Art and antiques are widely underappreciated investment vehicles that have major advantages over traditional paper assets – like beauty and historical importance. But they do have a few drawbacks. One of their major flaws is that, unlike stocks and bonds, art isn’t fungible. Fungibility refers to an asset’s ability to be subdivided into units that are essentially the same.
When you buy 100 shares of Procter & Gamble stock, you know that your 100 units are just the same as everyone else’s 100 units. They will all receive the same dividends at the same time and entitle their owners to the same voting rights. Fungibility allows financial units to be freely interchanged with other, identical units or combined seamlessly into larger units.
The concept of fungibility has important implications for the investment industry. For one, it allows good investment ideas to be readily scaled up to almost any size required. For instance, let’s suppose that an investment advisor has astutely determined that the drug manufacturer Pfizer is a good buy. He can advise all of his clients to buy Pfizer common stock without worrying that one client will accidentally receive shares that are different from another client. One share of Pfizer stock is completely interchangeable – fungible – with another Pfizer share. And if one client only has $1,000 to invest in Pfizer stock while another has $1,000,000 to invest, either amount can easily be accommodated by purchasing different amounts of the same, fungible, Pfizer common stock units.
Other assets besides stocks and bonds display the property of fungibility, too. Gold and oil are just two examples of fungible commodities. One troy ounce of gold, provided it is of comparable fineness, is just as good as another ounce of gold. Likewise, a barrel of sweet crude oil can be interchanged with any other barrel of sweet crude oil, assuming they are both of the same grade. This makes the trading and delivery of these fungible commodities much easier than it would be if they weren’t fungible.
Investment grade art and antiques, however, are not fungible assets. Every painting by French impressionist Claude Monet is unique, despite the fact that he sometimes painted multiple versions of the same subject. Even fine art that is ostensibly interchangeable really isn’t. A copper-plate engraved print might have a run of several thousand nominally identical pieces, but that changes as soon as they leave the presses, if not before. Some prints will invariably be damaged from being stored improperly while others will be kept almost pristine. These prints, even though theoretically identical, will trade at radically different valuations in the secondary market due to their different conditions. And this assumes that the printing process produced completely identical prints, something that rarely proves to be true in the real world due to plate wear and other minute printing variations.
The differences between fungible and non-fungible assets have important implications for investors in the art and antique market. First, it should be obvious that the devil is in the details. The success of a general recommendation like “buy medieval illuminated manuscript leaves” may hinge completely on the individual leaves chosen. An investor who overpays for poor quality illuminated manuscript pages may suffer a loss while another investor who buys high quality leaves at a reasonable price may turn a large profit.
The second ramification of art’s non-fungibility is that it is difficult to scale purchases, even if you do have the knowledge necessary to choose good examples. For example, it may be easy enough for a small art investor to quickly put $1,000 to work in vintage fountain pens. But another investor with $100,000 to invest may find it impossible to deploy that amount of money in desirable pieces quickly. He may have to wait for several months in order to successfully establish his desired position at fair prices.
Despite these drawbacks, I don’t think that the best approach to art and antiques is to avoid them because they are non-fungible. Instead I believe it is necessary to invest in them opportunistically. In other words, when you see a good deal in the antique world, jump on it. Chances are it won’t be there for long. If you wait until you are “ready” to deploy funds, you’ll likely be disappointed.
I speak from personal experience on this point. I have lost many excellent pieces because I didn’t feel like I was in a position to buy yet. I regret each and every one of those masterpieces that I passed up. The corollary to investing opportunistically is that sometimes you must have patience. Don’t invest in mediocre or subpar antiques just because you feel compelled to deploy your funds today. Better items are sure to come along eventually and missed opportunities are recouped more easily than losses.
