Saturday, March 14, 2009

Should Art Be Treated Like Stocks?

A correspondent sent us this inquiry, a matter of considerable interest in other places. Here is the issue and below, our response:

Should Art Be Treated Like Stocks?

Over the last couple of weeks Sara and I have had lots of late night conversations with artists and gallerists from all over the world about the current state of the art market and where things might be headed.

One thing that's been surprising for us to hear is that quite a few galleries and artists are talking about cutting their prices for work from established artists.

Surprising because in the past it would be sacrilegious for a gallerist or artist who's built a base of collectors to even consider cutting prices on new work no matter how bad the environment was. For years we've heard gallerists say - "I'd rather go out of business then cut my artist's prices."

The reason for this has been that if you cut an artist's price you alienate the buyers who purchased similar sized work only months before. It's also seen a signal to collectors that the demand for the artist's work is waning.

But this year, with many galleries facing the real possibility of shutting their doors, the discussion of cutting prices has changed. Many gallerist and artists are admitting that the prices for a lot of the work over the past few years has been far too high, rose far too quickly, and now completely impossible to sustain. Seemingly overnight, many artists went from pricing their work at $3,000 to $30,000.

So what do these artists do now? That's what everyone is asking. Do they cut their prices so their galleries can try survive? Do they hold their prices and wait it out?

One European gallery told us that they were thinking of cutting prices by as much at 30% this year. They said:

"As an investment, art should be treated no different than a stock. Investments go up and down. Why shouldn't art? On the flip side - If you buy art not as an investment but because you love it, why should it matter to you if the price comes down? You bought it because you loved it, not because of it's value."

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This is a classical problem that has afflicted artists since time immemorial. Times change and the reputations of artists change. Jan Lievens was, during his lifetime, a peer of Rembrandt's and equally valued by their contemporaries; some of his paintings were even wrongly attributed to Rembrandt. The subsequent divergence was enormous. Nevertheless, a renaissance of appreciation for him has only recently occurred since the "marketing" of Lievens was vastly less effective than Rembrandt's. Both these artists and this story provides a way of approaching the problem posed. Rembrandt was an active buyer and seller of his own and other artists' works as well as a prolific etcher.

The question here concerns Art as an investment vehicle. Among such are stocks, bonds, commodities and collectibles. Art is certainly in the last category and, like some others including furniture and baseball teams, has the ability to afford psychic pleasure to its owner. It is like some but different from others.

First of all, Art is not like stocks. Stocks are machines for generating profits and art is not. The only function of stocks and the businesses underlying them is pecuniary. Art, somewhat like commodities such as gold or diamonds, and also classical furniture, rugs, etc has no profit-generating capacity. Its pecuniary value is solely restricted to its possible speculative appreciation i.e. the chance that you could sell it later for more than you paid for it and the risk that you might sell it for less. Behavioral Economics ( such as Tversky & Kahnemann ) demonstrated that the aversion to loss outweighs in psychic utility the pleasure from gain.

However, Art is not a commodity. The latter is not differentiable although De Beers has tried, and sometimes succeeded, to make diamonds the individualized things that art is, intrinsically.The reason to mention this is that De Beers has been active in managing the supply-demand balance even at the cost of keeping things off the market in order to maintain prices. This control is not possible for other commodities like gold, silver, copper, etc although these can, except for gold, be consumed by the owner whereas Art cannot ( and, of course, should not ).

What does one do when it seems that the prices have risen faster than market demand? The conundrum is that, always assuming that the Art will stand the scrutiny of time ( as Bernard Buffet did not and as some suspect Andy Warhol might not ), one can keep it off the market to keep prices from obviously falling but at the cost of starvation or, for the gallery, bankruptcy. It has long been noted that an Art Gallery is a good way to build up an estate but a lousy way to make a living. It can do both only when it is selling briskly and prices are stable to rising. When sales falter, the first question to ask: has the fashion for this Art died down or has the economic climate reduced the number of buyers in general.

The usual principles of supply and demand would have you drop the price but Art is different. Some things sell better at high prices ( at least with rising prices ) and sell worse or not at all when prices go down. It is wisdom from hindsight that tells us not to let the price rise too high too quickly but ordinary greed holds in the Art business as well as in financial instruments and houses and it is too late to determine what should have been done. What to do now?

The intrinsic value as an investment vehicle is to have the price go up or at least not go down. You cannot make it go up but you can, at least, prevent it from going down by restricting the supply and not making sales at prices obviously below those of the past. The latter would signal to the investor part of the market that this is a flawed investment and may actually inhibit sales because no one knows how far the prices will drop. People have to live somewhere and people have to drive cars but no one has to own new art.

Can transactions still take place? Yes, provided that it is done circumspectly and with cooperation. Whatever transactions that take place should be in such fashion as not to make it obvious that the cash price has gone down. How can this be done? Barter has worked in similar circumstances: I'll trade my two $5000 cats for your $10,000 dog. I'll sell you this for $20,000 and make you a gift of another one for free. Here we see a major difference between Art and stocks. These suggestions are manipulative and, applied to stocks, would get you to the slammer. Art, fortunately, is one-off and the idea of a market price is more vague.

More to the point of making a living while waiting is to change the nature of the Art. If you've been selling 8' X 6' oil canvases perhaps you should start making and trying to sell 4'X3' canvases or etchings or lithographs in adjustable numbers of signed copies. That will enable both the artist and gallerist to live and make it difficult to render judgments about whether the artist's work has gone down in price or not. (You don't really sell Art by the square foot.) If you keep up the last price sold, you can even make donations of works to museums and collect more in tax deductions than you might fetch after taxes in the spot market.

In sum, don't be too greedy in a rising market and hold the price point in a falling one, if at all possible. Dropping your prices is a slippery slope and might not even bring in new customers at lower prices to compensate for losing your previous ones.

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