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Maslow’s Hierarchy of Needs and Investing in Art

Maslow's Hierarchy of Needs and Investing in Art

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.

The Monumental Clash Between Spenders and Savers

The Monumental Clash Between Spenders and Savers

We live in a world dominated by the financial clash of two titanic groups: spenders and savers.  Spenders like to borrow, shop and consume until the credit card is declined.  Savers enjoy squirreling away their hard earned lucre in bank CDs, savings accounts and the stock market.  Spenders and savers can be coworkers, neighbors, friends and family members.

And yet these two groups are always at odds.  Spenders want easy money policies.  They want low interest rates, readily available credit and high inflation.  These attributes are conducive to their preferred free-spending financial lifestyle.  Savers, on the other hand, favor a more restrictive monetary system.  They desire high interest rates, tight lending conditions and little or no inflation.  These economic circumstances allow savers to reap the full reward of their saving activity.

If you are reading this article, there is a good chance you are a saver.  Unfortunately, if that is the case then I have bad news for you.  Since World War II the U.S. financial system has been operated in favor of spenders.  The U.S. Federal Reserve and U.S. Treasury have cooperated for the last 75 odd years to ensure that inflation is always appreciably positive, interest rates don’t rise too high and credit is always accessible to both businesses and consumers alike.

There was a little bit of a silver lining for savers though.  While the U.S. financial system has been generally tilted towards spenders for decades, this bias wasn’t egregious.  Bank savings accounts paid interest rates above the rate of inflation.  The Federal Reserve tolerated moderate inflation, but always reigned in excessive dollar devaluation.  And credit availability was traditionally subject to fairly strict qualification rules.  These compromises may not have been ideal for savers, but they were good enough most of the time.

And then the Great Financial Crisis of 2008-2009 hit.  Bank savings accounts and CDs started paying practically nothing.  The Federal Reserve, along with central banks all over the world, enthusiastically declared that they would tolerate as much inflation as they could create.  And the U.S. Treasury bailed out systematically important, too-big-to-fail banks like Citibank, Goldman Sachs and J.P. Morgan Chase on the implicit condition that they make loans available to anyone who can fog a mirror.  Suddenly the age old struggle between spenders and savers didn’t seem so balanced anymore.  Spenders – governments, corporations and individual consumers – were the big winners while savers were left behind.

This brings us to the present.  Today we live in an economy that is highly financialized, dominated by grotesquely oversized banks that feed at the government teat.  Traditional investments, regardless of whether they are stocks or bonds, pay miniscule dividends or interest.  And, much to our chagrin, we’ve discovered that debt is the new financial heroin of our age.  But the real question is where do we go from here, especially those of us who are savers?

Unfortunately, I have more bad news for savers.  Inflation is basically a form of wealth redistribution from savers to spenders.  For many decades after World War II inflation was low and this process of redistribution was, consequently, slow.  But in spite of inflation not being particularly high since the Great Financial Crisis, redistribution has increased in pace.  This is primarily due to the fact that savers can’t earn a guaranteed return above the rate of inflation anywhere.  But this uneasy stalemate between spenders and savers will not last forever.

While it probably won’t happen within the next few years, one day the United States will experience a currency crisis.  I define a currency crisis as being an abrupt decline in the foreign exchange value of a country’s currency by anywhere between 50 and 90 percent.  This event will shake the foundations of the international financial order.  Currency crises usually happen after many years of a slowly deteriorating fiscal position.  As the grandfather of modern economics Adam Smith once commented, “There is a great deal of ruin in a nation.”  In fact, it is usually telegraphed for so many years beforehand that everybody assumes it won’t or can’t happen.  However, when the crisis finally hits, it often unfolds faster than even the most pessimistic observer thought possible.

How can a saver protect himself?  Ultimately, all wealth is physical.  Central banks, financial institutions and corporations can print money, issue debt and sell stock.  But none of these actions truly increases the amount of wealth present in an economy.  They are dilutive, redistributive processes, effectively moving wealth from savers to spenders.  The astute saver will realize this and convert much of his hard earned money into tangible assets.  Whether those assets consist of bullion, real estate, commodities or fine art and antiques is largely a matter of personal preference.  What is important is that you do it while you still can.  The final destination of a debt saturated economy is always a currency crisis and the clock is ticking for the United States.  Art, antiques and other tangible assets are a great way to protect yourself.

The Myth That “There Is No Alternative” to Overpriced Traditional Assets

The Myth That "There Is No Alternative" to Overpriced Traditional Assets

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.

Art Versus Traditional Investments – the Power of Compound Interest

Art Versus Traditional Investments - the Power of Compound Interest

Some of the best investments – the ones we dream about as market observers – are those that provide substantial recurring cash flows for many decades into the future.  This is really the ultimate underlying goal of growth, dividend growth and value investing equity strategies.  And proponents of these strategies will claim, to a man, that choosing these stocks is both easy and lucrative.  However, this assertion is one of those devious lies that is so compelling because it contains a bit of truth.  Just a handful of stocks have given their fortuitous owners very high returns over long periods of time.  I wish the aspiring millionaires of the world good luck picking out those specific companies beforehand, though.

Let’s look at an example: Coca-Cola stock.  If you had invested in this iconic American company during its IPO in 1919, you would have come away with a stellar annualized return of 14.27% (dividends reinvested through 2015).  Sounds great, right?  Except, as the incredulous among us already know, the real world doesn’t work that way.  For one thing, for every company that performs to the exceptional level of a Coca-Cola, there are at least a hundred companies with far more pedestrian returns and another hundred companies that never make any money.

So let’s construct a hypothetical stock portfolio that reflects this reality: 1 superb company, 200 mediocre companies and 100 failures.  We’ll assume our superb, Coca-Cola like company returns 14.27%, while our mediocre companies return 5% and our failed companies return nothing.  Once we run the numbers we find that our real life stock portfolio returns a less than inspiring 3.37% per annum, assuming annual rebalancing.

Let’s compare this more realistic stock portfolio to my preferred asset class: investment grade art and antiques.  While performance data is notoriously difficult to find for this asset class, I have cobbled together a return calculation using the 1912 edition of the Sears mail order catalogue.  In particular, I chose a women’s Elgin pocket watch (size 6) with a 15 jewel movement and a solid 14 karat gold hunting case.  This pocket watch sold for $27.60 in the 1912 Sears catalogue and would have been considered a good, but not great, timepiece during the period.  To estimate a current value, I checked eBay for similar watches that sold in the past few months and determined that $900 was a reasonable price.

Upon running the numbers I found our watch’s performance over the last 104 years was 3.41% a year – on par with our real life stock portfolio.  Of course this equivalency charitably assumes the mediocre companies in your stock portfolio stay in business for 104 years!  But that isn’t the end of the story.  You see, I rarely advocate buying new luxury goods as investments.  They generally cost too much to make sense as investments.  The secondary market is a much better place to pick up investment grade art and antiques for cheap.  If we apply this dictum to our pocket watch, the story changes a bit.

I assume that 10 years after the watch was originally sold (1912) you could have purchased the same piece second-hand (in 1922) for 60% of the original purchase price ($16.56) and then spent a generous $4 on servicing it.  These are not heroic assumptions; on the contrary, they are actually quite modest.  I’m sure any half-way competent fine art investor could have done considerably better.  Anyway, our new return number is 4.1% over 94 years, a clear win over our real life stock portfolio.

“But wait!” I hear you cry.  “Your real life stock portfolio wildly understates equity returns because indices like the Dow Jones Industrial Average and S&P 500 have performed far better than this for many decades!”  Ah yes, the good old lie of the index.  First, indexes are not truly passive.  They change constituents on a regular basis, usually once a year.  “No problem.” you reply, “I’ll just invest in an index fund to mimic their results.”

Investing in index funds is a great idea.  Or, I should say, it used to be a great idea.  Passively investing in an index wasn’t possible until stock market guru John Bogle made it a reality by establishing the Vanguard 500 fund in 1976.  There simply weren’t any available investment vehicles in existence similar to an index before this time.  I readily admit that passive index investing was a phenomenal idea in the 1970s, 1980s and into the 1990s.  But then passive investing became conventional wisdom.  And once a concept becomes conventional wisdom it rarely remains a good idea.

The popularization of passive index investing has created two ironic effects.  First, it has caused indices to perform better since the late 1990s than they would have otherwise.  All passive investors, by definition, buy shares in index companies, thus driving up demand for those stocks.  This boosts the prices of these index stocks specifically and the broad indices more generally.  Second, the broadly overvalued indices that result from this indiscriminate, passive investment demand invariably lead to poor future performance.  After all, the most important attribute of any investment is the price you pay for it.  Buy it cheaply enough and even an otherwise unremarkable company becomes a winning investment.  Likewise, overpaying for even the finest of companies will result in subpar investment returns.

Investment grade art and antiques suffer none of the guessing games inherent in the stock market.  The layman can easily choose antiques that adhere to the five principles of investment grade art: as large as possible while preserving portability, quality materials and construction, durability, scarcity and stylistic zeitgeist.  If you follow these simple rules when investing in antiques you can readily achieve 3% to 5% returns – although probably much, much better – compounded effortlessly over a century or more with implicit inflation protection.  In contrast, the average lifespan of a company in the S&P 500 index today stands at only 15 to 18 years.  That seems like an exercise in guaranteed frustration for stock investors as they scramble to cycle flavor-of-the-month stocks in and out of their portfolios in rapid succession.  And the more buy or sell decisions an investor is faced with, the greater the chances he will make one or more crucial errors.  It is clear to me that art and antiques are the better, safer way to build long term wealth.