making money part i: art history

hi, welcome to jesse's column, where a 3rd year economics undergraduate teaches you alternative ways to make money. isn't that great? they say picking stocks is an art. well, i say, art is art.

now i've been toying around with the idea for a while that instead of taking more classes in finance (oh god, i have to pick up martingale theory to price something using a method that is outdated? get out of here!) the best course i could take is probably art history, maybe at st martin's college of the arts, as an outside option.

look, i know nothing about art (all the more reason to take the course). but in the back of my mind theory predicts that the art history market is a good one to dip into for long-term and boom time investments, and being able to bullshit and waffle about your latest kandinsky is kinda like telling people why this stock is going to go up. of course, stocks are the present discounted value of future profits, so it's based on something real right (although truth be told, you're the residual claimant anyway). if you go wrong buying a piece of art, you get to hang it in your living room and enjoy the present discounted value of enjoying art which your art history course has taught you (though really, art is really pretty and i don't need a course to tell me that don't i?) but if i bought rothko's light red on black, for example, i better like red and black and count on enough people saying, omfg rothko, i'll pay xxx gazillion for it.

on a more serious note, art appears to be a riskier investment (and it also a less liquid market. are the two linked?) so your average save for retirement fund probably won't buy into it. but i'm inspired by the example of david swensen,, manager of Yale's endowment fund. A hedge fund guy once came down to my school and he was the only tangible thing I could latch on to the whole presentation. YOU PAY A PREMIUM FOR LIQUIDITY. (although it seemed his portfolio still has an equity bias). he was buying chunks of timber forest in siberia, you know, that kind of thing. (of course mere mortals can't do that). index funds were probably a good idea but i don't know if people have caught on to that.

but art, now art's interesting. i promise to do a proper analysis with numbers but i think the art history market has jumped massively during the past few years (and well, over the long term as well). of course, there's a survivorship bias (e.g. artists which were excessively hyped up and are now worth nothing are not on the market anymore), but that exists for companies too. it is definitely less liquid because the market is smaller on both the supply and demand side, and many paintings go on auction, which allows you to extract a sizeable "seller's surplus" from the buyer. it is possible, if you're a good collector, to buy cheap and sell high... the collection of paintings by egon schiele, gustav klimt etc at the leopoldau museum was collected by a young austrian doctor from 1950 onwards, and fabio capello also used his excess cash to buy paintings by kandinsky to line his walls... nobody is talking about van goghs here.

some problems: a. cost... to buy durable classics it may be necessary for some considerable financial outlay. and then you could do something like poke it with a scissors.
b. liquidity problems, as above
c. higher volatility, due to small market, low liquidity, and art's status as a luxury good making it highly income, wealth and expectations-elastic. so it should go wildly up during a boom and down during a bust
d. it's also a more irrational market... but precisely... this works in your favour... opportunity for arbitrage... but could you really take your painting down and sell it when the price is right? so i guess you would be less emotional if you knew less about art, or weren't so biased towards certain artists... it's interesting how trade in consumption assets is that much harder to value rationally, and i guess why people stick with financial assets... although you can still show some biases towards the stocks you initially picked. it's the same thing with first-time homebuyers, my dad tells me, there's the fear and the premium to stay at the best place that you like much more than any other. and why property in a sense is also not entirely a rational market.

all for d. higher returns. i guarantee you. and you can hang the kandinsky on your wall and call it an investment. reading prospectuses replaced with visits to the gallery and museum (which i know is torture for some).

on a side note, you could probably do the same with comic books and baseball cards. stocks and shares? they're sooooo 1990.


Anonymous said...

luxury items such as prada, gucci, LV would be a better option since there is sort of some liquidity and use for it. Furthermore, you can start up a rental business with them if they are not yielding the value that you think they should.

Jesse said...

not my area of expertise=) i don't even know where the market is.

you can also rent out art to galleries.

in terms of use, i don't see how a prada handbag has any more "use" in a practical sense than a regular handbag. same with a piece of art.

both derive their value from the pleasure they give to the owner.