The Art to Investing in Art

Art is the ultimate symbol, the ultimate luxury item. Put aside the yacht, the garage, the fleet of Bentleys and vacate the Hyde Park 1 address. Art is where it’s at. But is it a wise investment?

As a dealer in fine art of 28 years, I tend to act with restraint, even scepticism at the words, ‘investment in art’. I am not even sure I believe in the concept. This is a more rarefied and, dare I say it, subtle world where vast fortunes can be made, and indeed lost. This being the case, the following advice is crucial to the success of any purchase in art:

• Seek advice from auction houses and dealers
• Miracles don’t happen
• A little knowledge is a dangerous thing
• Never buy a name, always buy a picture. If you can combine the two, you have achieved your goal
• A painting is worth what someone will pay for it
• Selling a piece of art takes time. With the help of a dealer, timing your sale to the exact moment when the art is in high value can save you time and substantial costs.

A crisis-free investment?

Let’s say you had invested $250,000 with me between 1994 and 1996 in one particular area of the market, Russian Art from 1890-1930. By 2008, you would have seen a return of $5,000,000, or 20 times your original investment. If you had invested $3,000,000 around ten years later (2005-6), you would have seen a return of $8,500,000 by 2008, giving a nice return of 250% over three years. Sound spectacular? Apparently, over the first period you would have seen greater reward with shares in Gazprom, and over the second you might have seen a greater return in gold, real estate or zinc.

These art sales and the profits thereof take on a far greater significance when you consider that they all took place between October 2008 and June 2009, the eight months that followed the world financial crash. Whilst it can’t be said that a profit was made on every painting sold, it is the second group of figures, the profits posted on paintings purchased between 2005-2006, that are the most striking. Myself and the collector in question bought on the crest of a boom in the art world and yet we sold successfully during a financial trough when many others were less fortunate.

There was no science involved, no calculated nor specially-directed investment on the side of the buyer. We simply stuck with the tried and tested method of buying not names, but pictures. The exact meaning of this is simple and refers us in part to a quote from Forbes.com that, “art market indices mostly track high-performing works, and ignore the duds – skewing both risk and return figures”. In very simple terms, many artists of world renown painted many thousands of paintings of which only a fraction are worth buying. To a dealer or other expert, it is no great science to spot the better pictures from the so-called ‘duds’.

If sold today, the return on the paintings in question would look considerably more, with the stock purchased between 2005 and 2006 likely to fetch $15-17,000,000. While this offers evidence to the claim that people ‘move into collectibles’ when times are rough, it also shows that great art, great paintings, will always find a buyer and that art may even somehow be a “financial-crisis-free” investment. The great science, however, is how to buy these commercial items. This is where the secret to being a clever buyer lies.

The role of the dealer

If you are offered a painting by Malevich for $5,000,000 which, according to the sellers, is worth $40,000,000 on the open market, you are not being offered a real Malevich but an offer to go and physically burn $5m worth of $100 notes in a public square. These paintings are almost always accompanied by certificates of authenticity from ‘noted academics’ who are almost all either incompetent or simply corrupt.

My maxim when offering advice on these ‘miracle’ paintings is simple. Would either of the two leading auction houses, Sotheby’s and Christies, or any credible dealer, offer them for re-sale? If the answer is no then the painting should be avoided. Sadly, the world of Russian Art has been cursed with such paintings but blame lies firmly with the academics. They simply have no experience of the art market – how could they from their ivory towers? – and are not financially liable for their opinions.

The dealer is the filtering mechanism; experienced at buying and selling they understand where the potential
pitfalls are.

A dealer will also help a client with the promotion of his paintings, for example, organising for items to be reproduced in books or shown at museum exhibitions. Whilst some clients prefer anonymity, I try to persuade them of the value of showing an item in public. By increasing a painting’s exposure, you increase its value because, by virtue of it appearing in a museum, the Art establishment has given it an official seal of approval.

A competent dealer will also help research a painting, frequently finding information that will increase its value. For example, a work from my collection was found to have been owned by the great tenor Fyodor Chaliapin and illustrated in a book from 1918. Whilst a clever market analyst might be able to put an exact percentage figure on how much this increased the value of the work, I am more sanguine. A painting is worth just exactly what a buyer is prepared to pay for it – the aforementioned work was finally sold for much more than I could possibly have hoped.

Blue chip purchases

Dealers have a phrase, ‘to talk a picture off the wall’. Indeed, I have been involved in several deals where Party 1 has a painting that they have no intention of selling but Party 2 is so keen to obtain the work that they will make an offer far above the ‘market price’ which, in itself, is something difficult to quantify. I enjoy such deals because the painting in question is usually a masterpiece and both parties are getting blue-chip returns – either a museum quality painting or an inflated price.

To overpay is fine, to underpay is potentially fatal. There simply are no bargains around. I can quote tens of examples. Twelve years ago, a client tried to haggle on a purchase, insisting on a 10% discount which, taking into account his overall wealth, was unnecessary. I explained that he was making a major mistake and he eventually withdrew his terms. The painting is now worth 15 times what he paid for it.

Buy the art, not the investment

The art market is, essentially, like any other: supply and demand are the motors. However, in the case of the blue chip ‘investments’ that I advise on, supply is running out and demand is strengthening.

To successfully invest in art one needs to be detached, less rational and less in control, leaving many of the decisions to those better qualified than yourself. Listed below, however, are the key things to remember:

• Find a trusted dealer
• Be patient
• Don’t expect miracles, no one lets great works sell at a discount
• Don’t buy names, buy pictures
• Go blue chip
• A painting is worth what someone will pay for it
• Don’t haggle
• High prices for the greatest works are always justified
• Enjoy it

In my opinion, the last word should come from Larry Gagosian, one the greatest dealers in the world today: “An art investment can also be a bad investment.” Therefore, buy the art, not the investment. If you have the great art that others covet, you’ll make money.