Art: For Love, Not Money


By Thane Peterson It's happening again, just as it always does when the stock market turns bearish. The experts tell investors they should consider alternatives to putting their money in stocks, and then someone gets the bright idea: Why not invest in art? After all, paintings and sculptures -- like real estate -- are tangible assets that are likely to rise in value over time. Quality artworks also are unlikely to suddenly become virtually worthless, as Enron and WorldCom shares have in recent months.

Unlike a lot of theories, this one is easy to test. It just happens that some of America's top art collectors also are among the nation's savviest, most successful investors. If art really is a screaming "buy" right now, they surely must have the skinny.

So on July 29, I checked in with four top investors/art collectors: Eli Broad, the Los Angeles real estate and financial services magnate; Paul Sack, a wealthy San Francisco real estate investor; Kent Logan, a retired investment banker who lives in Vail, Colo.; and Arthur Goldberg, a retired top dog with mutual-funds giant Neuberger & Berman who lives in New York.

A "HIGH POINT"? Surprise, surprise. Not one of these smart guys thinks buying art as an investment is a good idea. And if they were going to try it, none of them would start now because they all fear the art and photography markets are getting badly overheated.

Historically, art prices have slumped about a year after stocks. "I know art is overvalued right now," Logan says. "I don't know when the correction is going to come. But I suspect we're looking at the high point right now."

It's not that you can't make good returns buying Warhols, de Koonings, and Ansel Adams photos -- even at today's prices. All four collectors are continuing to buy, and all have seen the value of their collections surge enormously over the years.

Indeed, the latest research indicates that over the long haul, buying art can be as lucrative as buying stocks. Last year, New York University business professors Jianping Mei and Michael Moses published a study of some 5,000 artworks that had been sold and resold by Christie's and Sotheby's. They concluded that from 1960 through mid-2001, art prices rose 11.5% annually, only a hair less than the S&P 500.

COSTLY TRANSACTIONS. With the stock markets in turmoil, moreover, art, by most measures, looks pretty good as an investment. Artprice.com, a Paris-based outfit that has an extensive historical database of art auction prices worldwide, says since May, 1996, art prices have risen by a respectable 6.8% annually. The S&P 500 has risen an average of 6.2% a year and the Dow by an annual average of 9.2%.

Before you rush out to add a Rembrandt to your retirement fund, however, consider a few of the caveats raised by my panel of big-time collectors. First, you should plan on owning any art works you buy for years -- or even decades. That's because you have to amortize the high transaction costs of buying art over a number of years. If you buy stock in reasonably large volumes, your transaction cost -- mainly brokers fees -- is under 1%. It's much higher for small investors who buy mutual funds -- typically 1% or 2% annually, which adds up over time.

That's a pittance compared to the cost of buying art, however. Auction houses charge fees on both ends of any sale that add one-third or more to the original purchase price. Art galleries typically charge a 50% commission on works they sell. The same percentages apply whether you pay $1,000 for a painting or $250,000.

"I CAN'T JUSTIFY IT." Indeed, when I spoke to Sack, one of the top U.S. collectors of vintage photos, he had just decided not to invest in a $275,000 print by the 19th century French photographer Gustave Le Gray precisely because of the high commissions involved. "I thought about it and realized that I wouldn't make money until it got up to $500,000," Sack says. "I might still buy it for pleasure, but I can't justify it as an investment."

Also, when the art market does turn down, notes Logan, "it turns with a vengeance." For instance, Mei and Moses figure the price of Impressionist works plunged 51% during the 1990 crash. And when the tumble comes, art can be hard to sell if you suddenly need to raise cash.

That's mainly because with the passage of time, tastemakers come to consider the vast majority of the art bought and sold in the world as junk. "Ninety-nine percent of the art in the world is unsaleable," Goldberg says. "Just go look at the art in people's homes. Go into the galleries and ask them how much of the art they have sold over the last 10 years they would buy back. Virtually none."

THE SAME CREED. The paradox of buying art, both Goldberg and Broad say, is that if you buy it with the idea of making money, you probably won't. "Normally, people who do that aren't connoisseurs," Broad says. "People who buy art as an investment typically haven't ended up buying the best works, and they typically haven't made good returns down through the years."

The collectors I talked to all subscribe to the same creed: Only buy art works you love. That way you'll always own a beautiful painting that enhances your life, even if its price doesn't go up.

Serious collectors tend to buy works that rise in value because their tastes are highly informed. All the collectors I know spend endless hours of their spare time visiting museums and galleries and studying up on art. Broad is famous for going home on the weekend with two bulging briefcases -- one full of business and the other full of catalogs, books, and other art-related reading material.

"PSYCHIC INCOME." Of course, major collectors don't really have to worry much about whether the art they buy goes up in value. They plan to eventually give away their collections to museums or charities, anyway -- and they know the passage of time will sort out which works have lasting value. In the meantime, they're content with reaping what Broad calls "the psychic income" of collecting art.

"We meet interesting people we wouldn't otherwise meet," says Goldberg, who collects with his wife Carol. "And it changes you. It has expanded our sense of life's possibilities, let us experience bigger emotions, taught us about living." It's possible that you'll make money, too, but Goldberg's sentiments are the only returns from collecting art you can really count on. Peterson is a contributing editor at BusinessWeek Online. Follow his weekly Moveable Feast column, only on BusinessWeek Online


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