For my final project, I would like to explore art through its investment potential in a prospective portfolio. I think the trend we have been noticing through readings has shown that, for better or for worse, art has been evolving from a unique good to a commodity good, with the individual characteristics of art largely less important that its resale value in the secondary markets, especially when passed through channels like auctions. I think history has shown that art has been a relatively good investment; it is one of the only goods that has sustained a bull market for abnormally long periods of time, and can achieve substantial returns, which is of considerable significance given recent market conditions in the stock market and the near-zero returns of holding cash or cash equivalents. Since demand is, to some extent, artificially inflated do to the manipulation of buyer preferences, it seems like these steady, high returns can be sustainable in the long run, as the inherent value of art doesn't fluctuate, only demand, and the market has shown (through Hirst, Warhol, Gagosian, and other examples) that it is very good at maintaining or inflating demand. One of the most popular uses of art now is the buy-and hold mentality for the purposes of portfolio diversification. One this mindset grows in popularity, which it will if art continues to outperform alternative investments, art's path towards a pure commodity market will gain momentum. Questions I would like to address are: When was the general shift towards commodity art -- when did its use as an investment begin to gain popularity? What have its returns been over the years relative to other investments? Does the data actually show that it has sustained a large bull market? What percentage of art buyers can be labeled pure "investors," what is that proportion relative to other consumer segments, and has/how fast has that percentage been increasing? How has art failed in recessions -- is it generally recession-proof? What are the factors that would enable it to weather market downturns? Is the market for art liquid, is there active trading? Is the market mature, are there derivatives, options, futures, etc.? and others questions as well.

A possible outline might be:

  1. Intro, background
  2. Brief history of investment-side of art market
    1. including description of historical returns relative to other investments
    2. examples of art that have produces extraordinarily high returns
  3. Characteristics of investment market
    1. liquidity measures, trading volume, key players and exchanges, market today in terms of futures/investment vehicles
    2. description of general returns for all stratifications of art market, from most to least expensive
    3. how many investors are there? who are they, what is the trend?
    4. in terms of diversification of portfolio, what are its opposite investment types? what investment types does art hedge against, in terms of risk?
  4. Analysis of art as a commodity investment
    1. characteristics of art that make it an attractive investment
    2. features that enable it to withstand downturns, recessions
    3. features that differentiate it from other investments
    4. what artists/medium/other characteristics of art produce the best returns? the worst? and why
  5. Brief prediction of art investment trends in future
  6. conclusion / wrap-up

Of course, this could change as I start the project, but I think the analysis above would be fairly interesting. 

Sample graph of returns:

Some possible sources:
Art market vs. Stock Market
Art Market Description 
Art Market Monitor Article
Article about Art Market Bubbles
Economist Article about Hirst
Analysis about Art as an Investment
The Art of Investing in Art
Investment Returns and Risk Returns on Art
Art as a Financial Investment in Emerging Markets

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1 Comment

  1. Cheryl Finley

    Dear Charles, this is a great topic and you seem to have most of the bases covered, especially with the questions you bring to bear. I'd suggest that you take a look at the Tosca Photography Fund, as a way of thinking about how some art investment funds have operated recently. This fund, begun approximately 5 years ago is now closed and will be paying out investors in the spring. We covered the Tosca Photography Fund in depth on Day 14 and you can find their report there. You should also check out arttactic.com for podcasts that discuss this very topic, as well as detailed art market reports -- although their services are not free of charge, many of the podcasts are. You might also wish to do a search on the Wall Street Journal, which reports on art every Friday. Finally, I think that the auction house's recent gain in market share for first time sales of contemporary art might be an interesting coda and or angle for you to pursue. Many of the people participating in these sales seem to be speculating, especially in the area of contemporary art. Let me know how I can help. I wish that we had free access to some of the data bases that might be useful....