The unique investment as it is, art market has some unique risks. Successful investment in art requires not only extensive know-how about the artistic quality and authenticity but also the peculiar nuacences of the art market.
As each work of art is different and the markets are everything but transparent, evaluating quality and price requires knowledge of the market inside out.
There are potentially large differences in expertise between buyers and sellers. And the art markets are often cloaked by veil of secrecy.
Investment horizons typically run for years or even decades, and the market is generally illiquid, which significantly limits an investors' ability to convert a holding to cash.
Transaction costs (auction fees, appraisal fees, insurance, handling costs etc.) are by far larger than in other markets. Though there has been increase in availability of and access to data from art-research firms, websites dedicated to prices of art, indices of the art market and art auctions, it is far from adequate.
The main trouble with investing in art is that it is almost impossible to identify an intrinsic value. When evaluating individual purchases, there are few risks that may not arise when investing in securities.
For example, there is no official registration office or certification authority that can authenticate the ownership of individual artworks. Other transaction risks include absence of clear title, forgery, mislabeling, and auction fraud. These risks have made art market a place for insiders.
On a physical level, art typically requires a specially controlled environment where temperature, humidity and light are continuously monitored.
Further, thin and opaque markets make it easy for the insiders to artificially inflate the prices. For instance, price-fixing collusion by the two major auction houses in 2000, Sotheby's and Christie's, defrauded art investors by millions of dollars.
The method is similar to stock market manipulations by the major stockbrokers.
However, in the art world, there is not even pretense of accounting and the market is entirely unregulated.
I. E. C. Haramis says, "The art world is far less regulated than securities and real estate, so there is often no resource in the event of misrepresentation. The investor is very much on his own to perform appropriate due diligence."
During the asset inflation of the 1980s, large corporations in Japan and the US invested large sums in abstract art and landscapes. When the bubble burst, corporations" holdings became mere wallpapers as the distorted market took a dive. Art market itself is not volatile. Investors, seeking financial gain only, create volatility in the market.
Art is a good investment, but only in the long run. Its gain has been slow, but steady. It is a good investment only because people of taste recognize their historical significance and their rarity. These are values that no other investment options offer.
If greedy investors, for whom these values do not matter, start playing in the marketplace, the short-term economic value may become disproportionately emphasized over their long-term aesthetic and historical values.
Art is certainly a growing asset class, to use financial language. Wolfgang Wilke says, The zeitgeist and the search for alternatives to the classic forms of investment will ensure that art as an asset class will enjoy an unimagined upswing."
The number of art advisory firms promising to help new art market entrants is growing. Many financial institutions are building up large databases covering various segments of the art market. A few firms are even turning to art experts to build art portfolios for their wealthy clients. But it is never going to be just about the numbers.
Art speaks a language-subjective and unique. Most people who have made money over the years, haven't bought art as an investment. Nearly everyone, from art experts to gallery owners to financial advisers, emphasize that investment should never be the sole-or even the primary-reason to buy art.
I. E. C. Haramis feels, "Collecting art can be one of the most enjoyable ways to spend money. An engaging work can provide its owner with a lifetime of visual pleasure-and then fetch cash! But investment in art should not be solely financially motivated! Buy what you love, because even though it might go through a transitory devaluation, the intrinsic value of the work will always be there!"
Virginia Wilson says, "The art market has been in existence for a long time because of its returns - capital gain, pleasure and social status." Considering that art touches a personal chord, it can never be a staple part of institutional investment portfolio.
Bill Muysken feels there will always be a place for artworks in the investment portfolios of wealthy private individuals who gain enjoyment from investing in art that goes beyond its attraction from a pure investment standpoint, but not in institutional investment portfolios.
And in final analysis, art markets are a lagging indicator of economic growth and are fallout of general wealth creation. Further, just as Bill Muskyn concurs, art has a role in society that goes well beyond its investment value.
Among other things, many owners view the artworks as a symbol of their social status.
That function has existed for thousands of years, and will most likely continue to exist in the future, regardless of the merits of art as an investment, and it is this image associated with it as a connoisseur that creates an ever increasing wannabes willing to pay through their nose to differentiate themselves.
