Art's New Era of Value Equality

A new era of value equality is indeed unfolding among the world's artists, with the denouement of the the contemporary artworld's' once effervescent stars contemporaneous with the slow ascent of those formerly overlooked.  The future is unlikely to resemble the past in other ways as well. As the trend of a larger and larger percentage of the public becoming aware of and interested in buying art for all manner of reason gains in strength, it's unlikely that you'll find these new connoisseurs exploring their options at the same old tired exhibitions at the same galleries frequented by traditional art patrons. Instead, they're much more likely to be found outside of traditional artistic outposts in venues which allow for a more genuine and unscripted interaction with the public. 

     Auction houses are growing the art market. Part of the beauty of art auctions stems from the fact that they allow art lovers to simply walk into an auction house, without having to demonstrate their seriousness to a dealer or gallery-owner, bid for a piece of original art and become its owner. Requirement: money. Not required:  referrals, lineage, documentation of existing portfolio, etc. Damien Hirst’s wildly successful auction at which all but five pieces sold marked the first time that original artwork was auctioned without having passed through either a gallery or dealer’s hands. This signals a new level of efficiency and transparency in the art market. And with the increased number of venues for marketing and selling artwork, the argument against first consigning art to high-cost (50% or higher) brick-and-mortar galleries and dealers has acquired a new solidity. 

     Poverty is not the cost of respect in any other industry or endeavor, however, it has seemingly been inculcated as such within the realm of art. Hirst himself refers to the 50% cut taken by galleries as “an extortionate amount of money.”
     

     When Claude Monet hosted the first exhibition open to the public of Impressionist artwork in the 1800’s, in effect circumventing the prevailing juried system, it’s unlikely there were very many cheers from the establishment. However, the exhibition held on the Boulevard des Capucines undoubtedly altered the way that artists’ sold their work.
     

     Under the old dealer/gallery system, a romantic notion was repeated often enough and allowed to codify as a truth, i.e. that artists must suffer to produce good art and that any state other than perpetual poverty for an artist translated to ’selling out.’ Not in any other creative or sports-related endeavor does this fiction exist, and it has survived only because of the prevailing inefficient sales and management structure under which the levers of power were tilted in favor of the middlemen.
     

     In the end, no industry is spared the power of the market - all are eventually mean-reverting. Hirst’s auction represents quite a few miles logged on the road to reversion.
     

 You Know More Than You Think
     One of the things that sets art apart from other investments is the fact that despite the potential for any asset to decline in value, buying what you find beautiful is invariably a profitable strategy when it comes to considering art as an investment. Art is always around us but we often more easily utilize its more digestable forms, i.e. on mugs and such because we trust our taste and know instinctively what we like. 

     The prescription for fear of anything is education, and fear of art is no exception.  You have to do your homework - read art magazines, go to art shows, walk thru  galleries, museums, and use the online price tracking services like Artnet.com, Artprice.com, MutualArt.com, and others. Alternatively, an art advisor can fast forward the process if you don't have the time and wish to feel more confident in your purchase. 

“Man will begin to recover the moment he takes art as seriously as physics, chemistry or money”  Ernst Levy

     Contrary to what many think, art does not have to be intimidating. However, even if its aesthetic elements prove daunting, consider art's other side. Throughout millennia, the economic environment has always been important for art, prompting its use throughout history as an asset.  Arts' proven low correlation with the stock and bond markets make it an ideal diversification tool, and cement its value as part of a capital preservation and volatility reducing strategy. Add to these factors its positive role as a hedge against inflation, and the fact that over the past 50-years art has outperformed the S&P 500, and been particularly strong during rapid and sustained downturns, and suddenly its economic appeal overwhelms all else. 

     Several ongoing structural changes increase the likelihood that arts' acceptance as an asset class will continue to grow, including the presence of a new, younger art-buying demographic. Composed of a burgeoning worldwide middle class, this group's decision-making process almost always includes a nod to the importance of design and is powering the embrace of art and design. As Patricia Martin writes in her book "RenGen," we are now shifting toward more of a 'deregulated market for art and ideas,' particularly as those things so long accepted as valuable are called into question. Simultaneously, the availability of heretofore secret pricing information via the internet is informing the public and removing an important layer of power from the dealer class. As a result, artists are increasingly going directly to auction, circumventing the inefficiency and bias inherent in the long-standing dealer/gallery model.

     This shift of power toward the producers and away from the middlemen is birthing a new degree of efficiency, and augmenting the acceptance and availability of this alternative asset just when the world needs it most. 

Insiders Are Selling: Don't Let The Door Hit You...

When corporate insiders, the ones who actually know the numbers, are selling as they are now, it's time for the retail investor to follow their lead and head for the exits.

TrimTabs reported today that its ratio of insider selling to insider buying rose to 30.6 -  the highest level since the company started recording the data in 2004. What we're seeing today is a very high level of insider sales, coupled with a greater proportion of investment advisors recommending clients' get into the market (Investors Intelligence). Oh yeah, and I almost forgot to mention the over $105 billion in stock sales by companies since the end of April.

Investors are always heartened when they learn that a company is buying its own stock. When the flip side is true, concern is warranted and the happy talk about the markets' continued recovery on cable news shows must be taken with a bit more than a grain of salt. The combination of the latest data points indicate that it's time to take cover. 

Website: http://www.bestartinvestments.com/

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Art as an Asset Class - Or, How Many Consecutive Down Days is it Going to Take to Get Your Attention? - The Need for Alternatives IIIExcerpt from Put Your Assets on The Wall™

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“Growth in the economy in this decade will be the slowest of any decade since the Great Depression.”

Paul Volcker, former Chairman, Federal Reserve,  August, 2008   

David Dreman and Eric Lufkin produced a study in 2000 titled "Investor Overreaction: Evidence That Its Basis is Psychological" which examined just why it takes so long for a stock to make a new low once negative information is out. Less favored, or known, stocks often get penalized despite favorable fundamentals. What Dreman and Lufkin concluded is that the facts are far less important than peoples' perception of a company  or group of companies when it comes to stock performance.  

 In this same way many investors will remain locked into an asset class such as equities out of habit, despite all fundamental evidence to the contrary, artificially upholding the asset classes’ value 'til the very end, and ignoring the existence of viable and well-performing alternatives, often to their detriment.

 Even investment professionals are vulnerable. Writer Mark Hulbert in a January, 2009 New York Times article reported that at the end of third quarter of 2008, the forecasts for the fourth quarter made by the 10 best and worst performing market timing newsletters produced dramatically more bullish forecasts from the timers with the better historical track records.  

 In a study done by former Federal Reserve Chairman Alan Greenspan and James Kennedy, in March of 2007 titled, “Sources and Uses of Equity Extracted From Homes,” the authors determined that the greatest driver of the nation’s growth in GDP, by far, was the equity extracted by U.S. consumers from their homes via mortgage equity withdrawals. Obviously, that activity has ground to a halt, consumer spending is falling sharply, causing earnings estimates for S&P 500 companies to continue on their downward trajectories. Prospects for the resumption of former levels of economic growth and productivity are anything but bright. After all, a market is only undervalued on a price to earnings basis when those earnings being forecast hold some validity. 

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Central Banks Around the World Holding Onto Tangible Assets - 

Shouldn't You?

In the seventeen months between October, 2, 1998 and March of 2000, the NASDAQ Composite Index tripled before declining by 42%, marking the bursting of the technology bubble. Surprisingly, despite the dramatic decline, investors continued for some time to put money into technology mutual funds in the belief that the valuation metrics they'd come to believe in would return. They didn't. 


However, current economic challenges have motivated today's investors to demand actionable solutions to economic uncertainty and financial dislocation via proven investment alternatives. As a tangible asset, art not only satisfy an intangible aesthetic call, but also plays an important role as a store of value at a time of heightened volatility in other asset prices, just as it did in 2000.

Furthermore, data compiled by Mei/Moses show that when stock markets fell during World Wars I and II, art outperformed the S&P during most of those years, and in the case of WWI, by 1920 had risen to 125% of its 1913 value (versus 94% for the market). Further, while the S&P 500 increased 67% during the Korean War (1949-1954), art was up 108%, and during the Vietnam War (1966 to 1975) when the S&P 500 fell 27%, art rose 256%.

However, art's outperformance of the equity markets is not confined to times of war, but surpasses the more traditional investment vehicles as well when the markets are roiled by a troubled economy, exactly the situation we find ourselves in today. For example, in 2000, the U.S. economy was facing many of the same conditions as it does today: declining retail sales, reduced capital spending and tightening bank credit standards. The peak in the Dow Jones Industrial Average that occurred on March 10, 2000 was followed by a loss of close to $3 trillion in market value and an overall loss for the year above 10%. Results for art were much different however with the Mei/Moses Index gaining 16%. Far from being a luxury, it can be argued that art is an essential component of any portfolio.

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Performance That Isn't Painful: Art's Outperformance of Stocks

Non-traditional assets are assets nonetheless. The data show that Art dramatically outperformed stocks in 2007 and 2008, with the only comparable period being the bubble period of 1990. It has also outperformed stocks for the most recent 5, 10 year and 50 year periods. Stocks outperformed over the last 25 years.  And the best part is, lower-priced work performs the best.

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Need for Investment Alternatives II: 401K Investors


Overweighted in Equities? Well, according to data from the Employee Benefit Research Institute, of investors with 401k's, 25% of participants between the ages of 56-65 had at least 90% of their money in stocks, and 

nearly half had at least 70%. 

With its impressive long-term growth track record, low correlation with the stock and bond markets, and proven ability to hedge inflation, most of these investors ought to be taking a look at Art.

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The Need for Alternatives: Put Your Assets on the Wall™

I think it's safe to say that current conditions are redefining what's a safe investment - the kind of return that the S&P 500 has 

provided over this period is not the kind that either individual or institutional investors can live with long-term: