Investing in art is reminiscent of getting married. You look for something pretty, hope it ages well, hold on for as long as possible, and if you want to part with it before you die, you’ll need to hire help.

I’m only half joking. I’m an economist by training and work in the stock market professionally, but to fully understand art as an investment I had to expand the way I view what it means to invest. 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. Owning the art is part of the return you get, and that’s not captured on a spreadsheet.

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 extra 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. It makes a difference to me, even though a concrete box would arguably be more practical.

The experience matters. Beauty matters.

So let’s talk about investing in art. Why it can be tricky but probably still worth the effort, how to approach investing in art, and ways the block chain is changing the rules.

Why is it tricky but probably still worth the effort?

Suffice it to say investing in art is a winding road to walk relative to simply buying an index fund tracking the S&P 500. It’s all but impossible to only pick winners, it’s incredibly illiquid, and you have to guard against forgery, theft, and the ravages of time itself. But, done right, art can be a great investment. It’s inflation hedged, it produces reasonable returns as a basket over time, and art offers something that index funds do not: you get to enjoy beauty while you own it.

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.

Generally speaking, a great way to preserve wealth is by storing it in hard assets, especially in times of high inflation. Real estate is 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 and 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.

The drawbacks of art are the reason it’s usually high net worth individuals to invest in it. 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 goes up 1,000x. Your average person simply doesn’t have the pocketbook or time to get over those hurdles. You really have to believe the art is the utility, and be happy owning most of it with no monetary return.

How to 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, it’s 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 art, as only a small portion of anything, by definition, can be at the top.

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 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.

In theory, the best way to invest in art then is to buy a lot of promising emerging artists, call it, 10,000 of them every year. 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. Alternatives include buying already established artists, as their work is likely to hold value, or to buy into some new types of products out there that bundle and securtize desirable works of art. Masterworks is the most prominent of the companies that do this. And a promising, emerging alternative is to use the blockchain.

Blockchain is 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. Social media 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 block chain combined with social media gives enormous power not just to the art, but the artists. The most successful aren’t just the most talented, they’re the most talented artists who also are the most talented at building their own personal brand. It’s a powerful combination. The block chain also 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. All of it trustless and on chain.

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 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 to expand their reach dramatically to find buyers in the first place. Both the original purchases and the resale are easier.

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, it’s much harder to steal. I won’t say impossible, but it certainly is not an easy task to heist a piece of art on the block chain. Oh, and if you try to sell it? We’ll fiiinnnnddd you.

Conclusion

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, or shares of Apple, or what your favorite color should be. The goal here is 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.

Beauty matters.

Art is the utility.

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