Why Investing in Art is an Opportunity For Profit
As an economist and banker, I have noticed that some of the best art collectors are, for some reason, bankers. Indeed, the current boom in prices of contemporary art worldwide owes much to the aggressive pursuit of hedge-fund managers of the latest works of celebrated artists.
One of the basic laws of economics is that in imperfect markets, which the art market clearly is, there is much opportunity for profit. The art market fascinates me endlessly because to succeed in it, one has to have a combination of skills.
First, one must have a passion for the arts and the commitment to devote a substantial amount of time toward art collecting as a hobby. After working a few years in investment banking in Hong Kong, I decided to spend a year in Paris to study French and Art History, and it was one of the best decisions I have ever made in my life. I spent many hours visiting countless museums and galleries throughout Europe, thereby honing my skills and training my eye.
Continuous education is essential for anyone who wishes to collect contemporary art. I spend my late afternoons almost daily visiting galleries here in Manila; it makes my day complete. I also love meeting the characters of the art world; as an undergraduate, I had chosen to live in the House for Artists, and I will always have this bohemian side.
Second, in any market, information gathering is key; imperfections in the market often arise when information is not properly disseminated. Of course, that is not the sole reason; after all, art is not a science, thus it is not precise. Sometimes when one sees disparities in values, one wonders whether there is an opportunity for profit or whether art simply defies logic and its value is dictated arbitrarily. This is especially true when the artist in question already has an established reputation.
Third, of course, is resources. I would recommend setting aside a small percentage of one’s total annual income and earmark this for one’s art collecting hobby.
Last, and perhaps most important, is “the eye.” One can develop the eye by exposing oneself to art and learning from artists and dealers, but I believe in the end it is a talent that is inherent. Either you have it or you don’t.
In other words, since the buyers are wealthy, pricing is hardly affected by adverse economic conditions and may fetch unexpectedly high prices through feverish competition between major collectors.
If one possesses the skills above, one would, in all likelihood build a collection whose value will rise over time. What kind of art does one collect? It all depends on one’s interest; there are, however, two categories whose mechanics are completely different. One depends on established values, and is thus more conservative while being costlier; the other is riskier but more accessible to most aspiring collectors. One may think of work by established artists as “investment goods”; contemporary artists are “consumption goods” with the chance of appreciation should one be lucky and truly gifted with an eye for contemporary art.
I have been collecting paintings for over a decade, and in that brief time, I have noticed a marked decrease in the availability of modern Filipino art. I will not even go into the subject of “old masters” (i.e., Luna and Hidalgo), which are all in the hands of collectors. Of course, occasionally “Lunas” come up, supposedly found in flea markets in Madrid, but their authenticity is most questionable. One acquires established Philippine modern art (e.g., Magsaysay-Ho, Manansala, Bencab, etc.) through auctions or through the secondary market, i.e., art dealers.
Buying at auction has become increasingly fashionable in the past five years owing to more aggressive marketing by the two main auction houses, Christie’s and Sotheby’s. The beauty of concentrating in established artists is that there is set pricing for artists’ works, and there is a limited supply of these works as the painters are dead mostly or are in the twilight of their careers. Indeed, one can simply look at old catalogs of the auction houses and consult their websites to figure out the sale price of most of these artists’ works. Therefore, it is easy to gauge, while at auction, whether the prices are fair value for the works on offer.
One must also be flexible because some works may go cheaply for a variety of reasons. At an auction, for example, I (accidentally) ended up with a Manansala, which I thought was beyond my “budget,” figuring it would fetch close to US$100,000. I snatched it at US$35,000. The reason for this huge discrepancy in pricing was that some of the major Filipino collectors, I was told, were on holiday in Europe.
The risk with contemporary art is that you may end up with a large collection of art by painters who would not fulfill their earlier promise and thus end up with a pile of unrealized potential.
Art sold at auction is a very safe investment because these have set pricing, and are demand-inelastic. In other words, since the buyers are wealthy, pricing is hardly affected by adverse economic conditions and may fetch unexpectedly high prices through feverish competition between major collectors. Some established names such as Amorsolo and Manansala are also purchased by foreign collectors, including institutions such as the Singapore Art Museum, so their prices are supported and do not go down. At an auction, I also noticed Indonesians bidding for “name” Filipinos such as Amorsolo and Manansala.
Most young collectors my age—and there’s a growing number—prefer contemporary art. As my interest shifted more toward contemporary art, I became more adept at navigating the different galleries in Manila and dealing with artists, with the requisite gossip, drama, and intrigue. The problem with contemporary art is that it is, by definition, much riskier, because one does not know how the artists’ careers will evolve over time. On the other hand, they are also much more affordable and should be enjoyed for art’s sake. One can limit this risk, however, by handling one’s relationship with gallery owners and artists.
The risk with contemporary art is that you may end up with a large collection of art by painters who would not fulfill their earlier promise and thus end up with a pile of unrealized potential. One can lower the risk factor by seeking proper advice from gallery owners, and perhaps, just as important, compare notes with fellow collectors to figure out what they’re up to. After all, to visit a friend’s collection is a real treat and a chance for you to exchange views and create bonds with people who are equally passionate in their love for art.
The beauty of concentrating in established artists is that there is set pricing for artists’ works, and there is a limited supply of these works as the painters are dead mostly or are in the twilight of their careers.
If there are painters you consider appealing, you may want to commission work from them. I have commissioned sculpture and works from four painters, all of whom produced outstanding work. The drawback to this is that it limits the artist’s freedom of expression, and you may give rigid requirements that might cause the artist to revert to a previous work instead of producing a new one that pushes the envelope.
The other thing you must be careful about is that your gallery owner/ friend should acquiesce to this; some gallery owners are quite possessive of the artists they represent and you may step on their toes should you go directly to the artists. It is something I encourage, though, as it is a deeply rewarding experience. I have been to the homes of the artists I commissioned work from, and it is interesting to see them in their ateliers. It pulls you down to earth and opens your mind to new ideas, while you gain a better understanding of the world that creates art that lasts—and appreciates in value.
BUYING ART AT AN AUCTION
Read and research
After identifying the pieces you like, read up on the artists, and check the Internet for past auction records. Study catalogs. Spot general market trends. Is the artist you are investing in commanding higher prices over time? You can then create a grid for a range of values for the pieces one is interested in. This range of values, however, should be flexible, depending on actual market conditions.
Compare notes with other collectors
This is especially helpful if one has a focus on Filipino art since the art market is mostly limited to Filipino collectors. Some serious collectors can mislead others by downplaying interest in certain pieces and pretending to be interested in others, hoping that competing collectors have overlooked the true “gems” up for sale.
Have a flexible strategy
The most interesting thing about the auction process is that one experiences the beauty of the market at its most raw. At a recent auction, knowing that most lots would be sold on the high end, I changed my strategy to focus on one or two pieces. I also raised my budget, aware that market prices would in the future be supported in a strong, rising market.
Go to the viewing
Get as much information as possible from the auctioneers. Spend time studying all the pieces because art is to be experienced firsthand; catalogs often don’t do justice to the art. If the pieces you like are very popular, develop a backup plan. You can write off those that would clearly be the subject of bidding wars—unless you have deep pockets, in which case justifying art as an investment would not be an issue in the first place.
Study how the lots are arranged
This is especially true if there are various lots from one artist. The first lot will tend to be sold at high prices and the later ones for less. The art market is quite imperfect and one can pick up “bargains” by focusing on “second-best” choices, which are usually not the focus of bidding wars because all eyes are on the big-ticket items.