The truth behind ROI in art investment

After my latest column on art investment. I received a few emails from some of the Oman Daily Observer readers asking me to be more specific with numbers about the profitability of investing in art pieces.

For simplicity I will limit my analysis to paintings, although art investment would traditionally encompass sculpture, and more arguably, jewellery or other forms of art.

According to the Wall Street Journal, art achieved an average 10.6 per cent return of investment in 2018 based on Art Market Research’s Art 100 Index. This sounds like a really exciting number, but one must consider that in calculating the average return, not all transactions are kept in account, and multi-million dollar auctions can skew the statistics significantly.

For instance, it is unrealistic to factor in the computation every single painting bought or sold in a year. Tens of thousands if not hundreds of thousands of paintings are sold around the world at little value behind closed doors and not in the spotlight of an auction.

This long tail of the market might represent a numerically important slice of the pie, but none of these transactions would make it into the headlines of international media.

Whereas a record-breaking auction is usually heavily publicised, like the Mayers of Chicago, who by sheer luck bought Robert Rauschenberg’s Buffalo II from Leo Castelli in 1964 for $16,900, and sold it more than 50 years later for $88.8 million (including fees).

Other recent record-breaking art transactions are David Hockney’s Portrait of an Artist (Pool with Two Figures) (1972) and Jeff Koons’s Rabbit (1986) — both of which were auctioned at $80 million. It is important to note that some of these acquisitions are not generated by an extravagant billionaire who “fell in love” with a one-of-a-kind piece of art.

Imagine for a moment the tax return filed by a hyper-wealthy individual generating billions of dollars in capital gain annually. What could be more appealing? Paying taxes straight away or rather performing some philanthropy with tax benefits attached? The latter sounds more credible, when making a generous donation to an art museum can potentially write off millions of dollars in taxes, in exchange for some glorified generosity recognition.

There is also another aspect of the profit evaluation bias.

According to the Blouin Art Sales Index, of the 2.3 million paintings sold between 1960 and 2010, a small sample of 32,928 paintings had a total of 69,103 transactions, indicating that they were sold at least once.

That represents less than 2 per cent of all auctions executed in a 50-year period. The other 98 per cent is still part of a private collection, sitting in a museum, or were sold privately outside of any statistics or news headlines.

So not all that glitters is gold in the art investment sphere. Too often we tend to react with excitement to stories of from-rags-to-riches and we dream to be the next talent scout able to make a lucky purchase of an undervalued future Picasso.

But it is probably as likely as striking the lottery once in a lifetime, which as we know, is certainly not a viable long term investment strategy.
[The writer is a member of the International Press Association]

 

STEFANO VIRGILLI
stefano@virgilli.com