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« Elsewhere | Main | Elsewhere »

September 03, 2003

Did I Mention the 12.3% Rate of Return?

Michael:

Psssst. Let me give you a little investment advice. Forget stocks and bonds: go with art.

According to a little graph in the August 23-29 issue of The Economist , over the past 50 years art has significantly outperformed the S&P 500, to say nothing of U.S. 10-year Treasury bonds. If this little chart is to be believed, $100 invested in fine art in 1952 would have grown to approximately $33,000 in 2002. According to a handly little compound growth calculator I found on the Internet, that figures out to around a 12.3% annual compounded rate of return. (And by the way, while the art market is down since its late ‘90’s peak, it’s only down 10%, not the roughly 33% the S&P 500 is down.)

Of course, like any other investment advisor, I have a little fine print to disclose. These numbers come from a study performed by Michael Moses at New York University’s Stern School of Business and Jianping Mei. They tracked the prices of some 5,000 paintings that have been repeatedly sold at auction since 1875. My suspicion is that most of these repeatedly auctioned 5,000 paintings are probably Old Master efforts, not your art student brother-in-law's paintings. Oh, yeah, another thing, art prices are kind of volatile, at least since the late 1980s, so if you had to sell at the wrong moment, you probably wouldn't do quite this well. And, one more thing: it might be a good idea to put out a sign saying “For Sale by Owner” if you want to get out of the market without paying extortionate commissions. If you sell at auction, you and the buyer together will have to shell out 25% of the sales price to the auction house.

Well, who said getting rich was ever easy? And think about this: while your investments in art won’t pay you any cash income while you own them, they will certainly impress your friends and neighbors, especially if you mention that Rembrandt over there on the wall is earning you a 12.3% compounded annual rate of return. And the best part is, when you know people are seething with envy, you can look noble and say, “Of course, I bought it for the aesthetic returns.”

Cheers,

Friedrich

posted by Friedrich at September 3, 2003




Comments

Finally, a way of fusing the aesthetic and the practical. If only. Hilarious, thanks.

Posted by: Michael Blowhard on September 3, 2003 12:29 PM



Two words: survivor bias. You may get different results if you track 5000 works of art that first sold at auction 1875 and track them forward, rather than tracking works of art from that period that have sold recently and track them backwards. The same effect can overstate stock returns in not taking account all those companies that are no longer listed on the exchanges because of business failure.

Posted by: rashomon on September 3, 2003 3:02 PM



Rashomon, no offense, but I got the idea Fried was aware of the flaws in the formula and the jokes in the "fine print" paragraph make that point.

However, it is true that all of my art, with the possible exception of a couple of thrift store paintings, is worth more than what I paid for it. At least, other works by the artists are selling for more. Perhaps I have a knack for picking the runt of the litter.

That said, my financial stratgey still hinges on previously unknown relatives leaving me a coal mine.

Posted by: j.c. on September 3, 2003 3:29 PM



The problem with art-as-investment is that it's hellishly difficult to find an exit strategy. You buy a painting by some up-and-comer who then becomes huge, but where and how are you going to sell it now it's worth much more than you paid for it? The artist's gallery probably won't be interested, since they're going to be mainly interested in selling off the artist's more recent work, and this isn't the sort of thing which is likely to sell on eBay. Auction houses are pretty much your only bet, and selling at auction is notoriously unreliable: it all depends on whether or not an underbidder turns up that day.

Posted by: Felix on September 3, 2003 5:26 PM



Rashomon is correct that I didn't explicitly take survivor bias into account in my skepticism about art investing. But since he's smart enough to bring this point up, and I wasn't, I'll chime in: "Yeah and how about survivor bias?"

Posted by: Friedrich von Blowhard on September 6, 2003 1:35 AM






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