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Ars longa, vita brevis – does investing in art make financial sense?

"Art prices are determined by the meeting of real or induced scarcity with pure, irrational desire, and nothing is more manipulable than desire."


Robert Hughes, Australian art critic and author

A new record was set for the price of a piece of art with the sale of Leonardo da Vinci’s 'Salvator Mundi' for US$450m at an auction by Christie’s (pictured below).


Press reports suggest the buyer was Saudi Prince Bader bin Abdullah bin Farhan Al Saud but Christie’s has refused to comment.

Salvator Mundi

That the art world should be setting new records soon after many of the world’s biggest stock markets are setting new highs themselves is no coincidence. Over eight years of very easy money in the world’s leading economies have made funding cheaper for all sorts of asset purchases, from shares to pieces of art.


Investors in the best pieces have moreover done well: the seller of the da Vinci piece, Russian collector Dmitry Rybolovlev, paid US$127.5m for it in 2013, according to media reports. The Picasso piece fetched $31.9m at an auction in 1997, which represents an annualised 10% return over 18 years.


Not bad for an asset that doesn’t pay interest or a dividend.

Record auctions for South African artists

Locally, the highest price ever paid at auction was for an Irma Stern piece titled, 'Two Arabs'.  Strauss & Co Auctioneers fetched R21,166,000 for the lot.

Highest prices paid on auction for South African art works at Strauss & Co. Auctioneers


Irma Stern


JH Pierneef


Irma Stern


Irma Stern


Irma Stern


'Two Arabs' - Irma Stern


'Farm Jonkershoek with Twin Peaks Beyond, Stellenbosch' - JH Pierneef


'Arab' - Irma Stern


'Young Arab' - Irma Stern


'Gladioli' - Irma Stern

Source: Strauss & Co

A number of art investment funds have sprung up in recent times to try to take advantage of the potential returns available, and many private investors are looking at art as a way of diversifying portfolios or generating extra returns.


But before brushing up on your old masters, impressionists, and contemporaries, all the while trying to tell the difference between Botticelli and Giacometti, you should be warned of the downside before delving into this asset class. There is money to be made from Monet (if you have one), but identifying the works and artists that will give you the best returns is hellishly difficult.


Many private investors are looking at art as a way of diversifying portfolios or generating extra returns.
Boticelli's Venus and Mars
Venus and Mars by Sandro Botticelli, circa 1483

According to research by Arthur Korteweg of Stanford Graduate School of Business, the returns quoted in the market appear to be significantly overestimated and the risks underestimated.


Analysing the benchmark of the market, the Blouin Art Sales Index, he found that the real annual return of the asset class over the period 1972 to 2010 was closer to 6.5% than the 10% reflected by the index. Moreover, the Sharpe Ratio, a widely used tool for measuring risk-adjusted returns, came in at 0.04 over that period, less than the 0.24 headline ratio. Over the same period, the Sharpe Ratio on the S&P 500 was 0.3.


(The risk measures can vary a lot within the different genres, of course. The old masters will, as one would expect, show less volatility than the more contemporary styles.)


Korteweg says that this overestimation of returns and underestimation of risks comes from what is called selection bias. Selection bias arises where returns are based on repeat sales of a few fairly illiquid assets that are not sold at random. So the big auction houses will generally cherry-pick the works of art and artists that they believe will fetch the best prices. This distortion is not unique to art – house price indices can fall prey to the same problem. In both cases, the less popular items run the risk of being left uncounted.


Survivorship bias also plays a role: think of all of the unknown or little-known artists whose work has faded into obscurity. 

A further problem is that of “friction” in the system – commissions and fees that are paid to buy and keep art. These will tend to be much higher than on, say, a share or unit trust, and include costs like storage and insurance.


Can you make money by investing in art?

There are some who have done very well out of it, though they tend to be those in the industry, with the kinds of market power of the big auction houses or the major collectors (often working off an already large endowment).


For most of us, the traditional asset classes like equities are probably a better place to start. And one must recognise that part of the “wealth” that one draws from art (just like collectables and one’s house) is in the difficult-to-measure enjoyment that one gets out of owning it, whether it be social status or a genuine appreciation of a beautiful work.


It should be added that in markets generally (including art) average returns – with or without survival or other measurement biases – can hide a great deal of variation about the average.

Looking at it as the bell curve of distribution of returns, it is the exceptional outcomes on the right-hand tail of the distribution where one finds the incentive for people to invest. This is the case when paying high prices for companies with minimal or even negative earnings (Tesla for example) in the hope that it all comes off big time.


It is also the case when buying the works of an as yet unknown artist or a young colt or filly. We gamble for similar reasons, for the small chance of a big prize, even though we know, on average, we must lose.

Turning passion for art into profit

While researching this piece I came across this rather interesting piece on the web, entitled “How a working-class couple amassed a priceless art collection”.


The article tells the true story of a New York couple of modest means who nonetheless managed to amass an art collection worth millions of dollars, and had a movie made about them. Despite their modest means, Herb and Dorothy Vogel were passionate about art, attending exhibitions, visiting studios and befriending up and coming artists wherever they could. All the while increasing their knowledge of art and honing their skills in recognising emerging styles, they also built up their collection piece by piece.


Between the 1960s and the early 2000s, they filled their small apartment with more than 1000 pieces.

Between the 1960s and the early 2000s, they filled their small apartment with more than 1000 pieces. Because they could not afford gallery prices, they usually obtained the pieces of art directly from the artists themselves, achieved by befriending the artists and then cajoling them to sell them the pieces directly.


It also helped that the couple focused in the early days on styles that were not yet popular, like minimal and conceptual art, as opposed to the abstract expressionism that was so popular in the 1960s.


What’s also fascinating about the Vogels is that they never sold their collection, even when, in the end, it was worth several million dollars. They ended up donating the collection to the National Gallery, in return for a small stipend – which they then used to buy more art.

Dorothy and Herb Vogel at their movie premier


Despite modest means, Dorothy and Herb Vogel managed to amass an art collection worth millions of dollars.

Advice for art investors


The Vogels' story has some lessons for art investors, and perhaps for all sorts of investors, which we can summarise thus:


  • Have a real interest in the topic (whether shares or art) as well as a desire to keep learning and building one’s knowledge and skills.
  • Do it over the long term, by starting early and thus allow the effects of price appreciation over the years to work in your favour.
  • Avoid works and artists (shares and sectors) that are too much in vogue and hence likely to be overpriced, while seeking out value or styles and artists with a future.
  • Don’t be in a hurry to sell. Herb and Dorothy never sold any of their works and this chimes with Warren Buffett’s famous response to the question about what the optimal length of time was to hold a stock – forever!
  • If you can, try to reduce the costs of buying, such as commissions and the like.


Whatever the investment lessons, perhaps the best lesson to come from Herb and Dorothy is the fulfillment and mental enrichment they drew from following their passion.

About the author

Patrick Lawlor

Patrick Lawlor


Patrick writes and edits content for Investec Wealth & Investment, and Corporate and Institutional Banking, including editing the Daily View, Monthly View, and One Magazine - an online publication for Investec's Wealth clients. Patrick was a financial journalist for many years for publications such as Financial Mail, Finweek, and Business Report. He holds a BA and a PDM (Bus.Admin.) both from Wits University.