How to Make Money Collecting Art

The Daily Reckoning: Let’s talk about art. You’ve mentioned many times what a great investment it has been for you.

Mark: Are you sure that’s a door you want to open? I can talk forever about art collecting.

The Daily Reckoning: Yes, let’s hear it. I’m interested to know why art collecting? Why not cars, or antique dollhouses or something?

Mark: Fine art—paintings, drawings, and sculpture—has always held a special place in my heart, so it was a natural choice for me.

My art collection has enriched me in three ways: Buying it is a lot of fun—especially when you know you are buying it right. Owning it is a great pleasure. It enriches your life every time you look at it, and it tells your friends and people something important about you.

Thirdly, it can make you richer. My art collection, as a whole, has appreciated more than $1 million. I wouldn’t care if it didn’t. I’d be happy if it simply maintained its value. But I made investing in art a hobby, and it paid off.

Fine art, like a number of other historically recognized collectibles, has a lot of the qualities you want in an investment: It’s a tangible asset, so it tends to appreciate during inflationary times. It’s portable, which is a very good thing in case you might want to disappear one day. It’s also private­—and by that, I mean that you don’t have to report your transactions to the government. And finally, if you buy the right art it can appreciate—sometimes a great deal.

The Daily Reckoning: So what does a novice need to know before collecting?

Mark: The novice needs to know that, from a wealth-building perspective, there are different kinds of art.

When you have studied 1,000 paintings… You will know what you like.

First, you have what I call “decorator art.” These are pieces of art that simply fill a given space with color and texture but will never appreciate. This is the kind of art you see in Las Vegas hotel lobbies and Caribbean resorts. “Decorator art” is a waste of time and money.

Commercial art is what you find in galleries. However, the quality of this art can vary widely—it all comes down to the dealer and his expertise. While it’s true that some dealers peddle that “decorator art” I was talking about, there are also some fine art commercial galleries that cater to local artists, graduate students, the talented Sunday dauber, as well as fine art by recognized talent. Priced right, these artworks make a very good starting point for the fledgling collector.

Those small local galleries I was talking about is where you want to go when starting your collection. You can find oils, pastels, and drawings that are worth a few hundred dollars. Buying pieces like that is a good way to train your eye.

Investment-grade art is different. It hangs in major museums. The artist is already in the art books. He’s already a serious figure. His art isn’t going to disappear. Nor will its value. It might fluctuate, as all investments do, but the long-term trend is good, and you can be confident that over the long run it will maintain or increase its value.

When buying art for investment purposes, collectors need to understand that appreciation happens over a substantial period of time. Unless an artist dies or is the subject of a 60 Minutes interview, collectors will cool their heels for a while before selling for a profit. However, studies show that high quality, investment-grade art is one of the top performers in terms of long-term return on investing.

The Daily Reckoning: Okay, so how does someone begin?

Mark: There are two methods. If you are new to art and aren’t sure what you like, you can begin by buying inexpensive art. I’m not talking about decorative art. It won’t teach you anything. I’m talking about art that you might find at small galleries, local art shows, or antique shops. Buy the stuff you like, but don’t spend any more than a few hundred dollars on any individual acquisition.

As your taste improves—and it will improve—you may find that much of what you once admired is not so wonderful anymore. When that happens, you can sell it (for whatever you can) or give it away.

Ask questions of the dealer every time you buy art. If you meet the artist and like him, make friends. Gradually, your circle of contacts will improve and so will your eye. Eventually, you will feel ready to venture into investment-grade art.

The Daily Reckoning: Sounds like a relatively slow process. Is there a better way?

Mark: Yes. You can begin with investment-grade art, but you have to do your homework and be patient. Start by trying to figure out what genres of art you like. Do you like landscapes? Do you like abstract art? Do you like portraits? Sculpture? It doesn’t matter. Don’t let someone talk you into, say, abstraction, if you prefer portraits.

Art and collecting are life-enhancing endeavors, first and foremost. There is investment-grade art of every kind. The collector needs to figure out his personal tastes before acquiring. That is why museum visits, gallery openings, etc., are so important.

Find what type of art appeals to you. Then figure out what artists you like within that genre. Try to limit your interest to two or three artists to begin with. Study the price history of those artists. Find out what their pieces have sold for in auction in the past. Find out what they are selling for currently.

Try to become an expert in their work as quickly as you can. You don’t need to take any art appreciation courses. Just read books about the artists and the genres you like. You should also visit museums whenever you can and study the work of your preferred artists.

When you have studied 1,000 paintings, you will have developed your eye. You will know what you like. And more importantly, you will have a sense for quality.

You don’t want to start off spending lots of money. This can lead to costly mistakes. Begin by buying inexpensive pieces such as sketches from major artists (expect to pay $1,500 and upwards) and gouaches and paintings of second-tier investment-grade artists ($2,500-7,500). This sort of buying will keep your risk relatively low, so if and when you do make the occasional mistake (like buying a fake or overpaying for a piece), it won’t break you.

When I first got started, one of the things I got involved with was a school of art called CoBrA. CoBrA is an acronym for Copenhagen, Brussels, and Amsterdam. It was a period of art that officially took place from 1948-1952. It had a total of 10 or 12 artists in it, of which there were three major artists: Appel, Corneille, and Jorn.

All of these artists hang in the major museums in the world. I knew their art would never be worthless. This was a good group to begin with because it was small. It took place over a small period of time, it comprised a small number of artists, and each of them was recognizably different.

In other words, it was easy to study. So I began by collecting these three artists. I bought sketches and crayon pieces at first because they were cheap, and afterwards I sold some of them at a profit and “traded up.” Eventually, I was able to purchase a very nice collection of good pieces that have appreciated over 300%.

The Daily Reckoning: Okay, so let’s say I’ve done all that. I’ve picked my genre and my artists, I’ve spent months poring over paintings and visiting museums. When I’m ready to buy, how do I know what’s a fair price, or how to value a piece of art?

Mark: That’s actually easy. But you have to ignore what the pundits say. Art pundits say that valuing art is impossible because it’s subjective. That is true in terms of the pleasure you get from art, but it is not true of the investment value of art.

From an economic perspective, art is valued by the marketplace, just as stocks are. An artist’s work is valuable because important critics at some point decided it was good. Because of that, it went to the big museums. It got into books. It is taught in art courses. And when it goes to auction, people bid it up.

Once there’s a 10- or 20-year market for a particular artist, the value of his art is unlikely to collapse. By that time, so many people—museums, brokers, and wealthy collectors—are invested in it. None of them, if they can help it, will allow it to collapse.

Who is ever going to say that Rembrandt wasn’t a great artist? Or that his paintings aren’t worth millions of dollars? Nobody. That doesn’t mean he was the best Dutch painter of his time. If you look at paintings by his contemporaries, you might think that some of the other Dutch masters (or even a few of the minors) were just as good.

But Rembrandt’s values will hold. Why are his paintings worth 100 times more than another one that is technically just as good? Because history has decided it should be so. Art critics—experts, people who dedicated their lives to studying art, have decided. The marketplace has put a value on it, and that’s what makes it more valuable.

When you’re collecting art, you’re collecting the history of what art critics have decided. You might disagree with them on an aesthetic basis, but you’d be foolish to disagree with them with your money.

My point is that the value of art, from an investment point of view, is not subjective at all. It is objective. More objective and easier to predict, in fact, than stocks.

Regards,

Mark Ford
for The Daily Reckoning

Ed. Note: This essay was originally featured in the Sunday edition of The DailyReckoning. That’s right… The Daily Reckoning is now being published 7 days a week, and each issue is full of insightful analysis and unique investment opportunities — like art collecting, for example… Don’t miss a single issue. Sign up for FREE, right here.