Monday, February 16, 2009

An Alternative View on Art Investing

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Today's guest Blogger Dennis Mack gives an alternative view on Investing in Art:

I was glad to see a presentation on art collecting as a form of investing. I would supplement the presentation by reminding people of the many costs of owning art.

First, the markups of the dealers are significantly greater than the markups by a market-maker of a security or someone selling land out of inventory.

Second, as mentioned by one person at the Meetup, art dealers are salespeople, as we must recognize, but they are only the most visible part of a web of people who influence the price of art and create trends in favor of some types of art over others. Almost 40 years ago, I took an art appreciation course with an artist, who was the widow of a well known artist. She regaled us with stories of the relationships among, dealers, galleries, auction houses, museums, critics, the press, appraisers, collectors and artists, themselves to shape the shifting interest of the art world in certain types of work or certain artists. The tools went beyond press releases, gifts to museums, sponsorships of museum shows, holding back on the sale of available works, underwriting puff pieces and the like. She would always ask – and then answer – who stood to gain by a particular museum show or article in an art magazine.

Her advice, like that we hear at the Meetup, was not to buy art for investment but to buy for enjoyment. “Investment” in art takes lots of work to become successful or luck to ride on the efforts of others to pump up a price. “Investment” often risks buying into a bubble, only to watch it collapse as interest moves to another kind of art where prices had been low and someone had built up a significant inventory.

Beyond the markups and risks, there are some real costs that beginning buyers often overlook. These costs include insurance, conservation, restoration, and periodic appraisal. Many owners overlook these costs to the detriment of their collection.

Ordinary people who start to buy when they are young can build up collections worth more than their securities portfolio. But just at the time that the art portfolio should be supporting them, they may find that they have to support the art portfolio. I know an academic who on his sabbaticals bought art, rugs, and jewelry over the years, stopping much of his buying nearly 30 years ago. As a teacher, he was not making major purchases. Many cost less than $200. He and his wife have fewer than 400 pieces. Now in their 80’s, they need to know the value of their collections for estate planning purposes and for considering making gifts to museums. They knew that they needed an appraiser, but because their collections are so unfocused it had to be either many appraisers or a very rare generalist. After 10 years of putting off the appraisal, they finally found an appraiser recommended by their property insurer.

After consulting with other collectors and dealers about appraiser fees, they decided the appraiser’s fees reasonable. The appraiser explained to them how much work it takes to appraise for tax purposes each piece, particularly those of any value (i.e., worth over $5,000). The appraiser reviewed a CD of pictures of their collection and visited them to look things over generally and give his estimate of the amount of work. Taking lots of shortcuts, it looks like the appraisal process alone will cost well over $35,000. This appraiser’s fees are low compared to those of the big auction houses, which might charge $5000 per day. A friend who was giving away a more focused collection of photographs paid $1,500 to have his $40,000 collection appraised before he gave it to a university. Note, that is almost 4% of the value of the collection which if you wish to insure your collection must be done periodically – although updates are cheaper than the first appraisal and authentication.

There will be additional expenses of restoration and conservation of pieces and insurance on the collection. According to something I found on the web, theft/damage insurance for art, added onto home insurance, generally costs $1-$2 annually per $1000 of coverage. A collection that has appreciated to $2 million would cost $4,000 annually, although I have heard much higher rates from reputable companies. Most of the people I know who have collections have not insured them. They, then, are not looking at their collections as a holder of wealth that they can live off. If they were, they have a risk of loss from many causes.

And the insurance may not work for you if you live with your art and it is destroyed by a flood or other uncovered risk. Even storing your collection in a bank vault, a frequent practice, may not be adequate risk protection. A teacher with a passion for middle eastern rugs went on frequent buying trips in Asia, making a market in his rugs but considering the rugs largely as his retirement fund – a comfortable retirement fund. He felt that he could not afford the premiums to insure them but kept them in a large bank vault. Unfortunately the vault was in the World Trade Center.

If a picture is matted and framed, it may have to be rematted and reframed periodically. Works are damaged by sun and humidity or simply having the wrong glass over them. Contemporary art work is notoriously expensive to conserve – more so than paintings that are 100’s of years old. They are often made of materials that were not intended to survive or involve glues that dry up. An art restorer told me of horrendous charges to repair the effects of age of “ordinary” contemporary pieces that were only 35-50 years old. Sadly, much work that was purchased in the 60’s and 70’s is not matted with acid free paper. The result is damaged prints.

For the ordinary “collector” the level of forgeries can be surprisingly high. I have at least one in my collection. It hangs in my home, because I really like the image. I did not pay much for it. Therefore I do not bemoan the fact that it Is not a real Dali.

Collections can lead to wealth if you understand the system and know how to work it, particularly if you are a dealer who knows how to put the shine on base metal and get someone to need it. Unfortunately, if you are the collector, you might end up being the person who “just has to have it.”

NEXT: Dow Testing Low, Gold Testing High

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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