Profit OR Pleasure? Exploring the motivations behind Treasure Trends

Here's an interesting article on investing in so called collectibles like Art, Wine etc. Enjoy

In May 2012, a version of Edvard Munch’s The Scream, sold for a record USD$120 million at Sotheby’s in New York1 after a period of bidding lasting just 12 minutes. It joined one of only a handful of paintings that have exceeded the USD$100 million mark, including Picasso’s Nude, Green Leaves and Bust, which sold for USD$106 million.

The world of collectibles thrives on such fairytales. Stories of investors who bought paintings, wine collections or antiques for a song and then sold them years later for millions abound in the popular media. In 2011, a painting by Roy Lichtenstein sold for almost USD$40 million. Thirteen years previously, its owner purchased the artwork for just USD$2 million. Also in 2011, Gimcrack on Newmarket Heath by George Stubbs sold in London for GBP£22.4 million (USD$36 million), which was amongst the top five highest prices ever paid for an Old Master at auction. The painting had been previously purchased in 1951 for GBP£12,500 (USD$20,000).

These stories of exponential growth understandably stoke investor interest in the world of collectibles. With traditional financial markets still highly volatile and interest rates at record lows, the possibility that art, wine, antiques and other collectibles could earn handsome return that is uncorrelated with broader financial markets is certainly alluring. Add to that a post-crisis mistrust of esoteric financial instruments, and a perception that tangible, scarce and non-fungible investments could provide a stable store of value in uncertain times, and it is no wonder that a growing number of investors have increased their exposure to art, wine and other collectibles.

For today’s wealthy investor, acquiring and holding collectibles is akin to building a store of treasure. The rationale for accumulating this treasure can vary considerably. First and foremost, wealthy individuals acquire treasure because they enjoy it. It may give the man emotional or aesthetic pleasure, or be an interest that they want to share and discuss with friends. They maybe passionate and extremely knowledgeable about art, antiques or sculpture. They may enjoy exhibiting it in museums, or basking in the status that the ownership of a rare and beautiful item can bring. These are perfectly legitimate reasons for accumulating treasure, and these personal holdings can rightly form an important part of any individual’s total wealth.

Gaining access to the market for collectibles, or treasure assets, is now easier than ever. The Internet has opened up the auction process, enabling collectors more easily to bid for and acquire objects anywhere in the world. Collectibles now increasingly share the characteristics of broader financial markets. There are market indices and specialist funds, which enable individuals to invest in art, wine or other treasure assets indirectly. There are even asset-backed financing products that enable collectors to borrow against their treasure assets.

This combination of increased investor interest and more robust market infrastructure has led to a surge in activity across a wide range of different treasure assets. According to Art price, 2011 was the best ever year forsakes of art at auction. Auction house Christie’s had bumper year, with sales up 9% over the previous year to a record USD$5.7 billion. Rival Sotheby’s did even better, with a 21% increase in annual sales to USD$5.8 billion.

Boom times for auction houses however do not automatically translate into strong returns for investors. Collectibles markets are riddled with inefficiencies, are frequently opaque and illiquid, and are extremely volatile and risky. They involve high transaction, storage, insurance and appraisal costs. Appreciation in value can also incur a higher tax burden in some jurisdictions, such as the U.S. Some categories of treasure are also highly susceptible to vagaries in fashion, which can cause prices to fall as dramatically as they have risen. Of course, for many collectors the cost and financial risk of treasure are irrelevant given the intellectual stimulation and aesthetic pleasure it brings to them. But when acquiring such assets primarily for their financial benefits, extreme caution is essential. It has long been known that investors in equities and other financial asset classes can be susceptible to a host of cognitive biases that make it difficult for them to make rational decisions. With art, wine and other treasure assets, these biases can be even more pronounced. When buying a painting, for example, collectors can all too easily let their heart rule their head. The emotional and social attachment to treasure means that investors are extremely likely to make sub-optimal decisions about when to buy, sell or how much to pay.

In this report, we examine the financial and emotional motivations for holding treasure assets, and explore how they should be treated in the context of an individual’s total wealth. We look at recent trends in key collectibles markets, and assess the risks and behavioural biases associated with holding treasure as part of a broader financial portfolio. At a time when investors continue to be concerned about financial markets, tangible assets, such as art and antiques, hold strong appeal. But as we argue, they should primarily be held for the pleasure they bring, rather than any potential financial benefits.

Originally published in "Wealth Insights" from Barclayswealth.com

Tips for your art investments

Art became an investment fad even among the uninitiated a few years ago. And the inevitable correction followed. We may not see those fancy prices for works of art again says Pheroza J. Godrej, founder of Cymroza Art Gallery, Mumbai.

Her call: After a correction, art sales have picked up within a range of up to Rs. 5 lakh.
Her investment idea: Start small. Buy works of art that you are prepared to live with. Returns will come eventually.

To many people, Indian art became investment-worthy, a commodity to trade in, when the capital market peaked three years ago. Investors, some of whom did not know a brush from a spatula, bought, bought and bought more. They were heavily influenced by the growing interest in Indian art, on the back of highly successful auctions and increasing participation of Indian artists in international exhibitions. Naturally, they did not want to be left out. These “money rollers” had already invested in real estate, commodities etc., and came to art last. Unfortunately for them, that was when art had attained a high premium. When the inevitable correction came, many such investors were romping mad.

Today, the changed scenario in the art market is that there is no desperate selling. Prices are not increasing. There is not much good work available that can be bought at a throwaway price. If people who bought at the peak of the market were to sell now, their portfolios would receive a terrible blow. What I do see now is that artists whose works were artificially priced high — and this happened through auctions — cannot expect their works to continue to command those prices now.

Sales have picked up within a particular price range. Works under Rs.5 lakh are selling briskly. This is a healthy trend and the price level could gradually be pushed up to Rs.10 lakh. However, any price upwards of that would be difficult. People are getting 5 percent returns. They are not even getting their hurdle rate, if they had committed a hurdle rate. This is not a very healthy sign. My personal view is that something as precious as art should not have been treated as a commodity to be traded in the market. Art is something personal. You have to develop an interest in it, you have to do so with a passion – not just to make money and definitely not for a short-term.

The surge had taken place during all of 2007 and the first half of 2008. The top of the moderns went up haywire. There were paintings being sold for a crore, a crore and a half, rupees. Similarly, in the case of the contemporaries, works of the top ten kept rising.

I believe that the correction has been a big leveller. Frankly, I do not think that we are going to see those prices again unless something radical happens — even in the case of F.N. Souza’s work of which there is no shortage in the market.

In the present scenario, however, you may wonder how should artists react. There are two things that celebrated artists can do: if they are working independently, they could negotiate a price with the buyer; or they could instruct a gallery to act on their behalf. Between the gallery and the artist, the price would again be lowered. I have been in this field for 38 years and I know how difficult it is to negotiate with artists, sensitive as they are. This is the ground reality and artists have no choice but to learn how to face it.

In the case of sculptures and similar works, the material cost is high, be it for copper, marble, bronze or brass. Besides, many artists don’t do everything on their own. They bring the creativity aspect, but have studio assistants for the execution. They have these costs to take care of. Further, there is a saturation point up to which a work can be pushed. A new phenomenon is that of Indian galleries tying up with reputed galleries overseas. These galleries have done well for themselves by taking Indian art to the international market. They have also raised the profile of our artists. However, when the recession started hitting America and Europe, this led to Indian art taking a knock as well.

Source: ArtTactic Research
Being connected with an art fund as an advisor, I naturally have to be very, very selective and calculating. How do we go about purchasing works, you may ask. Frankly, for every work that we recommend, the first question I ask myself is, if this work goes on the market, would I buy it. As a result, except for one painting in that fund’s collection, I would buy all the paintings, if I had that sort of money. It is indeed a very good collection.

Investors in art funds should at first look at the credibility of the people managing the funds. There are no paintings when the fund is launched. Purchases come later. Investors have to take the trouble to find out who the people are, under which group are they operating. They should form a personal relationship with the asset management people and get to know, if not meet, the people entrusted with the buying. One would be skeptical of giving away one’s money to someone who would just turn it around very quickly. One could do that by investing in gold or bonds or in something one is familiar and comfortable with, but not in art.

A word of caution to young collectors who do the rounds at art galleries and find that every time they decide to buy a good painting, the price of that particular artist has gone up. My advise to them is to buy a smaller canvas within their budget. Don’t buy a signature for the sake of a signature. Be prepared to live with it. Buy one that you would continue to enjoy. You have decided to put your hard earned money into art, so why don’t you get yourself a good work of art? Don’t buy only from the point of view of how much it will appreciate. So I tell any new collector who I feel would value my advise: the gestation period is very long, buy what you like, enjoy it and look after it. Your returns will eventually come, and irrespective of what happens in the meantime, you will be the winner.

(Co-ordinated by Saumya Roy)
By: Pheroza J. Godrej/Forbes India

This article appeared in the Forbes Indian Magazine, 19 Jan 2010
 
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Guide to investing in art - How do I choose the right artist?

There are primarily 2 ways in which one could invest in Art:
1. Investing in individual pieces of art work similar to buying shares of a particular company or
2. Investing in an Art Fund which is similar to investing in a mutual fund, where there is no possession of the art work

This article discusses what we need to look for while investing in Individual artists and artworks.

Like the stock market, there are some key attributes that you should be aware of before buying an artwork. The artist is the brand (like a company) and the products are the artworks he produces, therefore it is pertinent that one invests in a good artist. How to judge whether an artist is good? Here is a check list of factors that you can use:

1. How famous is the artist? – A little bit of research will let you know who the well bought artists are, who the emerging artists are and the ones that are promising starters. You need to make the decision between these different categories of artists. For the very famous ones, your budget needs to be higher than for a promising star, which may have high appreciation potential.

2. What is the artist’s training background, is he/she from a famous art school? – did he/she train under a famous artist? – Most galleries have a bias against self-taught artists (the artists who do not have a formal education), but this doesn’t mean there are no talented self taught artists – MF Hussain, Bhupen Khakhar are the most prominent ones.

3. How many shows or exhibitions has the artist done in the past and in which galleries? – The more the better, since galleries only host artists that they think will sell well.

4. How long has the artist been painting? - The longer the better, as style and technique matures over the years, with experience.

5. The number of awards and accolades won by the artist – Awards and accolades given by recognized national and international art institutions.

6. The workshops and other learning events attended – Workshops help an artist learn and grow in creativity, technique and outlook.

7. The number of international shows exhibitions – International shows and exhibitions proves that the artist is not only a good artist but also a good PR person, which is important to sell art.

8. Find out whether reputed art institutions like museums, organizations have the artist’s work in their collection.

9. Does the artist have a unique style – This can be found from reviews written on the artist or by comparing his works to others

10. But the most important question is DO YOU LIKE THE ARTWORK, because it will be hanging on your wall for sometime.
The above checklist should help you select a good artist for the purpose of investment.

Tips

• It is best to acquaint yourself with the art scene before making a decision to purchase a piece. It is advisable to visit art shows, galleries and use the internet to read reviews and article on art.

•All galleries have artist biographies on their websites, which provide most of the information needed as above. Some sample biographies :
o CF John / Asma Menon / Yashwant Shirwadkar

• In the event of purchasing, please make sure to get an authenticity certificate – preferably from the artist himself.

Happy Art Investing !

Above : An untitled portrait by TM Azis