This week's doses of finance, the world and other notables:
#1. Doses of Finance 💰
Purchase a Picasso for Peanuts
I recently co-bought an original Banksy piece.
No, I didn’t fork out millions. Instead, I purchased shares in the original piece that has been securitised and offered to the public.
Most people cannot afford to buy an original Banksy. Or Basquiat. Or Picasso. Or Pollock. Or Rothko.
However, investing in fine art is no longer limited to the wealthy elite. While you still may not be able to shell out millions to hang a Monet in your home, you can still own part of a masterpiece - and earn investment returns while your at it…
They make investing in contemporary fine art easy and have become one of the largest art buyers in the market. Plus, they’ve returned +30% to their investors three years in a row.
This isn’t a sales pitch. I have no affiliation with the company. I just haven't been able to find a fault with this incredible business.
The only problem? Apparently there’s a big waitlist for membership. Although I managed to get through it pretty quick after a short “interview”.
How it Works
First, their research team uses proprietary data to determine which artist markets have the most momentum and then purchase a good piece.
They then securitize the artwork. In other words, they register it with the Securities and Exchange Commission to allow anyone to invest by offering shares to the public, similar to an IPO.
Unless you are in the US, the shares are rather illiquid as you will need to wait for them to sell the painting (3-10 years holding period).
If you are in the US, their platform allows you to trade shares on a secondary market if there are any buyers (not guaranteed).
Their fees are not cheap - 1.5% annual management fee plus 20% of future profits. Pretty much what you would expect with a private equity or hedge fund. But for that you get all the assurances of professional storage, insurance, regulatory filings and appraisals. And it’s in their interest to sell the painting at a higher price for those "performance fees".
Obviously there are risks.
Including the fact that Masterworks has a unique and yet unproven business model. Artwork may also be sold at a loss and there is no guarantee that a profit will be made.
Investing in art in general is subject to numerous risks, such as potential fraud, damage and litigation. It is also highly illiquid and the ability to sell artwork and the timing of sale is unpredictable. There is also the risk that you could lose part or all of your investment.
Why Would You Want to Invest in Art Anyway?
Here are a few reasons why you might consider investing in art.
Art, as an alternative asset class, offers low correlation to traditional equity and bond markets.
During the financial crisis of 2007 to 2009, the decline in art prices for the top 100 artists was estimated at between 26% and 28%, while the S&P 500 declined 56% from its peak.
Subsequently, blue chip art presents an opportunity for investors who want to include it as part of their alternative asset strategy and lower their overall risk through diversification.
Economists have used various approaches to calculate the correlation between art prices and other asset classes. It is believed that the coefficient between art prices and the S&P 500 lies between -0.03 and .19. This basically signals that when equity markets decline, fine art is more likely to retain its value.
As I wrote last week, a recent report from Pictet which looks at the next 5 years says that investors should expect lower than historical returns from mainstream asset classes.
With Goldman Sachs' Chief U.S. Equity Strategist predicting S&P 500 average annualized returns of 6% over the next 10 years, investors are looking for new avenues to build wealth.
It is estimated that the total value of privately held art to be $1.7 trillion and is one of the largest asset class to never have been securitized.
According to Artprice, the value of blue-chip art has outpaced the S&P 500 by 180% from 2000–2018.
The art market is up 32% in 2022—compared to 20% losses for the S&P—and the WSJ calls art “among the hottest markets on Earth.”
The stock market has been in free-fall this year. We might expect ongoing volatility as the guessing game about the outlook for interest rates and inflation continues.
Real assets like art can help provide protection in an inflationary environment. Of the major asset classes available to investors, art can mitigate risk because it shares a very low long-term correlation coefficient to the S&P 500 Index, as mentioned above.
Invest in What You Love
For lovers of art who are also interested in earning investment returns to beat inflation but could never afford to spend millions on a piece, it’s hard to beat owning a piece of an artist you admire.
Investing in fine art can be a good investment for some but is a risky endeavour. It is not guaranteed that all art will appreciate, so you can can never be sure what the future value of the art will be.
I'm a lover of all kinds of art - particularly street art, Japanese woodblock prints of the Edo period and abstract expressionism. (You may have noticed the Renascence logo is inspired by Mark Rothko paintings). So I'm happy to throw a few quid at it.
But this is not for everyone.
Given its high illiquidity, you should be prepared to set it and forget it. Art should also not make up more than around 15% of most portfolios.
Of course, everyone is different, so best to get some professional advice if you're not sure.
#2. In the World 🌎
Freedom in the World 2022
The Global Expansion of Authoritarian Rule
Freedom House's most recent paper discusses democratic decline in countries across the world from Nicaragua to Iran to Mali and Myanmar, and the rot within democracies from the United States to El Salvador.
"Global freedom faces a dire threat. Around the world, the enemies of liberal democracy—a form of self-government in which human rights are recognized and every individual is entitled to equal treatment under law—are accelerating their attacks."
"In countries with long-established democracies, internal forces have exploited the shortcomings in their systems, distorting national politics to promote hatred, violence, and unbridled power. Those countries that have struggled in the space between democracy and authoritarianism, meanwhile, are increasingly tilting toward the latter."
"As of today, some 38 percent of the global population live in Not Free countries, the highest proportion since 1997. Only about 20 percent now live in Free countries."
Democracy is an acknowledged folly. That's how Alcibiades, the Athenian statesman of the 5th century B.C., had described it, anyway.
It's (un)useful to be reminded that Democracy came from the Ancient Greeks.
But neither the Greeks nor the Romans knew anything about it (the Romans especially). The Classical world flourished not under Democracy but under Tyranny - a tyrant being a leader who seized office rather than waiting to be voted into it.
"In another sign that international deterrents against antidemocratic behavior are losing force, coups were more common in 2021 than in any of the previous 10 years."
Throughout the Classical world, it was only briefly and exclusively in Athens that democracy had seemed to be working and, apart from producing the Parthenon, the theatre, and the basis on which all subsequent philosophical thought evolved, it ended in complete disaster.
Not that modern day democracies will ultimately end up in disaster. But they often end up in war.
+ An Art Crime For the Ages. "Deep in the Cambodian jungle, investigators are unraveling a network that trafficked antiquities on an unprecedented scale and brought them all the way to the Metropolitan Museum of Art." [Bloomberg]
+ Why won’t parliament speak up on Charles? "Princes are not bound to give account of their actions, but to God alone," said Charles I after dissolving parliament in 1629. Much has changed in the succeeding four centuries, but parliament’s response to news that Prince Charles repeatedly accepted large bags of cash from a Qatari sheikh would have met his namesake’s approval. Because it has said nothing at all. [The Times]
Ardent football fans will get this one ^.
Get Rishi Sunak in as Conservative leader I say. Above all, the UK needs economic leadership in times like this. Although the bookies currently have Defence Secretary Ben Wallace as a favourite to replace Boris, for some reason.
#3. Sources of Interest 💡
- How football shirts chart the rise and fall of tech giants. "Sponsoring a football club — proper football, that is — is more than just a business transaction. It’s about using the world’s most watched sport to promote your brand. And for decades, it’s been a route taken by emerging tech companies, flush with cash to burn and a name to earn. But these sponsorships actually reveal something about the tech industry as a whole: when you trace the history of these commercial deals across the decades, patterns emerge." [Rest of World]
- If We’re Living in a Simulation, the Gods Might Be Crazy. "A professor of philosophy responds to David Iserson’s "This, but Again." That we’re living in a computer simulation—it sounds like a paranoid fantasy. But it’s a possibility that futurists, philosophers, and scientific cosmologists treat increasingly seriously. Oxford philosopher and noted futurist Nick Bostrom estimates there’s about a 1 in 3 chance that we’re living in a computer simulation. Prominent New York University philosopher David J. Chalmers, in his recent book, estimates at least a 25 percent chance. Billionaire Elon Musk says it’s a near-certainty." [Slate]
- Reading Ourselves to Death. "We are awash in text. The cumulative cultural effect is a kind of mass delusion. We may believe that all this text somehow captures reality. But as the words engulf us, the world recedes ever more from our grasp." The average internet user, it is estimated, can see almost half a million words in a day — more than is in War and Peace. Horrifying thought. [The New Atlantis]