A new era of value equality is unfolding among the worlds’ artists. In the case of the price differential between the work of the contemporary ‘art stars’ and emerging artists, consider for a moment an important influencing factor also found in the stock market: uncertainty. For instance, a company operating in an industry where a key competitor suddenly becomes the subject of an investigation will undoubtedly see its stock price at least temporarily negatively impacted regardless of culpability simply because of investor uncertainty. Lack of knowledge in any industry acts as a damper on value, and let’s face it, the famous are such because to date they’ve received the entirety of the spotlight from the art market apparatchik, hence relatively little is known about those without such support.

 

However, the internet is THE equalizing factor. In an era where the internet functions as the facilitator of the distribution and promotion of the work of emerging artists from all over the world, the era of the ‘art star’ deemed such by the critics, curators and self-appointed art experts has come to a necessary end. 

 

In order to assess value and predict the direction of prices with respect to any asset, including stocks, it’s instructive to look at comparables. The work of the Old Masters and other dead artists has stood the test of time thus guaranteeing its worth in the form of the stratospheric prices garnered today. What is less clear is the rationale for the difference between the prices paid for the work of many contemporary artists and the much larger group of emerging artists. In any other industry, over time such a relative value disparity would disappear. 

 

Given the increasing recognition of the value of art today, equalization of the prices between discovered and undiscovered artists is inevitable if only because the relative value of the latter is highlighted. In the case of two stocks with equal earnings generating power where the sole exogenous, differentiating factor is the amount of ‘coverage’ by Wall Street that each receives, the difference in price to the long-term investor highlights the less expensive as a powerful value, and the common sense choice. Yes, the value stock may lack the imprematur of the big Wall Street analysts, but how many times have they overlooked a diamond covered in coal dust? Emerging artists are the greatest investment opportunity that no one has ever heard of.

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“Our chief want is someone who will inspire us to be what we know we could be.” Ralph Waldo Emerson

 

Assume for a moment that emerging artists are akin to value stocks. LIke any true value stock, the work of emerging artists is often overlooked, and their worth and prospects underestimated. However, just as Warren Buffet will search out quality companies with distinctive attributes, art lovers can unearth emerging artists  whose work is thoughtful, topical and passionately committed to a sense of relevance to modern life. And while the majority of investors fail to perceive value stocks’ improving prospects until after the greatest gains have already been made, the opportunity to discover the value of emerging artists exists now.

 

The art market continues to expand at an unprecedented pace. 2007 marked the first time in history that total worldwide sales for Christie’s and Sotheby’s hit $10 billion. In November, Christie’s posted its second highest total for sales of Post-war and Contemporary art at $325 million, second that is to the $385 million tallied in May. Notably, 93% of the works sold, and a dozen artists set records. Meanwhile, Sotheby’s sold $316 million at its November sale of Contemporary Art, the highest auction total ever posted by the firm. Sotheby’s sold 91% of its lots. 

 

CREATIVITY ENGENDERS CHANGE 

Art is attracting a new breed of buyer. At Sotheby’s June sale of Contemporary Art, over 20% of buyers were participating for the first time. Around the world, young, urban and increasingly affluent professionals are choosing art as an accessible means by which to obtain a hallmark of their culture, while demonstrating their individuality and increasing their wealth.  

The reasons for art’s broadening appeal are varied, but beyond the worldwide expansion of wealth, what’s taking place is a fundamental shift in the understanding that creativity engenders change.  Whether it be municipal or county governments, educators, or art lovers, there is a new respect for the way that art and music inculcate culture, define generations, and influence the lexicon.  When asked to characterize a decade, our responses most often include references to art and music.  Art can and often does provide society with forward momentum. 

 

RELEVANCE RULES

Despite their unquestioned quality and finite inventory, sales results of the Old Masters haven’t kept pace with those of the Contemporary and Modern art markets.  Even Contemporary furniture outsells older fare at sales and auctions. Growth in the value of Modern Art has outstripped every other category of art at auction. According to Art Market Research, prices for Contemporary Art have quadrupled since 1995 while results for Old Masters have significantly underperformed.  For the period between June 2006 and June 2007, Old Masters posted gains of 7.6% vs. 44.3% for Modern Art and 55.3% for Contemporary Art, according to the Hiscox Art Market Research Index.  And Sotheby’s sale of 304 lots during its sale of Old Masters in December, while yielding strong year-over-year results, nontheless pale in comparison to Contemporary Art results.

Two economists at NYU’s Stern School of Business, Jiangping Mei and Michael Moses, have developed one of the most respected art indices. Their work centers around an examination of the auction results of over 11,000 sales transactions.  Interestingly, in research reported in the magazine Registered Rep, they found that in over 4,500 cases it was not the most expensive paintings which provided the most return for investors, but those at the lower end of the pricing scale.

PROFIT POTENTIAL IS GREATEST AMONG EMERGING ARTISTS

As society grows more comfortable with the idea of art as a legitimate investment vehicle, the necessity of appropriately guaging the potential posed by emerging artists versus the few known, hot commodities increases. Emerging artists lack the price premium, and therefore the risk, of the more established, “growth” artists. Notwithstanding his works’ aesthetic appeal, the time to have bought Damien Hirst was when he was relatively unrecognized, or in investment parlance, when there was actually alpha relative to the art market.  

 

Like any other inefficient market, the opportunity exists in the art market to realize outsized gains via active management of a portfolio. When it comes to value investments, the greatest gain is always realized by buying the stock whose price is the furthest below its intrinsic value.  As a group, emerging artists fit squarely in the value camp, with equally strong prospects.  Why assume that a tiny minority of artists, blessed with the impremateur of a small pool of art dealers, would produce the only art worthy of collectors attention and investment?

 

EMERGING ARTISTS CUT OUT THE MIDDLEMEN

A healthy byproduct of the clamor for art has been a movement toward a more direct-to-consumer experience among artists. In the past, an artist would often spend many years selling their work through galleries before gaining entry into the auction world. However, the current market allows many to bypass the high-cost (50% commission) gallery experience altogether as demand for their work pulls them directly to auction.  There’s less of a need for a dealer or gallery owner to telegraph an artists’ worth, as intrinsic value virtually sells itself. As a result, lower commission rates paid by artists, and the ability to view work in an objective context both earlier and less expensively via the auction setting, creates a win-win for the artist and the art lover.