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Everything You Need To Know Before Your First Big Art Investment: Part II

Lisa Schiff, Art Investment

With Lisa Schiff, President and Senior Advisor at Schiff Fine Art Advisory

Steve returns to his conversation with Lisa Schiff, President and Senior Advisor at Schiff Fine Art Advisory, one of the most recognized art advisors in the country.

The Role Of Foundations

The art world is mostly dominated by big players, museums, wealthy private collectors, and well-endowed foundations.  Steve wants to understand whether they are driven by the love of art or by its investment value.  Lisa says the motivations are two-fold; they originate with a real love for art, not a desire to buy it for profit, and are balanced by a desire to make sure investments in art are headed in the right direction as an asset class.

Are Art Valuations Too Frothy Now?

With the stock market in record territory, rising real estate, and acquisitions minting wealthy hundred-millionaires and billionaires, Steve wonders if the art market is getting frothy with too much money chasing marquee art deals, such as the astounding $450 million sale of a Da Vinci painting in November 2017.

Lisa doesn’t feel the market’s too frothy because there is an abundant supply of art across 20,000 galleries, all of which are chasing about 2,000 serious art collectors worldwide.  With more supply than demand, the art market’s at a healthy balance for now, with little risk of an imminent drop.

Steve sees parallels with the stock market, which is a little frothy in his view but also has good reasons to justify the rise.

Collecting Art To Playing In The NBA

Referring to one of his prior segments, Why Investing in Art Is Like Playing for the NBA, Steve notes that John Maynard Keynes, the great English economist, had a 135-piece art collection valued at about £70 million, of which 10 pieces alone accounted for £64 million.

As an art advisor, Lisa attributes the valuation imbalance of Keynes’ art portfolio to the vagaries of the art market and suggests that the other 125 works may have had a higher value at a different time, when they may have been more favorably viewed by the public.  For those seeking liquidity, she sees art as a terrible investment because getting the right price for art takes time and patience.  Even though a work of art may be valued at $10 million, getting an immediate buyer at that price isn’t always possible.

Can Art Indexes Do Justice To Valuations

Digging deeper, Steve wants to know if there are any indexes for art, similar to the S&P 500 for stocks, for instance. There are no indexes, explains Lisa, because there isn’t enough data. Furthermore, she doesn’t believe market reports on art, art trends, or algorithms can do justice to the true value of a work of art, nor can anything substitute being in the room when art is being auctioned.  In reality, only about 10% of an artist’s repertoire is fantastic; so a “name” does not always translate into value.

Lisa mentions an app called Magnus which is trying to increase transparency of artwork pricing, billing itself as the world’s best art-price database, but says it was unable to recognize and price a David Hockney that Lisa uploaded to the app. In her opinion, apps, algorithms, and indexes have a long way to go before they threaten art advisors.

Lisa is cautiously optimistic, however, that technology could give people greater confidence in their own tastes in artwork.

Primary Vs Secondary Market

Lisa highlights the nature of primary and secondary markets.  Ninety percent of the best artists in all of the top galleries have healthy primary market prices but haven’t been re-sold and have no pricing data in secondary resale markets.  As a result, some artists are not listed in secondary market databases and, if listed, bear artificially low prices that do no justice to their true value as art.

Advice For The Average Art Buyer

Steve notes that most Americans can’t afford high-priced art and wants Lisa’s advice for average buyers.  For those people new to the appreciation of art, Lisa recommends spending time at galleries and museums to figure out your own likes and dislikes, doing a lot of research, asking a lot of questions, and taking your time before making any major investment.

Riskiest Art Purchase

Steve wants to know what the riskiest assets are in the art world, comparing them to the risks posed by emerging new companies, mid-sized companies, and established companies.

Lisa Schiff believes emerging artists and their earlier artwork carries the most risk.  Her advice to aspiring art buyers is to determine if the piece is visually and conceptually compelling, to check for notable historical relevance, and see if the art is strategically placed.

In summary, art is a terrible investment, has no reliable valuation methodology, lacks liquidity, and changes capriciously in value depending on prevailing art-market taste.  Knowing these drawbacks, if you still wish to buy art, spend a lot of time getting to know different artists and styles through museum and gallery visits, take time to develop your own taste, and then buy what appeals to you. True value can often be in the eye of the owner.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Read The Entire Transcript Here

Steve Pomeranz: I’m back with Lisa Schiff. Lisa is President and Senior Advisor of Schiff Fine Art and one of the most recognized art advisors in the country. And we were talking about actually the Leonardo da Vinci painting that just sold for 450 million. I wanted to switch gears here, Lisa, and talk about the role of foundations.  I think there are big players in this market and also big private collectors. What are their motivations? Is it just for the love of art or is it mostly as an investment orientation?

Lisa Schiff: I think it’s twofold. I think first and foremost, you really need to have the bug to go into this at a high level, and everybody I work for is 100%, loves what they’re buying. And, of course, because the numbers are high, you don’t want to be throwing money out of the window. So they’re not buying art to trade it. They just want to make sure their asset class is going in the right direction.

Steve Pomeranz: The stock market has been rising for eight, nine years. Real estate is rising; corporate earnings are fantastic. A lot of private companies are being bought by larger companies and minting these hundred millionaires and billionaires. So there’s a lot of money floating around. Is there ever a sense that, especially with that $450 million sale of the da Vinci painting, that the market is getting pretty frothy and maybe this signals some kind of a top of the market?

Lisa Schiff: No, it doesn’t feel frothy to me at all, actually. There are not that many collectors in the world, to be honest. There’s a statistic out there, and there’s like 20,000 galleries basically chasing 2,000 people. So, there’s a lot of supply and less demand, and it’s actually been healthy lately but not overly bullish in a way where you could feel something’s going to drop.

Steve Pomeranz: Okay, okay. It’s funny because I feel that way about the stock market; it is high but there’s good reasons, and it’s starting to get a little frothy in my view, but it hasn’t felt like that either. I kind of get what you’re saying. I want to go back to the piece that I talked about a few months ago where I compared art collecting to playing in the NBA, and I mentioned that the great economist, the English economist, John Maynard Keynes’ art collection sold for 70 million pounds some time ago. And of the 135 works that he’d collected over his lifetime, only 10 accounted for 64 million of the 70 million pounds. In other words, 10% of the collection garnered 90% of the value, and the remaining 125 works really weren’t worth that much. Is that still true in your experience?

Lisa Schiff: It depends on how much money it cost him. I would say liquidity is where there’s a lot of misconceptions in collecting art because, maybe 20 years ago, the other 10% of his collection was more valuable than it was the day that it’s sold. So I think that is sort of something you have to consider.

Steve Pomeranz: So it’s subject to fad and fashion, so to speak?

Lisa Schiff: On the one hand, I would argue that art is a terrible investment because it’s absolutely illiquid, and I’m always shocked when people are surprised when they want me to sell something on that day, and I can’t. But it doesn’t mean that their painting isn’t worth $10 million. So that is where the understanding of value in the art world gets really complicated because it might still be worth $10 million from your insurance replacement. Even any appraiser is going to come in; they’re going to still put it there because that’s where the market is, but it doesn’t mean I can find a buyer.

Steve Pomeranz: Okay, so let’s come into the 21st century and let’s talk about maybe some indexes for art, so people can kind of see, like the S&P 500 you can kind of follow what the average price of a large company’s stock is, or algorithms that can be created to deal with that complexity.

And also, I understand that there’s a new app that you told me about that I signed up on, and I want to talk about that; it’s called the Magnus App. But let’s get to these indexes and these algorithms. Are those viable today?

Lisa Schiff: Not for me. I could care less because the only way I can judge value is by having my sniffer to the ground. I can read every report about the auctions, but if I am not in the room—it’s so different when you’re there and you understand the nuances of what’s going on—but the sale on paper might look like it was fantastic when it was really a big disaster. So, I don’t really care about market reports or trends or algorithms, but I am sure—and I’m open to changing my mind because I don’t want to shy away from things—there are many people who are trying to develop them, and the truth is, we still don’t have enough data. And that’s where an app like Magnus, which is collecting way more data than ever before because of the nature of it, which I can explain in a second. When we have more data, maybe it will be viable. But I have other reasons not to care. I think maybe if you don’t know anything, it’s an interesting guide, but I think it’s a dangerous guide. And don’t forget, every artist, 90% of their work is okay, 10% of it is fantastic, so I can’t read those nuances.

Steve Pomeranz: So, the Magnus app is this new app; I downloaded it.
And I have some art in my own possession. And I took pictures of it, and I uploaded it. And they did not recognize it. Now, one is a David Hockney. So you think that it would have been recognized, but it wasn’t. And then someone was supposed to get back to me and tell me what they found, and nobody ever did, so I put in the description myself.

Lisa Schiff: Great.

Steve Pomeranz: I guess it’s kind of brand new and maybe it’s like…

Lisa Schiff: This is the point, so if it’s never been photographed before or at auction before, then it won’t be in there, right? And the reason why it’s expanding so fast is because it is crowd-sourced.

Steve Pomeranz: Yeah, that’s what I was going to say.

Lisa Schiff: So that is the key element here that no other app has really tapped into. Basically, the primary asking price and secondary market private sale asking prices are getting entered into this and can mix in with the publicly posted auction results, and that tells an entirely different story than just the auction results.

Steve Pomeranz: Well, maybe that’s the beginning of this data-gathering needed to get these algorithms to be more effective.

Lisa Schiff: Absolutely, and I know that people developing them are looking at all kinds of data beyond pricing to try to come up with formulas.
I really am not that interested, but maybe it will be convincing at some point, I just haven’t seen anything that’s up to snuff. But I’m excited about this app because people don’t have the confidence they should in their own taste. And a lot of people say, “I’m just buying quality Blue Chip now,”
which really is just a way of saying, “I’m just buying what is going to sell at auction.”

Lisa Schiff: …and then you just end up supporting like three families at auction, and it just ends up in this circuitous place where I would say 90% of the best artists in all of the top galleries don’t have auction secondary markets.
They have very healthy primary markets.

Steve Pomeranz: What is a primary market?

Lisa Schiff: Primary market is right from the studio into the gallery; no one has owned it before me. So you can take an artist who has been in more museums or is in more museums than somebody like a Jeff Coombs, for example, but who doesn’t have the auction results that Jeff does, he could be—this supposed artist X, let’s say—could be 80 years old.

So his primary prices are already up to 250 grand. Now if people just look at Artnet for auction prices, they’re going to say, “Wow, this is really expensive. He doesn’t have a second, these are trading for $10,000 over here.”

Steve Pomeranz: Yeah.

Lisa Schiff: That’s a big problem. But if you saw the primary history, there’s tons of sales, just not secondary. So it’s an interesting thing, could shift a lot of the power in the art world, if it works.

Steve Pomeranz: Let’s bring this down to earth a little bit. There’s just a lot of us out there that are not art experts; we’re not well-heeled enough to spend $250,000 on a painting, but we may go to an auction and even…I’ve been [LAUGH] on a cruise once, and they have these art auctions on the cruise— which I could just say “stay away”—but what about this idea about the average person going to an auction? Is this a bad thing, is it okay, what should they do?

Lisa Schiff: I would recommend, first of all, I would look at as much art as I possibly could in the flesh. Go to galleries; go to museums. Start to figure out what you like, and then do the research. Read what you can; just keep asking. If I were just getting started and were going to spend a substantial sum of money, I would be very careful and take my time.

Steve Pomeranz: One last question. So, what is the highest risk investing in art? Is it the emerging artist, is it the one that’s been around for a while, or is it the established artist? Is this like emerging new companies and mid-sized companies and then established companies? Is it the same risk profile? We have a minute.

Lisa Schiff: I don’t know what those are, but I would say, yes, emerging is definitely the biggest risk; it’s the cheapest, but it’s high risk because there’s not enough there to really gauge how relevant it’s going to be. Is it going to stick? But I have three things I usually look at too before I buy a work of art which is, is it visually and conceptually compelling, is it historically relevant, and is it strategically placed? But even with all of that, the highest risk, I would say, is on the young early stuff.

Steve Pomeranz: So I want to thank Lisa. Lisa is President and Senior Advisor of Schiff Fine Art and also advisor for Leonardo DiCaprio Foundation and an art advisor to Leonardo DiCaprio. And remember to hear this discussion again, to read it, to weigh in with your opinion, or share it with friends. Join the conversation at stevepomeranz.com.