THE BLOG

Art as Investment

04/13/2015 02:52 pm ET | Updated Jun 13, 2015

In February, the art market was shocked by the news that Marina Picasso, granddaughter of Pablo Picasso and heiress to about 10,000 works by the artist, plans to sell an indefinite number of works to finance and broaden her philanthropy. Ms. Picasso had been regularly selling works by her grandfather for years to support herself and the charities she has founded -- yet, what shocked market speculators was that she planned to speed up this flow, and sell a lot at once. Instead of selling the works through an auction house or art dealer, Ms. Picasso plans to sell each of these works in private sales. Her unconventional approach has art dealers and auctioneers, who are traditionally used to controlling the sales of rare and expensive art, worrying over the potential repercussions. At $449 million sold, Picasso was the world's second highest selling artist at auction in 2014, just behind Andy Warhol. Picasso's famous Femmes d'Alger (1955) will be offered at Christie's auction house in May 2015 with an estimate of $140 million, and will likely be auctioned for more than Francis Bacon's record-setting Three Studies of Lucian Freud (1969) sold at $142.2 million in 2013, potentially making it the most expensive painting sold at auction, ever. Dealers, auctioneers, and private owners of Picassos have a lot to lose if Marina Picasso floods the market with her grandfather's work, as auction sales and private baluations of Picasso's works will undoubtedly plummet.

The story of Marina and the Market offers an interesting case study of the art market, and the role of artworks as investments. The works of name-brand artists such as Picasso, Warhol and Bacon have become very much akin to stocks in name-brand companies such as Apple, Google or Amazon. The sale of Picasso's Femmes d'Alger this year, expected to break the record for the most expensive painting ever auctioned, is akin to Facebook's 2013 IPO, the world's third largest at $104 billion. In an article on the future sale of Picasso's work, Artnet, a prominent online art market watchdog, described the auction house Christie's effort to "mitigate risk" by offering a guarantee on the sale. This language is reminiscent of the rhetoric surrounding hedge funds, mutual funds, and the multitude of instruments that our global financial system deals in. Risk is a key factor in this system -- at its most basic level, riskier investments can lead to both higher rewards, and greater losses. The global financial crisis of 2008 is brought to mind, which began because of risky mortgage investments by large banks such as Fannie Mae, Freddie Mac, Goldman Sachs, and Citigroup. This comparison begs the question; will the art market meet a similar fate?

People often buy art in the multi-million dollar range not just because they like it (although that may be a factor), but because they think that the work of art will appreciate in value. You buy a stock expecting to be able to sell it for a higher value later -- however, whether or not the value of stock will go up or down from here on out is unclear. Uncertainty is one of the most potent forces in the stock market; as Matthew McConaughey's character said in The Wolf of Wall Street, "Nobody knows if the stock is going up, down, or in circles." In many ways, there is much less risk involved with buying a Picasso than buying stock in a Fortune 500 company. Picasso is one of the world's most sought-after painters, and his place has been firmly established in the art historical canon as one of the world's best modern painters, if not the best. Picasso will never go out of fashion, and his works will always be sought after. Picasso was remarkably prolific during his career; the Picasso Project has catalogued upwards of 25,000 works by the artist, and there are doubtless many more. There will always be Picassos to sell, and there will always be someone to buy them.

Yet beyond the Picassos, the Warhols, and works by a handful of modern and historic masters, much of the art that is bought at the big fairs and auctions, which constitutes a large part of total art sales, is from contemporary artists. Preeminent among these is Damien Hirst and Jeff Koons. Hirst is famous for his record-breaking diamond skulls and embalmed sharks, while Koons is best known for his metallic balloon animals, including a red balloon dog that sold for $58.4 million. However, whether or not future investor-collectors will value works by Hirst or Koons for more than they are valued at now remains to be seen. The global financial crisis of 2008-09 was brought on by the collapse of banks that were heavily invested in subprime mortgage-backed securities, which were based on mortgages extended to people that were unable and increasingly unlikely to repay. Those securities were failed investments -- because so many people defaulted on their mortgage payments, they were bought for more than they would be worth in the future. While it is somewhat of a stretch, the multi-million dollar sales of works by contemporary artists such as Damien Hirst and Jeff Koons are similar to those securities in that there is no guarantee the works will increase in value. The bullish trend in the contemporary art market has built up excitement around particular contemporary artists just as the global financial market had built up excitement around presumably low-risk mortgage-backed securities and other "new" financial instruments. Hirst and Koons do not have the same critical validation that Picasso had, and occupy a much less secure place in the art historical canon. Future investor-collectors will undoubtedly be caught up with some other "hot" artists, and those that have bought multi-million dollar works by Koons and Hirst will lose out big time. Because, let's face it, there is absolutely no way that someone would spend $58.4 million on a balloon animal for aesthetic or sentimental reasons.

The investment mindset of collectors and the bullish trend in the contemporary art market has undoubtedly changed the entire art world for the worse. Collectors that buy art because they like it are being crowded out by oil-barons from the mid-east and wealthy investment bankers that instead buy art to invest. Contemporary artists feel increasing pressure to play into the market in order to succeed. It will take a crash-like the global financial crisis to change this speculative attitude towards collecting art, and it is no longer a question if this crash will come, but when.