Can you make money investing in art?


Andy Warhol’s Silver Car Crash (Double Disaster) sold for a record $105.4 million in November 2013.

Yes. People have made millions buying art purely for financial reasons. Art funds have generated significant profits (the most famous being the Peau de l’or The Peau de l’Ours or Bearskin Club in 1904 and the British Rail Pension Fund in 1974). There are many collectors that have made fortunes from art (or exceeded the fortunes they started with) and newspapers regularly report record sales. Art speculators have probably been around for as long as professional artists. A lot of people have made money by buying and selling art.

But we do only hear about the winners. Art price indexes only register lots that have been sold (so do not record the times when works fail to meet their reserves) and many buyers have quietly hidden losses by selling pieces privately through dealers. Auction press releases, obviously, only highlight lots that have broken records.

Unlike yachts or business jets, art can genuinely appreciate. The supply of (real) Old Masters will not increase and demand for museum quality pieces has risen as the number of ultra high net worth individuals and art museums in the world has grown. The last few years has seen a huge increase in demand for contemporary art.

As prudent financial advisers always warn: The value of investments can go down in value as well as up, so you could get back less than you invest. This is as true for art as any other investment.

Apart from (possible) rising values,people selling art as an asset class or investment often say that the main advantage of art is that it is not correlated with the stock market. This makes sense. The art market is not correlated with share prices in the same way that apples are not correlated with giraffes. They are two completely different things.

The art market is not correlated with share prices in the same way that apples are not correlated with giraffes. They are two completely different things.

It is a mistake to compare art with established financial markets. There are far more differences than similarities. The art market is unregulated. It is common for dealers to try and protect the values of artists they represent by buying at auction for example. This would be illegal if practiced by financial institutions in real financial markets (as recent cases for Libor rigging have shown). Shares are extremely liquid and traded. Art is not.

Buyers of financial assets, like bonds or stocks, buy for what (they think) are rational reasons. Although they do get things wrong – as shown by bubbles (which are also common in the art market) – in theory they should be able to justify valuations.

The art market is not a rational one. In fact it is fiercely proud of being irrational. Most collectors and buyers would never claim they are acting for purely economic reasons. Whilst art funds are rational – and looking for pricing inefficiencies – they are not the main drivers of prices.

There are many things that make art a relatively unattractive investment. Transaction costs (dealer or auction fees) are significant. Ownership costs (storage, insurance) are relatively high. Art investors need to manage serious issues  like authenticity, provenance, smuggling, tax evasion and looting. And although art indexes help, it is very hard to mark your collection to market. Whilst it is common to hear stories about people buying art to hedge them against foreign exchange, it is important to remember that currencies can move both ways.

The problem with valuing art is significant. Stocks and bonds are fungible – they can be easily evaluated and traded. One Microsoft share is identical with another. The same is not true with art works. Two pictures painted by the same artist, on the same day, can be worth completely different amounts. Whilst (amazingly) people still forge share certificates, art fraud is far more widespread.

Organizations like ArtNet, ArtPrice, Skate’s Art Market Research, Art Economics and others do a great job of sourcing data where possible but much of the market is opaque. True financial markets trade on data. The art market trades on stories.

True financial markets trade on data. The art market trades on stories.  

There are many other differences. Although things are changing with crowd funding, most capital markets have significant barriers to entry. Not all companies can issue bonds or float. Anyone can try to be an artist. Companies rarely shift overnight into a new market. Artists can change their style completely.

In the long run, all markets reward expertise and this is especially true in the opaque art market. If you are primarily looking at buying art in order to make money you should hire experts or invest in (one of the few) reputable art funds. Inefficient markets offer great opportunities for smart traders. And the art world is definitely not an efficient one. As with the lottery you can also just be very lucky.

If you are looking at buying art for other reasons: enjoyment, fun, desire, or compulsion – you already know that profit is not your prime motivation. Obviously we all want to discover an artist we like and then have the validation (and profit) of seeing their art soar in value.

But you already know that is not why you bought that piece last weekend.


Questions to ask before investing in art

  • Is the dealer credible?
  • Is the piece listed as stolen by the Art Loss Register or Art Claim
  • Could it be a fake (especially with forger’s favourites like Jackson Pollack) – what provenance does it has?
  • Who owned it between 1935 and 1950 – was it stolen by the Nazis?
  • Is it really by the artist?
  • What is it made from? How long will it last for? How do I need to store it?
  • Do I love it? Will I get bored of it?