Editorial

In 1943 Abraham Maslow, an American psychologist, published a paper titled “A Theory of Human Motivation”.  This academic paper laid the foundation for what later became known as Maslow’s hierarchy of needs.  Most people have heard of this theory which is usually represented as a pyramid with five tiers.  The steps of the pyramid in ascending order are as follows:

• Physiological
• Safety
• Love/Belonging
• Esteem
• Self-Actualization

Physiological needs are the biological requirements for food, water, shelter and air.  Without these things human life cannot be sustained.  This is why they occupy the base of the pyramid.  The next tier represents the deep seated desire to feel physically safe.  This can mean safety from violence, natural disasters or even economic uncertainty, like the loss of a job.  The next level – love and belonging – describes our need to be part of a group and includes friends, family and sexual partners.  Esteem represents the desire to be recognized by others as having value, as well as valuing yourself.  Finally, self-actualization is the aspiration to realize one’s full potential, which is only possible when one has mastered all the previous stages.  This final tier may come in the form of any challenging task at which one excels.

Now you might well be asking yourself what the psychologist Abraham Maslow has to do with investing in art and antiques.  It is really quite simple.  Many critics of the idea of investing in art rightly claim that they produce no periodic cash flows.  The stock of a successful company will throw off dividends.  Bonds typically make semi-annual interest payments before returning the principal at maturity.  But art and antiques do neither of these things, and can only be turned into cash if sold.  Some people interpret this fact to mean that art is some sort of Ponzi scheme, forever doomed to boom and bust cycles based on unpredictable fads.  Another related accusation is that art has no intrinsic value and is, therefore, valueless.

However, these arguments are false and Maslow’s hierarchy of needs illustrates why.  According to Maslow, once people meet their lower needs, they then naturally attempt to satisfy their higher needs.  For many people, these higher needs are met in one way or another by collecting or possessing art.  Consider this: many truly wealthy people have art collections of some description, whether it is a basement full of fine vintage wines, a garage packed with gorgeous antique cars or stately mansions lined with paintings by the old masters.  This pattern is not unique to the modern age either, but has been a constant since ancient times.

This is because the wealthy, having already fulfilled the lower rungs of Maslow’s hierarchy of needs, subsequently move onto esteem and self-actualization.  Assembling a collection of fine art brings them recognition from their peers.  It displays their high social status and also creates opportunities to meet other well-heeled individuals.  Collecting art and antiques also creates a sense of fulfillment because these markets are exceedingly complex. They represent the culmination of thousands of years of human progress and culture distilled into rare objects of great beauty.  It takes substantial time and effort to become accomplished in even one area of the art market.  This is the antithesis of the modern stock market, where you can look up analyst coverage, financial ratios and technical charts on the internet in a few minutes.

Most people, therefore, naturally gravitate towards art once they reach a certain level of financial sophistication.  According to Maslow’s hierarchy of needs, as long as financially successful people exist in the world, there will be demand for fine art.  In a sense, investment grade art is an inflation-indexed claim on future global GDP.  It doesn’t matter if that economic growth happens in China, the U.S. or elsewhere; art and antiques will always be a primary destination for the discretionary spending of the well-to-do.

One current tidbit of conventional wisdom that we hear again and again about financial markets is that “there is no alternative.”  Market watchers endlessly lament how unattractive valuations of traditional assets classes are today.  Savings accounts pay nothing.  Longer term treasury bonds pay a miserly interest rate between 1% and 2%.  The dividend yield on the S&P currently hovers around a lowly 2%.  But at the same time, our illustrious financial pundits claim you must buy these wildly overvalued assets anyway because what else are you going to do with your money?  Bury it in the back yard?  There is no alternative.

The bankers, stockbrokers and financial advisors of the world are smug.  They have mastered their sales pitch over years, if not decades.  They work for giant corporations staffed with armies of lawyers built with the prodigious fees they have skimmed from hard working, middle class people over the years.  Your pensions fund, 401k, brokerage account and bank CD have all paid these good fellas their proverbial pound of flesh.  That’s fine with these corrupt financial conmen.  After all, what are you going to do?  There is no alternative.

And their advice is terrible.  Almost every single stock analyst has a buy rating on every stock he covers, even if some of them are obviously terrible investments.  If a stock an analyst covers goes from $10 to $5 a share while the price target is $20, it isn’t a problem.  Just change the new price target to $8 a share, maintain the buy rating on the stock and then claim it still has a whopping 60% upside potential.  Wall Street has a short memory and hey, what are you going to do?  There is no alternative.

By now it has become obvious to any thoughtful observer that the paper assets our financial overlords push cannot possible deliver the outrageously high returns they’ve promised.  The markets are a long, long way from compounding reliably at 10% a year.  This revelation doesn’t deter today’s strain of hardy financial thief of course.  These criminals in Armani suits have grown fat and happy on their backdoor dealings with central banks and crooked politicians – all of whom are quite willing to “look the other way” when average people get “accidentally” screwed by some “unforeseen” financial crisis.  “But what are you going to do?” chuckles your financial advisor softly.  There is no alternative.

Normal, responsible people can’t stop saving for retirement, college, a house, a car or a rainy day just because the Fed has driven interest rates to zero.  Life doesn’t stand still and so the financial predation continues.  The big Wall Street banks know you need to save and invest your money somewhere and they don’t care whether you choose stocks, bonds or cash.  They get their cut in any case.  You, on the other hand, would have better odds going to Vegas and putting it all on black.  At least then you would nearly have a 50-50 chance of doubling your money.  It’s a sad day when a casino can give you a better return on your investment than Wall Street can.  Somewhere an investment banker smiles while a Mafioso weeps.  There is no alternative.

There is only one problem with this odious narrative.  It is all an elaborate lie.  Your banker, broker and financial advisor want you to think you have no alternative.  They want you to think you are trapped in a Hobson’s choice – a situation where regardless of which asset class you choose – stocks, bonds or cash – they still win.  But I’m here to tell you that there is a choice.  An entire asset class exists that has been almost entirely overlooked by our financial illuminati.  There is an alternative: investment grade art and antiques.

Nobility, wealthy industrialists and savvy connoisseurs have coveted, collected and treasured fine art and antiques for centuries.  These masterpieces of human accomplishment are made from some of the rarest and most beautiful materials on earth – dazzling gemstones, glittering precious metals and exotic tropical hardwoods.  They are imbued with both historical and cultural importance, showcasing the skills of a society’s greatest artists and craftsmen.

And, perhaps most importantly, they are priced reasonably.  You can own an iconic World War II era mechanical chronograph wristwatch for just a few hundred dollars.  An elaborately engraved bronze Japanese tsuba (sword guard) from an 18th century samurai sword can be purchased for less than $500.  Jewel-like, medieval European hand-illuminated manuscript pages from the 15th century are readily available for $400 to $800 each.  The possibilities are almost endless and as little as $100 is enough to start.  While your banker, broker or financial advisor might insist otherwise, there is definitely an alternative for your investment dollar.

In our more sanguine moments many of us like to imagine that society has unwritten economic rules.  For example, many people believe that acquiring a college bachelor’s degree is a surefire way to secure a position in the coveted middle class.  And perhaps once, long ago, it was even true.  Now however, a college bachelor’s degree is just as likely to trap the young and naïve in a quagmire of six figure student loan debt and minimum wage work.  These unwritten economic rules – otherwise known as conventional wisdom – all too often become a graveyard for the unwary.

Conventional wisdom feels intuitively safe.  It lulls us into not really examining the decisions we’re about to make.  The fact that 100 million other people are making exactly the same decision gives us a sense of invulnerability.  We’re running with the pack now; how could so many people possibly be wrong simultaneously?  And nowhere is this herding dynamic more prevalent than in investing.

Many years ago, I worked in Boston at a medium-sized mutual fund firm.  It was the spring of 2000 near the peak of the dotcom bubble and I was shooting the breeze with a work colleague named Ryan.  He was of Irish descent and had all the vices of any good Irishman: he liked to drink, smoke, gamble and fight.  Our conversation went something like this:

“So Ryan, have you seen how much the NASDAQ is off its recent highs?” I remarked off-handedly.

“It’s a great time to get in,” shot back Ryan giddily as he took a big swig from his morning coffee.  “All that volatility means there are a lot of screaming bargains out there in techland!”

“I’m not sure I’d want to own many of those businesses,” I countered cautiously.  “Some of those big tech companies don’t have any earnings while others have insanely high price-to-earnings ratios.”

“Look, it doesn’t matter which of them you buy.  They’re all going to do great,” admonished Ryan in an exasperated tone as he rolled his eyes.  “The important thing is to get your money in the game!”

Neither of us knew it at the time, but the NASDAQ had actually peaked a month before.  It would go on to lose over 75% of its value over the next few years.  Speculator darlings such as Pets.com, Webvan and Global Crossing all ended up filing bankruptcy in the ensuing chaos.  “Getting in the game,” as Ryan advocated ended up being hazardous to your wealth.

Years later, in late 2005, I had another, eerily similar discussion with a different co-worker named Dave.  By this time I worked at the mutual fund division of a large bank.  The topic revolved around the high price of housing in the Boston area:

“With real estate prices as high as they are I don’t think I’ll every buy a house as long as I live in Boston,” I commented with disappointed resignation.

“What?  Why wouldn’t you buy?” asked Dave incredulously.

“Because renting is cheaper,” I countered, “a lot cheaper.”

“It doesn’t matter how expensive houses are,” intoned Dave earnestly.  “You have to buy in order to get on the escalator up!”

“The escalator up?” I repeated very slowly in utter disbelief.

“Yes, the escalator up!” chirped Dave with obvious excitement.  “You need to own a house in order to get all those fat capital gains!”

Predictably, this conversation with my real-estate obsessed co-worker coincided almost perfectly with the peak of housing prices in the Boston area.  A couple years later the largest financial crisis since the Great Depression descended, driven primarily by the unwinding of a massive housing bubble.  Dave discovered, rather painfully, that escalators can go down as well as up.

Although both of my former co-workers were spectacularly wrong, their beliefs represented the very best conventional wisdom at the time.  The problem is that today’s conventional wisdom all too often becomes tomorrow’s discredited idea.  This is one of the reasons I like art and antiques as investments; they are about as far from conventional wisdom as one can get at the moment.  I don’t have any co-workers telling me I need to sink my 401-k into medieval European illuminated manuscripts or old mine cut diamonds.  There aren’t any radio, television or internet advertisements screaming that I need to buy ancient Roman Republic denarii or vintage mid-century fountain pens.  Few people even know art and antiques can be investments, and that’s the way I like it.