Topic: How To Invest

Alternative investments: Invest in art for pleasure, not profit

Many investors consider investing in alternative investments, like art. It’s an interesting area that we’ve talked about from time to time with my Inner Circle members.

Our view is that you can’t really invest in art. An investment is something that may one day produce income — dividends from stocks, interest from bonds, rent from real estate, and so on. Art and similar alternative investments produce no income. In fact, art consumes income: you have to pay to insure and/or store it. It’s also expensive to buy and sell.

Expenses will quickly overwhelm any gains

To make money on a work of art, you need to sell it for more than what you paid, plus your accumulated storage and insurance expenses, plus transaction costs of 20% to 50% or more.

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However, unlike some other alternative investments, the supply of art keeps growing. Fashions change and buyers often prefer something new. So your artwork probably won’t bring the price you need to show a profit. That’s why profitable art investments are rare.

In fact, I’d say the vast majority of art depreciates from the time of its first sale.

Some people (especially people who sell or produce art for a living) will vehemently disagree with that statement. They may point to record high auction prices. But auction prices have an upward bias. Few auction houses want to handle art that has collapsed in price, since it may not attract any bids.

For that matter, few art owners want to sell at a loss. So they hang on to works that have dropped in price. They leave the losers for their heirs to sell (or give away, or throw out).

Profitable art investments can only be spotted in hindsight

In art, as with literature, music and other creative alternative investments, no one can predict what will retain value in the future. For that matter, no one can predict what the public will buy or reject this year. It has always been that way.

For example, who could have predicted that Elvis would still be among the world’s top-selling singers, more than 30 years after his death? The people who made money in Elvis memorabilia were fans, not investors.

When estimating the future value of your art, be conservative. Assume it will have sentimental value for your heirs, if any. As the saying goes, “There’s no accounting for taste.”

Though art has dreadful prospects among alternative investments, that’s no reason to skimp when decorating your home (or your office, where your outlays may at least be tax deductible). Buying art that suits your taste is a great way to spend your money. It can bring you pleasure every day of your life.