The Color of Money

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THE PLEASURE PRINCIPAL

Speaking of art and money, Peter Plagens comes across an economic study that attempts to quantify the pleasure principal.

Damien Hirst Bruce Nauman Andy Warhol Pablo Picasso Jasper Johns Francis Bacon Jeff Koons Jackson Pollock

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Green is good. But is it a good investment? Economist Don Thompson answers this and other questions about the art market in his much buzzed-about new book, The $12 Million Stuffed Shark, which hits U.S. stores next month. What follows is a sneak peek at Thompson’s colorful commentary.

Is a $12 million shark such as Damien Hirst’s famous work a good investment? What are the rules for art as an investment?

The answers may not be what you expected. In the overwhelming majority of cases, art is neither a good investment nor an efficient investment vehicle. Most art will not appreciate, and there are high transaction costs, including dealer markups, auction-house commissions, insurance and storage costs, value-added tax and capital gains tax when a work is sold. Like the stock or bond market, the art market is made up of many separate parts. The value of Old Master paintings, when taken as a group, has increased only moderately.

All art markets are cyclical. Back in the 1980s, the Impressionist and modern-art market seemed unstoppable. Japanese paper mogul Ryoei Saito came to symbolize the boom when he paid record auction prices in 1990 for two Impressionist works. The first, van Gogh’s Portrait of Dr. Gachet, 1890, cost $82.5 million. In inflation-corrected dollars, that was, until 2006, the priciest work ever sold. The second-most-expensive, sold a week later, was Renoir’s 1876 work Au Moulin de la Galette, for which Saito paid $78.1 million. Everyone concluded that the market could only go up. A few months later the art bubble didn’t deflate—it exploded, as economic uncertainty and the pending war with Iraq paralyzed buyers. At the Sotheby’s Impressionist sale in May 1991, 41 percent of the lots went unsold. London dealer Ivor Braka said, “It was not a question of how low the price was pitched; for many works, there were no buyers at any price.”

According to Jianping Mei and Michael Moses, two former Stern School of Business professors at New York Univer­­sity who track the market performance of fine art in their index, the market dropped from an index level of 100 in July 1990 to 45 in July 1993 and remained at about that level until July 2001, when it started to climb. It was 2005 before the prices of Impressionist, modern and contemporary artworks returned to 1990 levels. Even in 2005, one-fifth of the top 100 artists in 1990 had seen the value of their works fall over the previous 15 years; two-fifths were even; and only two-fifths were up.

So is contemporary art now a good investment? In the case of inexpensive art, the answer is definitely no. Eighty percent of the art bought from local dealers and local art fairs will never resell for as much as the original purchase price. Never. Not a decade later, not ever. Buy inexpensive art if you love it and want to live with it, but don’t do it in the hope that it will appreciate in value.

How about more-expensive art? There are examples of works that have resold for 10, 20 or 50 times their purchase prices. Surely those were good investments? Yes, they were, but the few hugely profitable resales are the ones that make the news. It is like reading about the one drill hole in 40 that finds oil. No newspaper reports on the 39 dry wells.

And no adviser cites Monet’s Le Grand Canal, 1908, sold at Sotheby’s in November 1989 for $12 million and reauctioned by the same auction house 16 years later for $10.8 million. We never read about the four out of five contemporary works that collectors bring in and that Christie’s or Sotheby’s, or even Phillips or Bonhams, rejects for its evening auction. Even artists whose works make it to auction can have short-lived popularity. Fewer than half of the modern and contemporary artists listed in a Christie’s or Sotheby’s contemporary auction catalogue 25 years ago are still being offered at any major auction.

Even with successes, there’s often more to the story. Take the Victor and Sally Ganz collection, auctioned by Christie’s in 1997. The 115 works sold for $171 million; adjusted for inflation, they had cost the Ganzes about $2 million in 1997 dollars. The works were purchased over a period of 56 years, with an average gross rate of return of 12 percent a year and a net of 10.5 percent, about equal to investing in stocks. The Ganzes were considered brilliant collectors; the Wall Street Journal coined the term Ganzmania for the excitement that surrounded the sale. Their profit history is hardly typical.