Headline: How Great, Thy Art
Date: 11/21/2020
Body: I just was scanning Yahoo Finance and I happened upon an article (really a sales brochure) bragging about how easy they make it to invest in art. The full article can be reached at the following link:
I don’t know, they might be right about making it easy for you. But, be careful, I suspect they just made it VERY easy for you to give them your money, too.
One Caveat
Before I give you a list of my concerns in investing in art, please give me a moment to put in a note. I think that art (very broadly defined) is the hallmark of a free and democratic society. Art can be drawing, sculpture, perhaps a sound recording, and they can all be evocative (or provocative), and this is essential in any democracy. In my living quarters, I have several art pieces that I prize highly because of their beauty and the story behind them (art lovers might use the word provenance, sorry.) Point is: I am about to tell you why not to invest in art. But, if you love the painting (or sculpture or sound recording) and you have the economic means to legally procure it responsibly, please, support the artist and be proud to display it.
Two Caveat
It might appear that I am picking on Masterworks, unfairly. If it does, I apologize for that idea. They are merely a representative of the class of companies that should be researched carefully when making a decision to invest. I have no competent evidence to hold against them.
My Chief Concern is…
I guess my first concern is in the actual verbiage, “invest in art.” Art CAN be expensive, and it CAN feel like an investment, even if you LOVE the piece of work. But, in my estimation, you should only purchase the object d’art if you LOVE it. As an investment, the art market is terrible. Most of the time, the market value remains almost stable or decreases, and you end up losing money when you do sell it. If it hung proudly in your home for 20 years, and you incur a 15% loss, you are not so unhappy, because you LOVED seeing it. But, imagine if it was a piece of art that you really didn’t like much, but, the famous artist is nearing the end of their career, and you might make a large profit when you sell it. I suspect you’d be significantly upset by that loss in capital value. This is why you must buy only what you love: really, it’s about your mental health and perception of beauty, they might say. (Perhaps happiness of a partner; This too, must be carefully considered.)
To my mind, the foregoing is plenty to keep me from spending a lot on art. But, the article in question provides reasons why you should consider investing in their service, under a banner “How does it [Masterworks] work?” For the record, Masterworks sells art and fractional interests in art. I will go through some of their “How it Works” section with them:
- “We Purchase Blue-Chip Art.”à 2 problems here, just offhand. Firstly, who is to say what is “Blue Chip Art?” Experts (real experts) can easily disagree, and if the learned experts can argue, laypeople like myself can EASILY (perhaps fractiously) disagree. Second, even if agreement on “Blue-chip-ness” can be reached now, who’s to say if the same judgement will be made when you sell your interest years later?
- “Anyone can Invest”–>Yes, anybody CAN invest. The question that remains open is, “Should THIS PERSON really be the one who invests?” This is not so clear.
- “Management Fees–>Ah, here lies the rub. They are not offering services for free. So, to make a profit, you have to figure into your calculation the management fees that will eat away at your potential profits. And, please remember, most art that does increase in value will not appreciably increase until the artist is dead. Bottom line is that Masterworks (or other Firm) will be receiving your checks for “management services” for potentially, a very long time.
- “How do I monetize my investment?–> This hearkens back to the earlier lines of my post. You never really know what pieces will become valuable, and even if you did, you would never have a clue of the timeline.
A few Other Observations
In a cursory scan of the FAQ, I am able to find a few things more that tend to make my antennae twitch:
- Masterworks (like many other similar entities) is a Delaware-based LLC. To be sure, there are thousands of reputable Delaware-based LLCs, but the business laws in Delaware are famously… err…um… flexible. So, when thinking of making a potentially volatile investment, through a potentially volatile entity, it seems like using a stack of many barstools to get to the second level of a building. It can be done, but the chances of a fall are significant.
- I give them praise because they list the risks of investing in art. But, I feel it necessary to highlight 3:
- They admit that the assets are “highly illiquid.” So, finding a willing Buyer is often not feasible.
- “Issuers are totally reliant on Masterworks.”
- “Masterworks has potential conflicts of interest.”
The Verdict
Caveat Emptor!!! (in Latin that means, “Do your Homework carefully!!”)
FIN
P.S. I was just listening to the TV several days ago, and I saw a Masterworks advertisement, so, this entry is still quite relevant. It also makes me realize that the profits that they make (and take from you) MUST be sufficiently large to afford expensive TV advertisement.
REFERENCES:
Council Post: Investing In Art: An Introduction For The Skeptic (forbes.com)
Does Investing in Art Make Financial Sense? (thebalance.com)
How to Buy Art: The Smart Way to Invest – Bloomberg
A New Way to Invest in a Million-Dollar Painting | The Smarter Investor | US News
Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice. Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.