their wealth in stocks," says Jerry Slusiewicz, president of Pacific Financial Planners in Laguna Hills, Calif., which has $80 million in assets and has assisted clients with developing investment plans that include art.

They should proceed with caution, experts say. Art can be an accessible investment even if you aren't a hedge-fund billionaire, says Kathryn Graddy, an economics professor at Brandeis University in Waltham, Mass., who researches art markets. "It's possible for art at all price levels to appreciate," she says. But making money on art is challenging and the risk of losses, particularly over a short time horizon, is significant.
Fluctuating Prices
Prices can fluctuate as artists and styles move in and out of favor, and buyers aren't equally enthusiastic about all types of art. Last year, the Mei Moses All Art World Index—which tracks repeat sales of a broad range of artworks, from oil paintings to sculptures to watercolors and drawings—rose just 1.5%, which underscores how fragmented the art market can be.

Selling individual artworks also can involve prolonged waits for favorable market conditions or prolonged negotiations, potentially causing expensive headaches for sellers who want to raise cash in a hurry.

"Since it can take years to sell a piece, art should be considered as a highly illiquid market," says Ron Vinder, a financial adviser in New York whose team at UBS Financial Services manages $3.7 billion, and who also has helped clients with estate plans that include art.

Even when investors do find buyers who will pay more than they did for a piece of art, taxes can take a bigger bite than they do of the profits from other investments.

"You see stories of big speculative gains, but flipping art is a very difficult investment strategy," says Tom Hainlin, national investment strategist at Ascent Private Capital Management, the ultrahigh-net-worth unit of U.S. Bancorp, which is based in Minneapolis...MORE
HT: The Big Picture's '10 Sunday Reads' post.

*The wordplay is not original. I first heard a variant in a meeting discussing whether to let hookers do proxy conjugal visits: "Well, the proposal has its pros and cons".