- Investing in art, long considered an exclusive business for the ultra-rich, is being democratized by a startup called Masterworks.
- The platform allows people to buy “stocks” of paintings that would individually cost several million dollars.
- Founder Scott Lynn brought 20 years of art collecting experience to the company and shared his advice for potential investors with Business Insider.
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In the investment world, art is one of the few asset classes considered to be the preserve of the top 1%, and people willing to take risks on esoteric valuables.
Namely, individual masterpieces can easily reach six or seven figure territory. And sometimes you hear about oddities like the Scotch Banana that grossed $ 120,000 in Miami last year.
This is where a platform like Masterpieces comes in. Founded by Scott Lynn, the New York-based company aims to level the playing field and provide research that helps potential investors make informed decisions.
The company allows people to buy fractions of arrays and owning “shares”, as if you were buying shares in a giant corporation.
To facilitate this, Masterworks first identifies and buys the paintings at auction. His targets include so-called first-rate works such as that of Claude Monet “Gale“, which he bought from Christie’s for $ 6.3 million.
The company then files each board as a public offering with the SEC, offering shares at $ 20 apiece. According to Lynn, the minimum investment ranges from $ 1,000 to $ 10,000 per board and a single offer can attract up to 3,000 investors.
The art appeal to these investors was spelled out in a recent Citi report which relied heavily on data from Masterworks.
He showed that art has a close to zero or negative correlation with most asset classes, which means that its prices move quite independently. Citi calculated that the highest correlation between art and any other major asset class from 1985 to 2018 was 0.3, with cash. Its correlation with developed market stocks was even lower at 0.13.
The benchmark for art in these comparisons consisted of three Masterpieces indices constructed for contemporary art, impressionist art and the broader market.
“Perhaps the most attractive quality of long-term investment in art has been its potential for diversification,” Citi wrote in its report. Used in conjunction with gold – another asset valued for its low correlation – art in an investment portfolio has helped improve diversification over time.
The problems with buying works of art, unlike other asset classes, ranged from huge transaction costs to inadequate data. And that’s where Lynn thinks she can take advantage of it.
“We see the opportunity as building the infrastructure – really the plumbing – that allows people to allocate a certain percentage of their portfolio to art,” he told Business Insider.
3 good practices
Just like stock picking, potential investors need to think hard and research what to buy.
They also need to understand the risks. These include a recession that affects the top 1% who still dominate the market, and a popular artist today who loses his appeal in the market tomorrow.
Lynn has distilled her 20 years of experience in this field into three best practices for choosing art with the greatest likelihood of appreciation over time.
First, the most important thing that determines whether you win or lose money is the artist himself. And so, yes, the masters of this universe like Picasso, Monet and Warhol are always your best bets.
“These artists tend to appreciate in single digits, even double digits, but these are very good stores of value,” Lynn said. “It is very unlikely that you will lose any money investing in any of these paintings.”
The second thing to consider is intermediate artists like LA-based Jonas Wood, whose works tend to appreciate at higher rates than the aforementioned legends. One risk to consider, however, is that there is no way of knowing whether history will be so kind as to keep the works of these artists in high demand.
The final guideline that Lynn offered was to be aware that art appreciation tends to follow recency. It just means that newer works tend to appreciate faster.
“If you buy a $ 10 million Rembrandt today, you will likely sell that Rembrandt in 20 years – adjusted for inflation – for roughly the same amount you bought it for,” Lynn said.
“Conversely, if you buy a well-known post-war contemporary artist today, you will likely return between 9% and 15% per year.