Kirsty Wigglesworth/AP
- Art investing, long considered an exclusive venture for the ultra-rich, is being democratized by a startup called Masterworks.
- The platform allows people to buy "shares" of paintings that would individually cost several millions of dollars.
- Founder Scott Lynn brought 20 years of art-collecting experience to the business, and shared with Business Insider his advice for prospective investors.
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In the world of investing, art is one of the rare asset classes seen as the preserve of the top 1%, and of people who willing to take risks on esoteric objects of value.
To wit, individual masterpieces can easily run into six- or seven-figure territory. And occasionally, you hear of oddities like the duct-taped banana that fetched $120,000 last year in Miami .
That's where a platform like Masterworks comes in. Founded by Scott Lynn, the New York-based company aims to even out the playing field and provide research that helps prospective investors make informed decisions.
The firm enables people to buy fractions of paintings and own "shares" in them, similar to buying equity in a giant corporation.
To facilitate this, Masterworks first identifies and buys the paintings at auctions. Its targets include so-called blue-chip works like Claude Monet's "Coup de Vent," which it bagged from Christie's for $6.3 million.
The company then files each painting as a public offering with the SEC, offering shares for $20 apiece. According to Lynn, the minimum investment ranges from $1,000 to $10,000 per painting and a single offering can attract up to 3,000 investors.
Why art?
The appeal of art to these investors was spelt out in a recent Citi report that relied heavily on Masterworks' data.
It showed that art has a near-zero or negative correlation to most asset classes, meaning that its prices move quite independently. Citi calculated that the highest correlation art had with any other major asset class from 1985 through 2018 was 0.3, with cash. Its correlation with developed-market stocks was even lower at 0.13.
The benchmark for art in these comparisons consisted of three indexes Masterworks constructed for contemporary art, impressionist art, and the overall market.
"Perhaps art's most attractive investment quality over the long run has been its diversification potential," Citi wrote in its report. Used in conjunction with gold - another asset beloved for its low correlation - art in an investment portfolio helped improve diversification over time.
The problems with art buying, unlike other asset classes, ranged from huge transaction costs to inadequate data. And this is where Lynn believes he can take advantage.
"We view the opportunity as building the infrastructure - really the plumbing - that allows people to allocate a certain percentage of their portfolio to art," he told Business Insider.
3 best practices
Just like stock selection, prospective investors must put serious thought and research into what to buy.
They must also understand the risks. These include include a recession that hurts the top 1% who still dominate the market, and a popular artist today who loses their market appeal tomorrow.
Lynn distilled his 20 years of experience in this arena into three best practices for choosing art with the highest likelihood of appreciating over time.
First, the most important thing that determines whether you make or lose money is the artist themselves. And so, yes, the masters of this universe like Picasso, Monet, and Warhol are still your best bets.
"Those artists tend to appreciate at single-digit, low-double digit rates, but they're very good stores of value," Lynn said. "It's very unlikely that you lose money investing in one of those paintings."
The second thing to consider is mid-tier artists like LA-based Jonas Wood, whose works tend to appreciate at higher rates than the aforementioned legends. One risk to consider, however, is that there's no way to know if history will be kind enough to keep such artists' works in high demand.
The final guideline Lynn offered was to be aware that art appreciation tends to follow recency. This simply means more recent works tend to appreciate at faster rates.
"If you buy a $10 million Rembrandt today, you'll probably sell that Rembrandt 20 years from now - adjusted for inflation - for roughly the same amount that you purchased it for," Lynn said.
"Inversely, if you buy a well-known post-war contemporary artist today, you will probably return somewhere between 9% and 15% a year."