The Color of Money

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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.

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.

And watch price trends. Most successful artists show a slow price increase in the first phase of their work, a steeply upward price trend in the second and a flat or downward price trend in the third. Decreasing returns set in, then negative returns. It is an S-shaped curve. You may be told that an artist’s work has tripled in value over the past 10 years, and that may be true. But it masks the reality that prices peaked two years earlier, that they have now dropped by a quarter and that the work now appears only sporadically, in secondary auctions. Plot prices as best you can, and when the steep rise ends and the flat phase seems to be starting, sell.

An interesting insight comes from David Galenson, a professor of economics at the University of Chicago who has studied the relative value of paintings. Galenson suggests that a pattern holds for the majority of successful artists: Their most valuable work is produced either early in their career, as in the case of Andy Warhol, or very late, as with Jackson Pollock. The younger innovators—think Picasso—are conceptual artists who make breakthroughs by introducing new ideas of painting at an early age. The older innovators—think Cézanne—develop their art through a lifetime of work, with their best-recognized contributions coming later, as the result of trial and error. This also suggests that for investment purposes, you should ignore older artists, because the market will have found them first, and midcareer artists, because they will already have had increases in value. The greatest return comes from discovering the innovators, the ones who will help shape art for decades to come. Try first to identify trends, and then identify the young innovators. That is how someone like Charles Saatchi collects.

When you visit galleries and auction houses, do not expect to like very much of the contemporary art you see, and don’t be put off by disliking everything in a show—everyone dislikes most of what they see. There is an art world saying that you have to see hundreds of works you don’t like before you begin to understand what you do like. This is a good argument for attending art fairs. Look at 1,000 works before you buy anything, and expect to see an additional 500 for every additional purchase. According to MoMA, the average patron looks at a work of art for seven seconds. When you enter an art fair or gallery room, try the “which one as a raffle prize” approach, or else look around and think, “If I were going to steal one, which would it be?” Most people have thought more about imaginary theft than about connoisseurship. Once you have circled the room, spend 30 seconds looking at the object of your criminal lust, and try to understand why you chose it.

When it comes to the work of Western artists, what kind of painting will appreciate most? There are general rules. A portrait of an attractive woman or a child will do better than one of an older woman or an unattractive man. An Andy Warhol Orange Marilyn brings 20 times the price of an equal-size Richard Nixon.

Colors matter. Brett Gorvy, cohead of contemporary art at Christie’s, claims that the grading from most salable to least is red, white, blue, yellow, green and black. When it comes to Warhol, green moves up. After all, green is the color of money.

Bright colors do better than pale colors. Horizontal canvases do better than vertical ones. Nudity sells over modesty, and female nudes for much more than male. A Boucher female nude sells for 10 times the price of a male nude. Representations of people do better than landscapes. A still life with flowers is worth more than one with fruit, and roses are worth more than chrysanthemums. Calm water adds value (think of Monet’s “Water Lilies”); rough water brings lower prices (think of maritime pictures). Ship-wrecks bring even less.

Purebred dogs are worth more than mongrels, and racehorses more than cart horses. For paintings that include game birds, the more expensive it is to hunt the bird, the more the bird increases the value of the painting; a grouse is worth three times as much as a mallard. There is an even more specific rule, offered by New York dealer David Nash: Paintings with cows never do well. Never.

A final rule was contributed by Sotheby’s auctioneer Tobias Meyer. Meyer was auctioning a 1972 Bruce Nauman neon work, Run from Fear/Fun from Rear, which referred to an erotic act. When the work was brought in, a voice from the back of the room complained, “Obscenity.” Meyer, not known for his use of humor on the rostrum, responded, “Obscenity sells.” Often it does not, but for a star artist like Jeff Koons or Bruce Nauman, it does. It did.

From The $12 Million Stuffed Shark by Don Thompson. © 2008 by the author and reprinted by permission of Palgrave Macmillan.

"The Color of Money" originally appeared in the August 2008 issue of Art+Auction. For a complete list of articles from this issue available on ARTINFO, see Art+Auction's August 2008 Table of Contents.