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Friday, May 12, 2006

Why Art Isn’t a Great Long Term Investment: A Case Study, Part 1 of 2

Almost every new collector asks the question at least once. “Is this piece of art I’m considering going to increase in value?” And almost any decent art advisor or dealer is going to answer in the same way. “It might. But don’t buy art as an investment. Buy it because you love it.”

Joan Mitchell, 1953The financial performance of the small Joan Mitchell painting (at right) that I mentioned in my last post provides an interesting case in point. The piece sold for $51,000 (including buyer’s premium) this week—just about at the mid-point of its presale estimate.

I wanted to determine how well the painting did as an investment for its owner, and I started with the Inflation Calculator. It told me that $125 in 1955 dollars (the year the owner bought the piece from Mitchell’s gallery) is the equivalent of $859 in 2005 dollars. So this lucky early supporter of Mitchell’s work beat inflation (which averaged 3.9% per year over that period) significantly with his or her investment. By how much, though?

To figure that out, I calculated the compound annual growth rate (CAGR) of the investment. Of the $51,000 purchase price, the seller took home a bit over $38,600 after the buyer’s premium and seller’s fee were subtracted. That means that this investment appreciated on average 11.9% per year over the period that the owner held the painting.

(As an interesting aside, the work was put up for sale at Christie’s in the fall of 1997 with a pre-sale estimate of $30,000-$35,000. It didn’t sell. If it would have gone at the mid-point of its estimate, it would have returned 13.4% CAGR—a much better return than it realized this week, even though Mitchell’s market is significantly more active now than it was then. Christie’s, it seemed, seriously overestimated the work’s value nine years ago.)

Over the time period that the owner held this painting, the Dow Jones Industrial Average has posted a CAGR of 6.3% and the S&P500 has shown a CAGR of 6.7%. Since its inception in 1971, the NASDAQ has performed better (9.4% CAGR) but still not as well as this Mitchell piece. (These index returns do not account for the reinvestment of dividends which really should be included to make this an apples-to-apples comparison. I would be happy to update the post if any financial types can provide me with the data to rerun the numbers.)

While the painting has outperformed these benchmark indices, it hasn’t shown a truly stupendous return. Well managed hedge funds will return 15-20% CAGR over a lengthy period. While the return on this little Joan Mitchell painting has been about as good (on a pure percentage basis) as could possibly be, when time is taken into consideration by looking at CAGR the return isn’t amazing. It did beat the market by a wide margin, but a smart asset manager can do significantly better.

Related: CAGR analyses of the secondary art market seem to be in the air this week.

Next: what this painting (and a similar one) tell us about recent theories of art as a viable investment vehicle.

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