Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Who is the butt of the joke here? Sotheby’s just sold a banana stuck to the wall with duct tape entitled “Comedian”. Cryptocurrency entrepreneur Justin Sun bought the artwork by Maurizio Cattelan for $6.2mn including fees.
Sun said he would eat the banana.
If you have conventional tastes in art, the joke is on Sun for wasting his money. But that would also mean the joke is on you, from Sun and Cattelan’s likely viewpoint. Enraging the hidebound bourgeoisie is a traditional pursuit of artists. Crypto bros now participate.
What better way to wind up lovers of Old Masters and fans of investment-grade bonds than by awakening their fear of missing out? “Editions” of Cattelan’s duct-taped bananas (which can be replaced when required and come with certificates of authenticity) previously sold for $120,000-$150,000.
But you would be bananas yourself if you regarded art as an investment. That is my takeaway after selling a far cheaper artwork. I clung on to it for 20 years believing it was appreciating steadily. My return on capital was represented not by a banana, but a doughnut (zero).
My real reward was a lesson in behavioural finance, the subject of this column.
There is no objective benchmark for the quality of an artwork. To have serious value it needs to fulfil three mutually dependent criteria: exclusivity, authenticity and desirability. I owned an old oil painting. This made it unique and therefore exclusive. But was it authentic?
I took it to an auction house.
“There are an awful lot of fakers imitating this artist,” the expert said.
My heart sank into my boots as she examined the brushwork.
“This is genuine,” she said.
My heart rose from my footwear.
“But it’s a bad painting,” she concluded, leaving my ticker floating at knee height.
Her judgment augured poorly for desirability. This is determined by expert opinion and fashion. Trends develop unpredictably at the whim of wealthy collectors and dealers. They decide which artworks are status symbols.
The cachet of the artist who created my painting has been waning. I sold for roughly the nominal price estimated 20 years ago, implying a real-terms loss.
I have no complaints. A kind relative gave me the picture. I had enjoyed looking at it. My only outlay had been insurance premiums.
Price discovery is much more entertaining at a West End auction house than on a Bloomberg screen. There was an auctioneer with a gavel and assistants taking phone bids, like in the movies.
Leaving the auction, I realised my own price outcome was only a surprise because I had fallen victim to the “endowment effect.” This is the tendency of owners to overvalue personal possessions.
I had also deluded myself that my picture was appreciating because auction prices for art rise steadily with time. This fosters the idea that art can be viewed as an asset similar to equities.
That is also an error. But it does not stop some dealers from promoting “art as an investment”. Some quote auction price increases and indices derived from them as if they were investment returns. One brochure claims contemporary art has outperformed the FTSE 100 by 400 per cent over a few years. A commonly occurring “return” figure for contemporary art is 7.5 per cent annually.
Auction prices rise in line with the finances of the wealthy. But auction houses and dealers only handle art they believe they can sell, embracing newly fashionable artists and shunning those that have lost lustre. They take a top slice of available inventory.
Art index compilers may cherry pick further, by excluding rarely-traded names from the auction price data they use. The level of survivorship bias in art price indices is far more extreme than for key share indices. Unsurprisingly, you cannot buy into them directly.
Dealing costs are much higher for individual artworks than for securities and depress paybacks accordingly. Unless you are good at haggling, expect buyers’ fees at art auctions of 20 per cent or more. Sellers pay roughly half that.
In an oft-cited 1986 paper, William Baumol described art investment as “a floating crap game”. That made it sound rather like the business model of UK water utilities. What the US economist actually meant was that prices are highly unpredictable and dealings are unregulated.
Tracking the price performance of a series of artworks, he calculated median annual returns of 0.85 per cent. That was two percentage points less than the risk-free return provided by US Treasuries.
“The overriding message is that you should buy art because you love it,” says Peter Stanyer, co-author of How to Invest. He has further advice as a former investment director of Railpen, a pension fund that sold off its art: “Commend yourself on your great skill if it goes up in value. Curse your bad luck if it falls in price.”
So what happens to all the artworks collectors are continually buying? The melancholy truth, according to Stanyer, is that most of it is eventually destroyed, intentionally or through neglect. Art is not just a prestige consumer good. It is a consumable like margarine, only over a longer period.
My own attempt to break into the art business did not even outlast non-dairy spread. I sellotaped some celery to our kitchen wall, creating an artwork entitled Sticky Situation 1. I was hoping to challenge Cattelan’s monopoly on vertically-presented foodstuffs.
My wife took the celery down and put it in a stew. A portion consoled me for the setback.
Jonathan Guthrie is a journalist, adviser and former head of Lex. [email protected]