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Wednesday, May 17, 2006

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

The Joan Mitchell painting I have been writing about could be used to illustrate the opinion of many managing art investments today. Art, they claim, is an alternate investment class that keeps pace with or outperforms the market.

Most of these claims are backed up with reference to the Mei/Moses Fine Art Index, an index of the art market’s performance developed and maintained by two professors at NYU’s Stern School of Business. The index calculates the performance of the art market by comparing prices of works sold more than once on the secondary market over the last century.

The problem with this methodology is that it only looks at the winners. The major auction houses, the source of the data used to calculate the index, do not typically take work by artists who don’t have an established reputation. The index also does not account for work that goes on the block but does not sell.

The Joan Mitchell painting with its return of 11.9% CAGR is the sort of art market winner that serves as the basis for the Mei/Moses Index. The piece was bought early at a low price, was held for a period of time over which it appreciated significantly, and was sold at auction for a substantial profit. (This piece won’t, though, go into the index unless it is sold at auction a second time.)

That painting was purchased for very little money when Mitchell was a young, emerging artist and didn’t have the reputation she has now. What are the odds that a purchase like this is going to provide the return that this painting did? Probably very small: one or two times out of ten—if the collector has a great eye and is lucky.

I started this series of posts by referring to Dorothy Miller’s collection, and that’s where I’ll end. Miller had one of the best eyes for the art of her age of anyone collecting at the middle of the last century. She wasn’t, I’m sure, collecting as an investment. She bought early and held pieces for her whole life. Only after she passed away was her collection sold.

The collection contained small works by big name artists, and she definitely had her share of financial winners: Jasper Johns, Franz Kline, Alexander Calder, and Lee Bontecou, among others. But Miller also had pieces by other artists who have been forgotten by art history.

There was one piece in her collection that caught my eye and my imagination back in the fall of 2003 when the work was shown at Christie’s. It was a small ab ex painting, about the same size as the Mitchell piece, and it was every bit as good. The painting was by an artist about whom I had never heard. I did some digging at the time and discovered that he was a painter who had lived in New England for most of his life and had never developed more than a local reputation as an artist. All I could find about him was an obituary in a small town newspaper.

The piece was estimated, I believe, to sell for less than $1000. It ended up selling for slightly more than that. Assuming that Miller bought the piece in the mid-1950s for around $125, the painting as an investment barely kept pace with inflation and under-performed the stock market.

But what a little jewel of a painting it was.

Even MoMA curator Dorothy Miller, with her great eye and access to work by artists whose reputation she had a hand in making, was not able to consistently pick investment quality art for her personal collection. But she did consistently pick great art that she must have loved living with.

That’s what collecting ought to be about—picking pieces because you love them, and living with them over the long haul. About the best you can do is claim that art is a venture capital-type investment. A few pieces, if you know how to pick them, may provide outsized returns. Many more may mirror the market. The majority, though, will barely keep pace with inflation—if even that.

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