The most successful work from the Ganz collection was Picasso’s 1932 painting La rêve, purchased for $7,000 in 1941 and sold in 1997 for $48.4 million. This seems a staggering return. To put that gain in perspective, had the Ganzes invested the $7,000 in a portfolio of small-company stocks in 1941, by 1997 the stock would have been worth $46 million. If we include insurance costs of about $4.9 million over the period they held the Picasso, the stock investment would have produced a greater profit. Of course, there is no emotional benefit from hanging stock certificates on your wall. (The economist John Picard Stein tried to quantify psychic returns and concluded that they were equal to a return on investment in art of 1.6 percent a year.)

Which brings us to an interesting fact: Big-name artists like Picasso, Monet and Renoir actually underperform the art market as a whole. Mei and Moses claimed in a 2002 article in the prestigious American Economic Review, “If you slice the art market into thirds by purchase price, the work in the top third does not appreciate as much as that in the middle third, and work in the middle third does not appreciate as much as that from the bottom third.” They also concluded that during every armed conflict of long duration of the past century, art indexes outperformed major stock indexes.

So what about the work of Picasso, who might be assumed to have the lowest long-term risk of any artist because of his role inshaping 20th-century art? Picassos combine the best attributes of investment-quality art: They carry the signature of an artist familiar even to those who know little about art. The work is recognizable from across the room (“Wow, ain’t that a Picasso?”) and advertises the owner’s financial and cultural status. What can be wrong?

What is wrong is the already-high prices. The top third in the Mei/Moses index underperforms because at higher price levels, there are fewer buyers. When Picasso’s Dora Maar au chat, 1941, sold at Sotheby’s for $95.2 million in 2006, becoming the second-most-expensive painting ever auctioned, it was hailed as a great portrait. But to be a great investment, Dora Maar would have to resell, seven years later, for almost $200 million, assuming the buyer would settle for a modest 10 percent annual compounded return after expenses.

Even if Dora Maar had been resold a few weeks later, the price would have had to be almost $110 million to compensate for auction-house costs and insurance. Would there be another two collectors ready to purchase this painting? It takes two for a bidding war; one bidder from the previous auction is now the owner, and the other dropped out one bid earlier. Of course, Dora Maar is a trophy piece; one art market theory is that there will always be bidders for trophy pieces—a major Klimt or Bacon or Johns—and that a record-price trophy is a safer bet than a second-most-expensive trophy. But trophy art might be a foolproof investment only if the buyer can guess which works will still be considered trophies seven years later.

Purchasing a nontrophy work from a lesser-known artist or school of art carries the risk that in 10 years, work by the painter or school will appear so rarely that collectors will have lost interest. This is happening now with Fauvist work by Maurice de Vlaminck, André Derain and Louis Valtat. There are far fewer bidders for each work than was true a decade ago.

Despite all these factors, if you still want to invest in contemporary art for profit, what are the guidelines?

Look for work costing from $50,000 to $100,000. Avoid the blockbuster, highest-priced work by an artist, not just because of the “underperformance of masterpieces” but to diversify risk, the same way you purchase a portfolio of stocks rather than invest everything in one company. An investor is almost always better off with 10 works at $50,000 each by developing artists than with a single work costing half a million dollars. If the investor buys at auction or on the secondary market from a dealer, he may find an artist’s early work whose rarity value will be high.

If you don’t want to simply buy and hold the work for 20 or 30 years (which is what most experts would suggest), then watch the artist carefully. If he goes more than a couple of years without a major gallery show or is dropped by his gallery and not picked up by one of equal status within three months, sell fast.