Investing in art is reminiscent of getting married. You find something good looking, hold on for as long as possible, hope it ages well, and if you want to exchange it for money before you die, you’ll probably need to hire a professional.
That’s a joke, of course, but as with all jokes, there’s a grain of truth in it. I’m a trained economist and stock market professional, so my standard investment approach is to swim through seas of spreadsheets. But with art that method doesn’t cut the mustard. Investing in art can provide solid monetary returns, yes, but just looking at numbers I knew I was missing something. As I stacked the scales with pros and cons, a single overarching thought stuck with me, a finger pushing down the scale in favor of art: the experience matters. Adding beauty to the world matters. The satisfaction of owning the art is part of the return you get, and there's no arithmetic for that.
We all get this intuitively on some level. For example, I live in a 100 year old house. I’ve become an apprentice carpenter by necessity, as even a well built house like mine needs TLC after standing for a century. It’s a lot of extra maintenance, but I don’t think twice about doing the work. Why? Because it’s a beautiful stone French Tudor, and I simply love coming home to it.
The experience of arriving through a door that was an acorn the year my country was founded matters. How something makes you feel matters. Beauty matters.
Now that we’ve framed investing in art (see what I did there?), let’s move past the broad brush strokes (zing!) and put a finer point on things (nailed it). Why is art a good investment, yet still a rather uncommon one? How should you approach it? And how is the blockchain changing the rules?
Why is art a good investment, yet still a rather uncommon one?
Generally speaking, a great way to preserve wealth is by storing it in hard assets, especially in times of high inflation. Real estate and commodities are perhaps the most obvious in this regard, but collectibles, gold, and art are all hard assets too. And the performance speaks for itself: from 1973 to 1981, when inflation in the US was running around 9% annually, the art market outpaced equities and even gold, returning over 30% annually. Even including periods without high inflation, art has returned 7.6% annually to investors over the last half century. With that kind of performance, inflation protection, and enjoyment of ownership, it’s easy to see why if you can invest in art, you often do.
But long term numbers obfuscate an inconvenient truth about investing in art: it is a protracted, winding road to walk relative to simply buying an index fund tracking the S&P 500. You need long time horizons, you need to be okay with a stunning lack of liquidity (just 1% of artists are 50% of all transaction volumes), and you have to be able to withstand much of the art going to effectively zero value, while that one Van Gogh you bought early makes up for it. Your average person simply doesn’t have the pocketbook or time to get over those hurdles.
This somewhat odd confluence of factors is what has made art an investment strategy predominantly used only by high net worth individuals despite the fact that 4 out of 5 wealth managers recommend art as part of an investment portfolio.
How should you approach investing in art?
Art is a fascinating product because it’s a Veblen Good, which means that the more expensive it gets, the more demand there is. Put in simpler terms, owning desired art is a flex. Art is a way to signal wealth and taste, and humans have been obsessed with signaling status since the dawn of time. This is part of why only a very small portion of art generates nearly all the actual return on investing in the asset class, as only a small portion of anything, by definition, can be in the top 1%.
Once an artist is desirable, the rarity of the work drives a lot of the value. As an obvious example: an original will always be worth more than a printed reproduction. (For those who care about the vernacular: the highest quality prints are known as “giclées.”) That does not mean that limited prints don't have value, of course, it’s just less than the original. I own one of a small number of lithographs of a beautiful work of Flathead Lake by Russell Chatham, and it’s worth a couple thousand dollars. I own a gorgeous Xplorer map of Flathead Lake that has unlimited copies, and it’s worth less than the frame I put it in. Both look great. But only one could be resold.
In theory, the best way to invest in art is to buy a lot of promising emerging artists, thousands every month. One of those from every year is bound to be a winner and pay for all the rest. But of course that’s not a practical way to invest. The effort of finding and storing everything would be astronomical. There are other ways to go about it though. Alternatives include buying already established artists, as their work is likely to hold value, or to buy into some innovative financial products out there that bundle and securitize desirable works of art (Masterworks is the most prominent of the companies that do this). And lastly, a promising, emerging alternative is to use the blockchain.
How is the blockchain changing the rules?
The blockchain democratizes investing in art because the door is opened to anybody with a phone. Finding the next great artist isn’t restricted to some Ferragamo heeled stranger in a suit strolling into a fancy gallery in Manhattan. A girl in Ghana or an old man in Omaha could have bought the first John Le piece on Solana with equal opportunity. Yes, we’ve had the internet for a while now, but the social media of web2 couldn’t easily unleash this because of the difficulties in transferring and storing physical art, it took the digital ownership and transfer rights of the blockchain to make it truly click.
The blockchain combined with social media gives enormous power not just to the art, but the artists. The most successful artists aren’t just the most talented artists, they’re the most talented artists who are also the most talented marketers, the masters at building their own personal brands. The combination is powerful.
The blockchain means that artists can have more of a say in how their artworks get sold. Typically, collectors used to invest and resell, pocketing all of a potentially huge profit if the investment works. With the blockchain, the artist gets a cut of resales, which gives them an incentive to keep hustling, a reward as they help the value of early collections go up.
Of course, once artists are popular, somebody with barely a few shekels can’t pick up something that goes for tens of thousands of dollars (and sometimes much more), but that doesn’t mean blockchain democracy is dead. The blockchain allows for art DAOs (decentralized autonomous organizations) to be created, which then cobble together disparate wallets into a single treasury that can buy either one piece of art or many.
The blockchain also helps solve for some of art’s biggest drawbacks. Digital art is far more liquid than physical art as it’s on chain (meaning it’s trustless, no need for expensive middlemen and authenticity guarantees) and can be sold on exchanges globally without hiring Christie's at a huge fee to find buyers. On the other side of that coin, it allows artists, no longer restricted to the local coffee shop, to expand their reach dramatically to find buyers in the first place.
What about the trifecta of troubles for traditional art: storage, forgery, and theft? Paintings require meticulous maintenance. Digital art does not. Storing it is painless in a way that storing the Mona Lisa never will be. It lives on the blockchain and you never have to touch it. Digital art can’t be forged. The block chain lets you know what the original is, always. There is never any doubt, no experts needed to verify authenticity. And lastly, when stored properly, it's practically impossible to steal.
I can’t tell you if investing in art is right for you, traditional or otherwise. I also can’t tell you if you should buy a house, own shares of Apple, or what your favorite color should be. The goal here is simply to provide a solid foundation of understanding so you can make your own decisions.
For what it’s worth though, I do invest in art. Some traditional, mostly digital. It’s a small percentage of my portfolio, but I’m glad it’s there. I think it will hold value over time and setting numbers aside, I very much enjoy the experience.