Contemporary Art: A Decorative Collectible or An Asset to be Invested and Traded?

This is a timeless question and I believe the answer is subject to the perspective of the individual.

Recently Jeff Koons’ 1986 bunny sculpture sold at auction for $91 million. Koons seems to be the quintessential “woulda, coulda, shoulda” artist as stories abound of those who passed up his works many years ago before they were fully appreciated and priced accordingly. There is no better example than a story I recently heard about a prominent collector who passed on buying the bunny for around $40,000 when it was first available. Making this purchase and holding it for the duration represents one of the best returns available in recent decades in any asset class. Early investors in Microsoft would have beaten it out, but only barely; $40,000 worth of shares at the time of IPO would amount to $85.6 million today, on top of the meaningful annual cash dividends they would have received for years.

From a purely numbers perspective, the early buyers of the bunny and MSFT were extremely insightful and fortunate. Based solely on a cash on cash return, neither buyer is better off than the other, however, there is an additional perspective when evaluating art. Specifically, art has the potential to generate endless hours of genuine enjoyment whereas the other is simply a line on a balance sheet or brokerage statement. Yes, it may be rewarding to own a piece of a company that has produced products and services used everyday the world over and as a result has cumulatively earned many billions in profits — but you can’t hang it on a wall to enjoy.

The experience with Jeff Koons’ bunny is rare and exceptional but not an isolated event. Many collectors/investors who recognized talent early in artists like Christopher Wool, Mark Bradford and Peter Doig have been handsomely rewarded in the appreciation of what they own. Similarly, artists who bought stalwarts like Picasso, Rothko, de Kooning and Twombly, even after they were well established icons, have earned many multiples on their investment and often fared far better than other more traditional asset classes.

But there is a flipside to investing precious assets into art. Art, especially valuable art, has direct costs associated with insuring, moving, storing and caring for it. In some cases these costs can be meaningful. More importantly though, unlike owning a piece of a cash-generating business, art has no intrinsic investment value other than what someone might pay for it. This point was hammered home by the brilliant but irreverent artist Martin Kippenberger who took a Gerhard Richter painting and made it into a table by attaching four legs. There are numerous once-promising and touted artists whose work is worth only the raw material that Kippenberger used to make his table.

Vast amounts of mediocre and essentially worthless works exist that will never have a secondary market or value beyond the decorative benefits they afford. That said, there is absolutely a place for such works and artists. On the other hand, there are countless artists who represent a meaningful place in art history and communicate a message about the world and popular culture as it existed at the time of its creation. These artists hang in museums for everyone to enjoy and fill the ever-growing pages of auction catalogues and booths at art fairs. For these artists there exists a secondary market — which in some cases is very active and has proven to be quite liquid — whereby collectors, galleries and intermediaries are happy and willing to make bids and transact.

As an investment professional, it is virtually impossible to completely divorce myself from an investment/trader mindset whereby every asset has both a relative and absolute value proposition associated with it. With a piece of art, these evaluations and determinations are considerably more difficult than with a financial asset. It’s not just the art market’s lack of transparency that contributes to these challenges, but it is virtually impossible to quantitatively assess and account for personal tastes. The time horizons associated with art as an investment vehicle can vary widely from the very short term to many, many years. Valuations can skyrocket or crater literally overnight based on the actions of a very small group of the “right” collectors. The triggering events that cause an artist or a particular work to become a worthwhile investment that is “properly valued” or “overvalued” are tenuous to predict with any accuracy.

Plenty of financial institutions like UBS, Citibank and US Trust try to promote contemporary art — perhaps self-servingly — as a bona fide asset class that their clients should own and even borrow money against. It’s empirically hard to argue with this proposition for certain works, but the validity of this suggestion is largely determined by an individual’s mindset. I don’t think there is a right answer applicable for all situations. Two owners of the same work can arrive at very different conclusions: one may consider the work purely for enjoyment, never anticipating to sell it, whereas another may consider it a great investment that they will sell should it ever appreciate beyond a certain threshold.

Regardless of whether one considers art something beyond a collectible is a personal matter, however, I would argue that in either case one should apply the same seriousness and rigor to the decision process. The research necessary to understand and properly transact the asset in question should be similar regardless of how you personally categorize it and its end use.

Does the brilliance of the bunny’s creator Jeff Koons match the brilliance of Bill Gates and his team? Clearly, they are both recognized leaders in their respective fields, however, answering the comparative question is something for others to debate just as they might between the contributions of Picasso and Rockefeller to the world at large. The bottom line, however, is that the phrase “art is in the eye of the beholder” applies not only to how art is enjoyed personally, but also to how it is classified on one’s balance sheet.