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What Is the Optimal Holding Period for Art Investments?

What Is the Optimal Holding Period for Art Investments?

What is the optimal holding period for art and antique investments?  This is a common question among alternative asset investors.  And, unfortunately, it is a question with no simple answer.

But there is at least one clear guideline surrounding the ideal holding period for art investments.  The longer you hold fine art and antiques, the better.  As the famous investor Warren Buffet once said, “(my) favorite holding period is forever.”  Buffet originally applied this wisdom to stocks, but I believe it applies doubly to investment grade art and antiques.

There are a couple of reasons for this.  First, most traditional assets like stocks and bonds are very liquid – meaning easy to trade.  This is not the case with alternative assets, which are usually extremely illiquid.  This means that art and antiques tend to have wide bid/ask spreads and are difficult to sell for fair value on short notice.

While illiquidity is, paradoxically, both a blessing and a curse, it absolutely precludes short-term trading as a profitable investment strategy.  Therefore, it is only possible to consistently turn a profit in art and antique investments by holding them for significant periods of time.  Patience is one of the savvy art investor’s greatest virtues.

This stands in stark contrast to the paper asset markets where holding periods have declined dramatically over the last several decades.  While many stock investors like to think of themselves as adhering to the traditional buy and hold philosophy, the reality doesn’t seem to align with the myth.  According to a 2015 Wall Street Journal article, the average holding period for stocks has reached a nadir of only 4 months, after having declined steadily since the early 1980s.  If you like traditional buy and hold investing, the art market, unlike the stock market, still rewards patience.

Another compelling reason to hold art and antique investments for longer is because their full potential is only realized over extended periods of time.  Artistic styles naturally cycle in and out of vogue over multi-decade timeframes.  A well chosen, but unfashionable antique purchased cheaply today may very well be tomorrow’s must have piece.

Vintage European mechanical wristwatches are a great example of this phenomenon.  In the 1980s, these miniature works of art often sold for bullion value – perhaps a couple hundred dollars each.  Untold numbers were unceremoniously shipped to gold refiners as scrap.  But today, circa 2017, vintage mechanical wristwatches from renowned makers such as Vacheron Constantin, IWC and Omega routinely sell for several thousand dollars apiece.

It can also take society decades to understand and appreciate the aesthetic genius of great art.  An old saying in the art world is that “No artist is truly appreciated until after he dies.”  Johannes Vermeer, Paul Gauguin and Vincent Van Gogh are just three ultra famous artists that died penniless and unappreciated by their contemporaries.  They all had difficulty selling their work when they lived, even at heavily discounted prices.  Yet even a minor work by any of them would easily sport an impressively large price tag today.

I think the optimal holding period for art investments is clear: as long as possible.  But I also understand that holding forever is not always realistic or desirable.  So a good rule of thumb is that the absolute minimum holding period for art and antique investments should be 7 years.  If you don’t hold for at least this long you should fully expect to take a loss on resale.

And simply holding for 7 years certainly doesn’t guarantee a profit either.  In fact, I think that 10 years is really a more reasonable minimum holding period.  A full decade gives at least a reasonable chance for stylistic tastes to change and underappreciated artists to develop a following.  Art and antiques are excellent investment vehicles, but their true potential is best realized over decades.  Art connoisseurs who understand this fact will have a tremendous advantage over those who don’t.

The Enduring Charm of Hand Struck Ancient and Medieval Coinage

The Enduring Charm of Hand Struck Ancient and Medieval Coinage

Hand striking, sometimes referred to as hand hammering, was the primary means of minting coins in the ancient and medieval periods.  This process involved affixing the lower die to an anvil, placing a heated flan (blank coin) on top of that die and then placing the upper or hammer die on top of the flan.  This left the flan sandwiched between the two dies.  A heavy hammer was then used to forcefully strike the upper die, forcing the impressions from both dies into the surface of the flan.  The result, if everything went well, was a hand struck coin of bold strike and incomparable beauty.

Hand striking was the dominant minting technique for the first 2,200 years after coinage was invented – from about 650 BC to 1550 AD.  There are good reasons why this was the case.  It was relatively cheap and required little technology to achieve good results.  However, as any connoisseur of ancient or medieval coins can tell you, it had many drawbacks as well.

For one, it was easy to botch a strike.  Making a mistake when hand striking could result in the coin being off center, weakly struck or double struck.  In addition, flans were manually prepared as well, often resulting in cracked, undersized or otherwise flawed coin blanks.  The final problem was the dies themselves.  Because a coin’s design was hand engraved directly into either bronze or iron dies, the artistic style of motifs and lettering, along with other important aesthetic qualities, could vary considerably from one set of dies to the next.

All of these factors combine to make ancient and medieval coinage both incredibly exhilarating and unbelievably frustrating.  It is exhilarating to hold a millennia old ancient coin of impossibly high relief and superlative style in the palm of your hand.  It is simultaneously both a work of art and a piece of living history.  It is equally frustrating when searching for a particular pre-modern coin to only find sub-par specimens with poor style and bad striking again and again.

It also means that ancient or medieval coins from the same series with the same design can look dramatically different.  One example may be a masterpiece while another, ostensibly identical coin, may be a dog.  Coin investors should take note; eye appeal and pricing can vary greatly due to striking and style.  And that is before considering the condition of a coin!

There are a few guidelines when collecting ancient and medieval hand struck coins.  First, greater care in the striking process was invariably taken with coins of higher intrinsic value.  So, generally speaking, ancient and medieval gold coins tend to exhibit good striking characteristics, well prepared flans and finely engraved dies.  Bronze coins, in contrast, are the ugly ducklings of pre-modern coinage.  They are often poorly struck, minted on irregular, dumpy flans and possess little eye appeal.

Exceptions do exist however, like the stately bronze Sestertius and Dupondius of the Roman Empire, along with the magnificent, huge bronze coins of ancient Ptolemaic Egypt.  Silver coins fall in between gold and copper in terms of average striking characteristics.  Sometimes quality is excellent, like on ancient Greek silver staters and tetradrachms.  Other times it is bad, as on some of the early medieval silver issues from the kingdoms of the Indian subcontinent.

Even though some ancient coins were minted in very large quantities by the standards of the day, they are still exceedingly rare compared to modern issues.  A set of ancient coin dies might have only lasted 15,000 to 30,000 strikes before wearing out.  For example, it is estimated that about 17 million silver denarii were minted every year in the 2nd century AD during the height of the Roman Empire.  This might seem like a lot until you consider that many modern issues from the United States exceed one billion minted per year!  And ancient and medieval coins have suffered severe attrition over the centuries as well.  Only a tiny fraction of their original mintages survive – and an even smaller fraction if you want a nice example with a fine strike in good condition.

In the mid 16th century, German silversmith Max Schwab invented the screw press.  Coins created via the screw press are known as milled coinage.  The screw press was a machine that, as the name implies, used a screw to maximize mechanical leverage in the striking process.  It could be powered by either humans or animals, as required.  The screw press, with its higher striking pressure, brought much needed consistency to the art of coining.  Milled coinage, in sharp contrast to hand struck coinage, would be recognizable by today’s man on the street as effectively modern.

The development of the screw press was also accompanied by the invention of mechanical rolling mills and punches.  Together, these machines heralded a new era of coin production.  Flans were now far more regular in thickness and roundness than ever before.  The screw press could even mint coins with reeded or lettered edges – an important safeguard in a world overrun with clipped, underweight coins.  And die impressions were generally far stronger compared to hand hammered coinage, although weak strikes still occasionally occurred.  Perhaps most importantly, as the mechanized screw press was refined, coins could be minted more quickly than with hand striking, leading to significantly larger volumes of coinage to facilitate burgeoning commerce.

Milled coinage was first adopted in France during the reign of Henri II (1547 to 1559) and in England during the reign of Elizabeth I (in the 1560s).  Although technically superior to hand hammered coinage, milled coinage was soon abandoned by both France and England because of opposition from long-standing mint employees who were used to hand striking coins.  They perceived the new screw press method as a threat to their continued employment as coiners. It wasn’t until almost a century later, in the 1630s and 1640s that milled coinage was readopted in France and England on a more permanent basis.

The rest of Europe adopted these new mechanical minting technologies piecemeal during the 16th and 17th centuries.  By 1700 the vast majority of European coinage was minted via the screw press or its derivatives.  I find this date – 1700 AD – to be a useful way to roughly delineate older, hand struck coinage from newer, mechanically struck coinage. However, I should note that some parts of the world – primarily India, Southeast Asia, parts of the Middle East and Japan’s Tokugawa shogunate – still struck coins by hand for many decades after 1700 AD.

Hand struck ancient and medieval coins have a unique charm all their own.  But if you are interested in collecting them, it is important to understand the different technologies used in their manufacture.  This maxim applies doubly if you are looking to invest in pre-modern coinage.  Search for specimens that have well-centered, strong strikes on broad flans.  Also be sure to choose coins rendered in fine style, as this attribute varied based on the skill of the die engraver.  And above all, always buy coins with the best eye appeal you can find.  It is a major indicator of desirability and, by extension, future price appreciation for ancient and medieval coins.

Investing in Precious Metals vs Antiques

Investing in Precious Metals vs Antiques

What are the relative merits of investing in precious metals versus antiques?  It is a compelling question for hard asset investors.  After all, precious metals have had stellar price gains since the turn of the millennium.  As of September 30, 2016, gold has appreciated at an annualized rate of 9.93% over the last 15 years.  Silver has compounded at an annualized rate of 8.66% over the same period.  Even platinum, the laggard of the precious metal family, has still managed to return a very respectable, although perhaps not spectacular, 4.20% per annum over that time frame.

So if you want to inoculate your investment portfolio against inflation, financial disruptions or the zombie apocalypse, precious metals look like a pretty good deal.  And they are a pretty good deal.  I certainly like precious metals and hold them in my own portfolio.  But I like to think of them as a complement to investing in tangible assets like art and antiques, not as a replacement for them.

Now, not everyone agrees with me on the question of precious metals versus antiques.  Some people feel that precious metals are so simple, straightforward and easily understood that they should be your only tangible investment.  These pundits argue that when you buy antiques you’re paying too much for intangible attributes.  This manifests itself in the form of a premium – the price over its intrinsic value that you pay for an object.

All precious metals – gold, silver, platinum and palladium – sell for fairly modest premiums over bullion value.  Gold and silver bullion coins and bars typically have premiums of only a few percent over spot prices.  Platinum and palladium bullion pieces usually have somewhat higher premiums, but they are still generally in the 5% to 10% range.

Antiques, in contrast, generally have premiums that start at 15% or 20% over intrinsic value.  And they often go much, much higher than that.  It isn’t unusual for some antiques to have premiums of several hundred percent or more!  In cases where an antique contains no precious metals or gemstones at all, a premium cannot even be calculated because the item has no intrinsic value.

But all this talk of premiums misses an important point.  Throughout history, the wealthy have been willing to pay good prices for high quality, investment grade antiques because of their unsurpassed beauty, historical importance and the social status they confer.  A fine antique’s aesthetic qualities grant it an allure that is at once both intangible, and yet, utterly real.  As the summation of human culture, arts and ingenuity, investment quality antiques are, quite simply, worth more than the sum of their parts.

Gold and its cousins cannot claim that, although they are desirable for other reasons.  Instead, precious metals behave a bit like the cold, hard cash of the tangible asset realm.  They are a great baseline position – a wealth preserver free from the vagaries of paper currencies.  And they are liquid, meaning easily bought and sold quickly close to their fair market value.  But precious metals do have their limitations.

For one thing, it is impossible to buy precious metals at a discount.  No dealer will ever sell an ounce of gold for a penny less than the going spot price.  And that global price is only a few clicks away on the internet, so everyone knows what it is at any point in time.  Sure, you can get a small price break on the premium if you buy large quantities of bullion from a reputable dealer.  But even then, the discount will never be more than 1% or 2%.

On the other hand, discounts abound in the antique market for those savvy enough to search them out.  Because the antique markets are illiquid, they lack the efficiency found in traditional asset markets like stock and bond exchanges.  But this is a good thing.  It makes it possible, with a little bit of specialized knowledge, to buy antiques at low prices.  Not only that, but the right knowledge can also help you invest in antiques that will provide excellent future returns.  This level of fine-tuning is not possible with gold or silver bullion.

But, I still feel it is important to allocate a portion of your investment portfolio to precious metals, in addition to antiques.  Like antiques, gold, silver, platinum and palladium are immune from currency crises, bankruptcy, fraud and confiscation.  Indeed, precious metals can provide much needed liquidity to a tangible asset portfolio, allowing you to confidently invest in high return, but illiquid antiques.  In the end, gold and antiques are the perfect pairing for a well diversified tangibles portfolio.

Etsy and Investing in Contemporary Jewelry

Etsy and Investing in Contemporary Jewelry

I was looking at Etsy recently for interesting investment grade contemporary jewelry.  Etsy, if you aren’t already familiar with it, is an online Indie craft-oriented sales platform.  As usual, most of the pieces I encountered might have been fine as fashion jewelry, but most definitely did not merit investment grade status.  Unfortunately, determining if a specimen of jewelry is investment grade can be a bit of an art form in itself.  To paraphrase a former U.S. Supreme Court justice, identifying investment grade contemporary jewelry is a lot like pornography; I know it when I see it.

In any case, I found a few desirable examples swimming in a sea of mediocrity.  This is actually not an unusual state of affairs.  Truly fine, investment grade contemporary jewelry is fabricated from the best quality materials into an artistically compelling design.  This is harder to do than it might seem at first – actually an awful lot harder to do than it seems.

For one thing, most jewelers pursuing artistic pieces work on spec – meaning they create the jewelry without having a buyer first.  They bear the cost of paying for all the materials upfront.  And they must dedicate substantial design and fabrication time without any assurance that a buyer will eventually materialize.

This is one of the reasons artists – jewelers included – are often starving.  It is also one of the reasons a lot of jewelers create their more experimental works out of silver, quartz and other relatively low value materials.  If they misjudge customer demand and make an unsalable piece, at least they’ve only wasted some time instead of valuable materials as well.  Unfortunately, the use of low priced materials tends to disqualify jewelry from investment grade status – although this rule of thumb is not absolute.

It is much safer for an artistically minded jeweler to take work on commission – meaning finding a client first and having him pay either part of or the entire fee upfront.  This removes most or all of the risk associated with working on spec.  But commission work is difficult to get unless an artist has already cultivated a client base over many years.  And developing a client base only happens after first creating captivating or intriguing jewelry – you guessed it – on spec.  It can be a discouraging catch 22 situation.

A few daring jewelers just don’t care though.  They will sink copious amounts of time and money into daring and evocative pieces with no potential buyer lined up – profits be damned.  These are the sorts of works I am constantly searching for on sites like Etsy.  But, as I stated before, they aren’t easy to find.

Artists looking to create the very finest contemporary jewelry face other challenges as well.  If you’ve ever spoken to artists about the creative process, they will usually admit that it can vacillate wildly between being joyfully easy at some times and frustratingly difficult at others.  And, of course, there is no guarantee that the product of their artistic endeavors will be good, even if the process is relatively painless.  So there is always an element of chance in creating a great work of jewelry.  This is the reason nearly every artist will regularly abandon works throughout his career before they are fully completed.  Sometimes you just can’t save a doomed piece, no matter how much you try.

But when everything goes right – when all the unpredictable stars in the creative process align – a jewelry artist can create a truly magical, special piece.  These masterpieces are physical manifestations of the genius of the creative mind.  They represent the apogee of human culture distilled into a single, small glittering object.  They are miniature works of art expressed through the coveted medium of colorful gemstones and precious metals.

The difficulty of investing in contemporary jewelry is often underestimated.  Let me share some shocking Etsy statistics that underscores this point.  Right now there are almost 7 million pieces of contemporary jewelry on Etsy that are categorized as “handmade”.  However, according to my best conservative estimate, only about 2,000 of these pieces are definitively investment grade.  Perhaps another 4,000 to 6,000 pieces are borderline in nature, straddling the edge of investment grade status.  If you add up all the possible investment grade contemporary jewelry on Etsy it amounts to no more than 8,000 pieces in total.  This represents less than 0.12% of all handmade jewelry on Etsy, using extremely generous assumptions!

If we assume that the average price of a piece of contemporary, investment grade jewelry on Etsy is $2,000, we can infer that there is somewhere between $4 million and $16 million worth of them available on the platform as of early 2017.  Ten million dollars might seem like a lot of money.  And for most of us ten million dollars is a lot of money.  But if institutional money management companies ever figure out how rare, special and desirable investment grade contemporary jewelry is, it would sell fast.  A medium sized hedge fund could easily purchase every investment grade piece currently listed on Etsy in a busy afternoon and the total cost would be a rounding error on their balance sheet!