Editorial

Read on as the Antique Sage debunks the top 6 art investment myths!  So if you are interested in investing in fine art and antiques, but are confused by all the misinformation, untruths and outright lies circulating on the topic, you’ve come to the right place.

1) Only millionaires can afford to invest in fine art and antiques

The idea that art is only for the wealthy is one of the ugliest, most persistent art investment myths out there.  It has been repeated so many times, by so many different people, that it has simply been accepted as being true without much thought.  This is understandable considering that films, books, magazines and newspaper have, intentionally or unintentionally, equated art investing with the ultra-rich.

And yet it is profoundly untrue, provided we are willing to entertain an open mind concerning what constitutes art.  Vintage mechanical wristwatches, antique sterling silverware, ancient coins and vintage fountain pens are all examples of antiques that are both moderately priced and investment-oriented.  In fact, I believe the greatest investment potential in the art market exists in the under $2,500 segment, with some investment grade artwork available for as little as $100.

2) Only paintings and full-sized sculptures count as art

This is one of those art investment myths born out of ignorance.  We are surrounded by a culture that lionizes the major arts – primarily painting and monumental sculpture – to the exclusion of all other art.  The rest of the visual arts, collectively known as the minor arts, have traditionally been treated as the red-headed step-children of the art world.  They are, at best, tolerated, but usually ignored.  This is a pity, because the minor arts boast some of the best workmanship and most alluring designs from hundreds of different cultures and time periods.  Yet, they receive almost no recognition in the art collecting community.

For example, traditional Japanese lacquerware is one of the most demanding, time-intensive crafts known to man.  It can take months for a skilled craftsman with decades of experience to prepare and apply the 25, 30 or even 40 layers of lacquer necessary to finish a single, high quality piece.  Yet, many Westerners have no idea fine lacquerware even exists, much less the skill and effort needed to create even a simple example.

So while paintings and large sculptures certainly qualify as art, I think that they are among the least interesting parts of today’s art market.  The minor arts, with their combination of reasonable pricing and phenomenal workmanship, are really the up and coming market segment.

3) Art is a poor investment compared to traditional assets like stocks and bonds

One of the today’s most popular art investment myths is that the traditional asset classes have decisively outperformed art since the mid 20th century.  According to this argument, broad stock market indices have tended to return around 10% per annum, give or take, over long periods of time.  But this assumes that an index investor immediately and unfailingly reinvests those dividends back into stocks – something that wasn’t even possible before the arrival of the first index funds in the mid 1970s.

In reality, the growth in nominal GDP in a national economy (or global economy, if you are investing overseas as well) tends to cap long-term returns for all asset classes in that economy.  We can prove this by looking at some annualized, long-term, U.S. asset class returns from 1947 through 2016:

• U.S. Treasury Bills – 4.10%
• U.S. Treasury Bonds – 5.36%
• U.S. Nominal GDP Growth – 6.43%
• S&P 500 (without dividends) – 7.38%
• S&P 500 (with dividends) – 11.11%

Notice how all the returns generally cluster around the nominal long-term annual growth in the economy?  That is because the growth in the economy is how these returns are “paid” or transformed into the real purchasing power of goods and services.  The only true outlier, the S&P 500 with dividends reinvested, is a theoretical number that almost nobody actually got, because almost nobody systematically reinvested dividends between 1947 and 2016.

Now that passive ETFs and index mutual funds are everywhere, it is a pretty good bet that stock returns with dividends reinvested will tend to be no higher than nominal GDP growth over the long-term.  It is a bit like Heisenberg’s Uncertainty Principle applied to finance.  As long nobody knows about an investment trick, it works great.  Once everybody is aware of its existence, it doesn’t work anymore.

Right now, fine art and antiques are the investment trick that nobody knows about.  But these alternative assets have just as strong a claim to future GDP as stocks or bonds.  As an added bonus, because so few people have invested in art to date, there will almost certainly be a period of elevated returns as art prices “catch up” to fair value.

4) Only artworks from famous artists are investable

Another one of those enduring art investment myths is the unyielding belief that it is the artist that makes the artwork.  We have all read or heard stories of paintings by Vincent Van Gogh, Pablo Picasso, Gustav Klimt or some other renowned artist selling for eye-popping, 8-figure prices.  It is easy to assume that these works are famous because they were made by these influential artists.  And there is a certain element of truth to this assertion; a famous maker undoubtedly boosts the value of a work of art.

But, like most art investment myths, this fallacy overlooks a very important fact.  Artists become famous because their art is widely recognized as having great merit.  In the end, it is the visual impact of the art that is important, not who created it.  To put it another way, I would much rather buy a great work by a completely unknown artist, than a poor work by a famous artist.  And make no mistake; there are some world famous artists who have produced some really bad art.

This rule of buying the individual artwork rather than the artist goes double if you hope to make money by investing in art.  The quality of the work you are considering purchasing must always be your primary investment criteria.

5) Fine art and antiques are too illiquid to be good investments

One of the things that everybody loves about traditional assets, like stocks and bonds, is that they are tremendously liquid.  You can generally log into your online brokerage account and execute a trade in just a few minutes (or even seconds).  In contrast, art is not nearly as easy to buy or sell for fair value.  You usually have to consign a piece to an auction house, or sell via eBay or another online outlet.  And because the market is so thin, there is no guarantee that you will walk away with the amount you originally hoped to realize.

And yet, the illiquidity of the art market isn’t all bad.  Illiquidity restrains speculation and rapid turnover, meaning that the price you pay when investing in art is more likely to be a fair price, rather than an over-inflated, bubble price.  The U.S. stock market, on the other hand, has been plagued by recurring bubbles during the past 20 years which have whip-sawed weary investors with roller-coaster performance.  One of the reasons for these serial bubbles is undoubtedly the ease of trading in the stock market, which invites frenzied speculation.

6) Art investing is for insiders who can flip works for a quick profit

This is one of those insidious art investment myths – the idea that only “insiders”, like art gallery owners, art critics and obsessive connoisseurs, can really profit from art.  The second part of this misconception is that these insiders scour hidden, back-channel sources for great art before anyone else even knows it’s even there, and then turn around and almost immediately resell the works for big profits.  The sky-high bubble prices of contemporary artwork just a few years ago certainly adds to this perception.

But the reality is that most money in art is made by dedicated, but otherwise average investors who purchase good works at reasonable prices and then hold them for decades before selling.  In fact, I think that the minimum investment holding period for fine art and antiques is realistically 7 to 10 years.  Anyone looking to hold an artwork for less time should expect to take a loss on the sale.

When I was a child, my parents took me on a weekend trip to New York City.  It was September, 1985 and I can distinctly remember singing along to Madonna on the radio as we drove across the George Washington Bridge into the city.  I can recall the vibrancy and neon lights of Chinatown after dark.  I can conjure up images of the grandeur of Manhattan as viewed from the observation deck of the Empire State Building.

I was only a child of 9 years old at the time and was completely unable to adequately articulate my sense of wonder at the things I saw.  But I knew a cultural apogee when I saw one.  New York City in the mid 1980s was the epicenter of a golden age that was no less impressive than that enjoyed by ancient Athens in the 5th century BC or renaissance Venice in the 15th century AD.

What I really experienced was the zeitgeist of the city as it washed over and engulfed me.  The term “zeitgeist” was borrowed from the German language and refers to the spirit, energy or cultural milieu of an age.  While every time and place has its own zeitgeist, movies, television and books tend to mythologize the most brilliant and romantic of these eras, leaving them indelibly branded on the popular imagination.

This concept of zeitgeist is incredibly important to both the fine art collector and the antique investor.  When you purchase a late 19th century French Pointillist painting, what you are really buying, in part, is the zeitgeist of the era in which the work of art was created.  And this is equally true whether you collect 17th century Indian Mughal silver rupees, Mid-Century vintage fountain pens or Gilded Age Edwardian jewelry.

Zeitgeist sits alongside portability, quality, durability and scarcity as one of the 5 critical factors that determine an antique’s investment potential.  Although it is insufficient to catapult an antique to investment grade status on its own, in many ways zeitgeist is the most important of the 5 elements.  All else being equal, a work of art that hews closely to the popular aesthetic trends of an age will inevitably be more desirable and valuable than a similar work that inelegantly fuses two or more artistic movements together in an awkward transitional style.

In other words, art connoisseurs expect their 1920s Art Deco masterpiece to use streamlined linear elements and geometric motifs.  And antique collectors want their late 18th century Georgian objet d’art to reflect staid Neo-Classicist rigidity and formality.  Those works that most purely represent the stylistic era in which they were created are generally the most desirable.

Artists and craftsmen are always influenced by the cultural trends in which they live and work, even if they don’t consciously realize it.  These cultural influences inevitably find their way into artistic endeavors, subtly influencing an artist’s personal style in a myriad of ways.  As a result, even though an artist may not intentionally be trying to create art that reflects the current zeitgeist of an era, the prevailing cultural cross-currents will nearly always be visible in his works under close examination.

Zeitgeist also has a distinctly historical aspect as well.  Sometimes an era is dominated by monumental geo-political events that overshadow everything else.  World War II is a perfect example of this occurrence, where the entire world was pre-occupied with or embroiled in a truly global conflict.  The most desirable antiques from this era, like World War II military insignia, will directly reference this world-shaping conflict.

For those interested in further exploring this topic, I highly recommend watching the superb BBC documentary titled “Bright Lights, Brilliant Minds: A Tale of Three Cities“.  Narrated by the engaging art historian James Fox, this three part mini-series examines the cultural milieu of 1908 Vienna, 1928 Paris and 1951 New York City.  Specifically, it looks at how the rich cultural backdrop of these near-mythological 20th century golden ages allowed avant-garde art to flourish.  Unfortunately, while this series used to be available to stream through Netflix (at least in the U.S.), it isn’t as of the winter of 2017.

After spending an inordinate amount of time in the dark corners of the internet, I’ve come to a conclusion.  The world is dominated by two kinds of investors: the “everything’s alright” crowd and the “prepping for the zombie apocalypse” contingent.  The approaches these two radically different groups take to investing couldn’t be more different.

The unofficial motto of the “everything’s alright” crowd is “buy stocks for the long run™”!  They believe the world is gradually evolving into a post-industrial, information-driven society.  Advances in technology, medicine and finance, coupled with the genius of our corporate and political leadership, will inevitably guide humanity into a permanent age of boundless plenty.  For the “everything’s alright” investor, stocks are the obvious investment vehicle to capture humanity’s infinite future potential.

The “prepping for the zombie apocalypse” faction takes a diametrically opposed viewpoint of the future.  They believe the world faces a comeuppance for its poor economic, political and social choices.  Some think widespread raw material shortages or environmental disaster will usher in an unfamiliar age of universal scarcity.  Others believe that the global economy has been terminally mismanaged and, staggering from crisis to crisis, is bound to eventually collapse with devastating financial consequences.  A few even believe the very roots of Western Civilization are being systematically eroded by ill-advised social engineering, inevitably resulting in a disruptive fragmentation of society.

The “prepping for the zombie apocalypse” crowd generally considers “stacking” to be the best investment for the trying times ahead.  “Stacking” is a term used to describe the orderly stockpiling of supplies for the future.  These necessities can be as diverse as non-perishable foods, ammunition and guns, or gold and silver bullion.  The idea behind this kind of investing is that basic food and materials will be much more difficult to obtain in a new, crisis driven world and whoever owns them will be well placed to prosper.

I want to focus on the investment assumptions underlying the “prepping for the zombie apocalypse” group in this article.  First, I should state that I am sympathetic to some of their arguments about humanity’s future direction.  I do believe that the global economy has been terribly manipulated by the world’s central banks and that we will one day pay a heavy price for that arrogance.

But the “prepping for the zombie apocalypse” crowd broadly shares many beliefs that I find highly improbable.  For one thing, their basic underlying assumption is that society will more or less completely disintegrate under the stress of the challenges to come.  This means they do not think there will be effective Federal or state government structures, although some form of local government may persist.  They also implicitly believe that food, energy and goods distribution networks will either cease functioning altogether or become highly impaired.

If you accept these “zombie apocalypse” assumptions, then preppers’ and survivalists’ insistence on stacking basic supplies like food, ammunition and precious metals make a lot of sense.  If the electrical grid permanently goes down and gasoline becomes unobtainable, then yes, a lot of people will starve and violence driven by desperation will be commonplace.  Such an event would almost undoubtedly be the end of the world – or at least the end of civilization – as we know it.

This “zombie apocalypse” strategy is best exemplified by the way survivalists and preppers approach investing in precious metals.  They typically like buying fractional gold and silver bullion coins, including old U.S. 90% junk silver, under the assumption that it will be easy to trade a real silver dime or quarter for a loaf of bread when the time comes.  They usually eschew numismatic coins and antiques because they feel these assets will have no demand in a world where starving people are desperate for food and little else.  Some preppers don’t even bother with precious metals under the hypothesis that in a crisis no one will believe your gold and silver coins are actually gold and silver!

But I don’t think a total collapse of society is a given.  In fact, I don’t even believe it is probable.  A look at history is informative in this situation.  The 20th and early 21st centuries have been packed full of some of the most disruptive periods in human history, yet only very rarely would a survivalist’s full-blown “zombie apocalypse” preparations have made sense.  In most instances, a less extreme approach was warranted.

Even the most extraordinary disasters are temporary in nature, rarely lasting more than a few years.  For example, Weimar Germany’s devastating hyperinflation of the early 1920s was only about four years long.  Yes, it was a miserable four years, but when it ended, it ended for good.

Calamities are also often localized or regional in nature as well.  The Yugoslavian civil war of the early 1990s is a classic case, with different hotspots flaring up at different times and locations in the fragmenting Balkan nation.  Yet the surrounding European nations were practically untouched by this conflict, only experiencing a rise in refugees.  World Wars are about the only exception to this rule, when entire continents became engulfed in conflict.

Finally, a number of catastrophes result not in bullets and chaos, but in slower, more manageable changes.  Argentina’s experience in its currency crisis of the early 2000s best exemplifies this.  Capital controls were imposed, prices rose and crime increased, but otherwise life went on.

We can draw some conclusions from these situations.  First, a protracted, slow decline is much more plausible than a total collapse, “zombie apocalypse” scenario.  In fact, “zombie apocalypse” conditions – like Berlin or Tokyo in 1945 where food is all that matters – are vanishingly rare and almost always highly localized.

Second, a healthy investment allocation to hard assets – bullion, gemstones, art and antiques – is a prerequisite to protect yourself financially.  However, there are a couple rules you must follow to maximize their benefit.  It is imperative you have enough liquid cash, savings or bullion to see you through a temporary crisis.  You don’t want to be forced to panic sell illiquid, high value tangible assets in the depths of a crisis.  A corollary to this rule is that stockpiling two or three weeks worth of food, bottled water and cash is always prudent.

Art and antiques are not investments meant to be liquidated in the midst of financial chaos.  Instead, they are a play on the inevitable recovery that comes afterwards, once the dust and smoke clears.  These precious tangible assets have been coveted and desired by the wealthy and sophisticated for many centuries.  And, as long as humans walk the earth, that is unlikely to change.