In the first part of my multi-part column for those who don’t know how to think about investing through upcoming turbulence, I made the case that inflation, interest rates and instability are nearly guaranteed to put an end to the frothy market that is creating all-round wins.
While there are many ways to skin a cat, the easiest way for me to understand how to protect and even create wealth during turbulent times is to look at those who have already done it; to take the lead from people who have been wealthy for a while despite recessions, depressions, booms, busts, and bubbles.
Four years ago, a friend rang me to arrange meeting up: “I’m going to Frieze, apparently the White Cube is exhibiting Hirst’s shark, I have a spare ticket if you want to come?” Uh- freeze? Sharks? Is this an aquarium? Count me in! After some back and forth my friend was nearly embarrassed to tell me “Damien Hirst’s Physical Impossibility of Death in the Mind of Someone Living sculpture at Frieze, the art festival?”
And that was the day I realized all wealthy people spoke a language that it was wrongly assumed I did too – the language of art. After this incident I started to notice it everywhere, another friend later asked me how difficult it would be to mimic a Jackson Pollock. I fumbled my way through that response, later googling Jackson Pollock and realizing they must have thought I was on crack cocaine.
Wealthy people all understand and know the world of art because they all live it – they are rampant intergenerational collectors of art. My resistance to this world was initially very high. Do they not have better things to spend their money on? Throwing paint at a canvas all looks the same, anyway. Even I could do that. Until I tried and realized one day the real answer to my friend’s question is no, it is not easy to mimic an original Jackson Pollock.
As it turns out, after spending some time catching up in the world of art, and now even being in love with the whole affair, that collecting art is about more than just being seen at a Christie’s auction or having your name on a small white placard in MoMA NYC that says “On loan from…”. It is a fantastic way to multiply your money in the medium but especially the long-term. It is an incredible investment class that is hidden from the plebs, like us.
After spending a couple of years trying to understand alternative valuation methods (which I wrote about in my first ever Currency column: What Is Value?), art became a main focus. Why is one painting worth more than another? How do you know which paintings will increase in value? Who decides how much your painting is now worth? Why can’t I sell my paintings for that price?
To simplify an industry that over complicates itself to keep people like us out, it appears to me that there are two main art markets. The first is the Not Yet Famous Market (NYFM). NYFM artists’ work is priced upon how colourful it is, how big the canvas is, and which gallery houses the work. It’s actually quite simple, although never really stated as such for marketing purposes.
This is where it helps to be rich. If you are a famous gallery owner, like Jay Jopling (White Cube) or David Zwirner (Zwirner Gallery), the artists you back will likely succeed. And the artists you back are likely people you know. Other wealthy people.
To contextualize this, it may help to understand that Jay Jopling’s son Caspar, whom I met at Harvard, ended up marrying Ellie Goulding, whom he met through his good pals Princess Eugenie and Beatrice. Eugenie, by the way, (like most of the royals who are all wealthy) loves art and worked at a gallery connected to Jopling in NYC. Another data point – David Zwirner’s son Lucas, whom I also met through Harvard, was engaged to Sienna Miller, who is also good friends with Prince Harry and Eugenie. Suffice to say: the art world is tiny and very wealthy, and money and art pieces tend to move in the same small circles.
The NYFM is a difficult market for multiplying money. It’s similar to venture capital in that you have to pick an artist that you think will become huge, and then make sure that your friends get in on the action too, to actually move the market in that artist’s direction. Since most artists only make it big once they’re dead, this is a very long-term bet, and perhaps the art you own will be worth something for your children or grandchildren. It is, by nature, intergenerational. The exceptions are more contemporary artists like Damien Hirst (made famous by Jopling), Jeff Koons (made famous by Zwirner), and my all-time favourite Yayoi Kusama, who are all still alive.
But who could have predicted that? In the short term, the NYFM is an expensive hobby whose dividends line the pockets of future generations. Return on investments in the NYFM are zero 99 per cent of the time, and millions the other 1 per cent. Like start-ups, if you invest in the right players, your odds change significantly.
The other art market worth discussing is the Already Very Famous Market (AVFM). This is probably what people think of when they think about art investing; auctions at Christie’s and very expensive pieces of art that you’ve seen in museums. This world also appears very elaborate on the outside, but the gist is that private owners of big pieces sometimes need to sell them for liquidity, through auction houses or art representatives. Most owners are very private, so prefer to get out-of-auction deals, unless it’s a superstar painting that could benefit from the price lift created by the circus of FOMO-inducing real-time bidding.
In order to get the piece, let’s say a Picasso, ready for sale, the owner will usually offer the artwork to a museum or exhibition for a season to put it into the public eye. This increases its value because the marketing materials for the Picasso will then include something along the lines of “as was recently exhibited in the outstanding 2021 Fractal Origins exhibition at the American Institute of Art”.
The prospective buyer will then think – wow, so many people admired this painting that will sit privately on my shelf, for only me to view! And voila, each museum exhibition can easily add $10k-$100k onto the price, depending on which museum and which exhibition.
I saw this happen myself. I happened to be staying at a friend’s house, whose walls adorned several Picasso’s. One day a curator arrived with boxes and some white-gloved workmen, told me he was from the Museum of Fine Arts in Boston and was there to collect a Picasso. After he had left with the Picasso, I wondered why I hadn’t asked for any identification and came close to calling the cops. Thankfully the painting was in fact going to the MFA for an exhibition (“Kindly on loan from Mr….”). Six months later, the collection of Picasso’s were sold. Like clockwork.
So, if you ever want some fine art for your portfolio, you can trawl museums for loaned pieces, and get your agent to contact their agent. But actually, buying a piece like a Picasso is not just about having enough money to do it. The AVFM is comprised of very few pieces, with lots of deep-pocketed bidders. In fact, even if you go to a Christie’s auction with proof of $100 million in your bank account, it is very unlikely that you will be allowed to bid on a piece that could go for $10 million.
The art asset class is where you see the difference between the rich and the wealthy.
Ultimately, even the AVFM comes back to being an established member of the wealthy club, and auction houses that sell famous works only allow bidders they know and like, who are serious about art, to bid in the first place. Sold some crypto and want to buy a Gerhard Richter? Forget about it. One of the richest people in China and thinking about American contemporary art? Unlikely. The waiting list to get onto the AVFM bids are years, sometimes generations, long. And so, it comes back to, a point – is there art in your family, what is in the rest of your collection, and are you likely to increase the value of the piece simply by being an owner?
So, what is an Irish investor to do? If the Collison brothers would struggle to get into Sotheby’s, what hope is there for the rest of us? Luckily, “disrupting the wealthy”, aka democratizing the world, is in full force in the art world too.
Unlike before, there now exists platforms whereby as a small investor you can buy a small portion of a great piece of art. If you can’t afford the $30 million for an original Gerhard Richter, perhaps you could afford $3,000 for a small piece of it. Or even $500 for an even smaller piece of it. Clubs like Masterworks, of which I am a member and seriously recommend, are now enabling shared ownership of some phenomenal artwork.
But a quick pause: by now a lot of readers will be wondering why anybody should own paint-flung-onto-a-canvas “art” in the first place. I get it, a lot of it is just weird. And you may especially question why you would want to own a fraction of something that looks like a child drew it, when you can’t even hang it on a wall. What’s the point?
Regardless of how aesthetically pleasing you find art, there’s a phenomenal reason to want access to this stuff. And that is simply because of the returns it provides over the long term. Over the last 35 years, while developed market equities had an average of 9.9 per cent returns, contemporary art achieved 11.5 per cent returns with a nearly zero correlation to other asset classes – an extremely important factor in inflationary environments. It’s close to the holy grail of investing!
According to art indices, Old Masters (pre-1800), Global Impressionist and Modern Art markets have all slowed to returns just below the S&P 500. However, Post-War and Contemporary art significantly out-performing the S&P. Check out the painting by contemporary artist Jean-Michel Basquiat, Untitled 1982, which returned upwards of a 5,000 per cent return and sold for over $100 million in 2021. By now you should be drooling.
The relevance and role of platforms like Masterworks is becoming increasingly important for the growing middle-class and is starting to give people like me an opportunity to hedge my personal portfolio in similar ways to the ultra-wealthy, albeit through the use of fractional ownership. Sadly, I’ll never have an original Gerhard Richter on the wall of my living room. But what I will have is a diversified portfolio that hedges inflation and never-experienced-before access to the Already Very Famous market.
And the really nice thing is that unlike the Dublin Old Boys Investment Network (wink wink), the management fees I pay to Masterworks go to creating the world’s most in-depth art valuation datasets that haven’t existed until now. This means that I am paying the world’s forefront art experts to manage my money in an investment style suited to my portfolio as well as help me create my own theses about the market I’m investing in.
Like I have said, the point is to do what rich people do, and so befriending Evan from Masterworks who helps me build my portfolio on Zoom may be the next best thing to me wining and dining with Caspar Jopling and David Zwirner in Manhattan galleries.
For now, I’m more than happy with a 1 per cent ownership of a very famous painting, and continue to hope that my children and their children get to own much larger shares of these assets as our economy and investing literacy surely matures. But in the meantime, I’ll continue to follow the art indices, keep an eye out for new artists at the Maddox Gallery in Mayfair, and follow the auctions should my windfall come early.
Post Note: This was supposed to be a two-part column which I am turning into an n-part column on personal finance and investing disruption in alternative assets. There have been lots of inquiries about my investment club – feel free to drop me a note on my website or Twitter if you’re interested!
