I do not like art as a long-term investment. Why?
Artwork not generate any cash flow. Strike One.
Artwork costs money in storage fees. Strike Two.
Artwork costs insurance. Strike Three.
Artwork sales require expert opinions on authenticity and valuation. Strike One.
Artwork can be damaged for a 100% loss with a toss of coffee. Strike two.
Artwork contains high transaction fees to buy. Strike three.
Artwork is taxed at a rate over ten percentage points higher than the capital gains rate. Strike one.
Artwork cannot be divisible as part of inheritance planning. Strike two.
Artwork is highly illiquid and takes approximately six months to sell. Strike three.
That’s the end of the inning.
For these reasons, I have an extreme bias against artworking investing.
I want you to acquire cash-generating assets that allow you to wake up on a lazy Saturday morning and see $583 deposited into your checking account. I want you to have monthly cash flows that are so extremely high you can buy whatever you want and still retain half your dividends for further investment. When I run this site, my vision is that the assets you own will deliver wealth to you on an ongoing basis.
When you get into fixed assets like Ty Cobb autographed baseballs, Bruce Springsteen signed albums, gold and silver, and yes, artwork, the only time you’re making money from it is when you relinquish your ownership position.
I vastly prefer a goose that lays a few golden eggs each month like you see with with regular dividend payments.
With fixed objects, you have to kill the golden goose to reap a bounty. Your gains come from giving it the Oliver Cromwell treatment. Off with its head!
Despite my personal aversions to art, I do believe in discussing the full picture (pardon the pun), and there is a fact about art that is counterintuitive. For the last fifty years, artwork has delivered returns of 9.06% annually. That sounds very competitive with equities, which have delivered 9.54% annual returns.
However, this does not mean that the net-of-tax returns from art are within a half percent of equities. With stocks, you would have to adjust for dividend taxes–stocks like Berkshire Hathaway wouldn’t be affected while others like AT&T would be greatly affected when performing an after-tax analysis.
But with artwork, you have to deal with the relatively extreme transaction costs. You have to pay a 25% fee on the first $200,000 of the hammer price; 20% on the range between $200,000 and $3 million; and then 12% on anything above that. That knocks your returns down to the 7% range from art if you go through a major auction house. The figures above are taken from Sotheby’s. And on the sale, the artwork is taxed at a rate of 28%.
That knocks your returns down to the 5% range.
When you consider that inflation runs at 3.5%, you’re only left with a 1.5% return. And from that, you have to figure in the costs of insuring the artwork, storing the artwork, and receiving expert opinions relating to its authenticity and valuation.
I would be careful when you encounter data points about artwork investing because those figures give you the returns without inclusion of the frictional costs. That is fine–costs vary, and you should perform the due diligence before making a semi-permanent investment like that. But when you do investigate, you will see that the costs of buying artwork, maintaining it, and bringing it to auction, along with the final tax rate, can eat up nearly all of your expected returns. When you combine this with the lack of cash flow and liquidity, you will likely reach the same conclusion that artwork is rarely more than a vanity investment.
Originally posted 2017-02-04 10:20:22.