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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Before co-founding CapucinesBoulevard.com, I spent my career investing in small and micro cap value stocks which basically means the smallest and least expensive 5% of all public companies – and despite the fact that these were all well-run enterprises, most investors didn’t pay much attention to them — so, when I went to visit companies to learn more about their operations, many were pleased that someone was actually interested.

Most importantly, by spending the time to get information that other investors were ignoring, I was able to find opportunities that others missed. I believe that like small and micro cap value stocks, Emerging Artists are the greatest investment opportunities that no one has ever heard of.

 

Many people make the mistake of looking at art as something that’s nice to have, but that simply doesn’t meet the qualifications of a necessity. How wrong they are. 

Art happens to be the biggest unregulated, legal economy in the world to the tune of $64B worldwide, in fact, it grew 95% between 2002 and 2006 and, the truth is, as Robert Redford has said, “culture is a solid investment”

 

Make no mistake, art isn’ fluff. We live in an abundant country, and have pretty much taken care of all of our basic needs, and our culture places increasing value on creativity and innovation: the ideas that catch on today are those that represent conceptual leaps – they give us things that we didn’t know we were missing, not things we necessarily needed, but ideas that appeal to our creative natures.

 

Artists begin with an innate advantage in this new economy by their very ability to see and to think differently. And Art is becoming more and more intertwined with our daily lives: we can see it in the examples of corporations buying Contemporary art in order to attract and inspire their employees, and to highlight their brands to the world while giving something back to society — and these companies aren’t cutting back on their art buying despite what’s going on in the economy, because they’ve come to recognize how much the visual really drives our culture, and keeps them top of mind.

 

The other side of this new economy other than the art itself centers around the value of it — art should always be purchased for the joy it brings, but art is also an asset and if it’s bought for pleasure and gives the investment returns for free, what more could anyone ask?

However, when it comes to art, it’s contemporary art that’s in demand because even though people admire the Old Masters, what they want to own are representations of their own culture and time. Contemporary art is more topical and often more interesting and now, it’s becoming more valuable.

 

Art isn’t usually an asset that springs to mind when thinking of investment alternatives, but its long-term performance record argues that it should be.

For the last 50 years, contemporary art has outperformed the S&P 500, which means that someone who bought a portfolio of art would have done better than someone who invested in the stock market over the same time period. The same holds true during every major war of the twentieth century and through the twenty seven recessionary periods since 1875.

 

From an investment standpoint, and most important for Emerging Artists, is the fact that there is no greater advantage to buying more expensive works of art, buyers get the same returns buying artwork that’s never been exhibited or received any citations, as they would buying the work of artists with more notoriety. 

 

There’s truly never been a better time to be an emerging artist. With their power to inspire, and yes, to prosper, the record is quite clear: the VALUE is in work of the emerging artist.

Man will begin to recover the moment he takes art as seriously as physics, chemistry or money”   Ernst Levy

 

Art fills many needs. Art and artists confer a ‘coolness’ factor onto neighborhoods,  driving communities’ economic growth. Corporations employ it as a way to motivate employees and lend bite to their brands,  and hospitals utilize its transformative power to encourage healing.   All of which helps to explain why, in concert with the current stratospheric rise in global wealth, art continues to attract a broader audience and deliver record-breaking auction results despite a worldwide economy just beginning to realize the effects of speculative excess and inevitable recession. However, even without a dawning realization of the myriad ways in which it impacts our lives, art would still be climbing because, particularly during times of economic distress, art is the asset that both pleases and prospers.

 

During 2007, America’s financial institutions wrote off a whopping $120 billion in assets stemming from the still unfolding subprime mortgage crisis. S&P is forecasting mortgage-related losses above $265 billion when all is said and done, and well-known U.S. banks have already borrowed $50 billion from the Federal Reserve to shore up their reserves. 

 

Meanwhile, the stock market is clearly unnerved by the prospect of a contracting consumer, with the S&P 500 having already lost 8% of its value year-to-date, with 6.1% of that coming in January, the biggest drop since September, 2002. Not to be outdone, the European Dow Jones equivalent lost 12% in January.  And as a result of reduced U.S. interest rates aimed at dealing with the effects of the mortgage situation, the dollar continues to lose value, having fallen 9.5% versus the Euro in 2007, 37% in the last five years. What’s increasing in value you may ask? The answer: the Euro, Gold, Silver, and ART. 

 

“Nonfinancial assets form the greater part of world wealth and have been more stable in value during periods of financial and social turbulence.” (Global Investing: The Professional’s Guide to the World Capital Markets, Roger G. Ibbotson and Gary Brinson).  On February 14th, 2008, Sotheby’s hosted the Red Auction in New York City to benefit HIV/AIDS. The  75 donated works raised $42.6 million, almost $9 million above estimates, and pieces by 17 artists sold for the highest prices they’d ever received at an auction. Ironically, on the very same day former Federal Reserve Chairman Greenspan announced that the U.S. is on the precipice of a recession. 

 

On February 5th, the Dow fell 370 points, the indexes’ worst loss this year, and the eighth worst day for the stock market since 2000. It was also the day that Sotheby’s held its auction of Impressionist and Modern works in London for a record total 116.7 million pounds, 40 million pounds over the prior record set just last June. The sale saw five records broken, with 88% of lots sold, a healthy outcome in any economy. It was also Sotheby’s highest total ever for an auction of Impressionist and Modern art in London. 

 

Just what explains these levels of spending on art at a time when, it could be argued, inextricably-linked worldwide economies are poised for a painful contraction? In short, because in some quarters, art is seen not as a discretionary luxury, but instead as the store of value that it has always been, especially during economically trying times.  

 

A survey compiled by the U.K. research firm ArtTactic found that in the second half of 2007, 40% of respondents expected a correction in the art market. Given the market’s unprecedented climb over the past eleven years coupled with the steep decline in consumer confidence relative to the woes of the credit market, that result was not particularly surprising. However, what only a few have known for quite some time is that art has often been one of the most stable, not to mention profitable, investments during uncertain economic times. In fact, when the stock market took a swoon in 1987 and again in 2001, outperformance by the art market was notable.

Two NYU economists, Jianping Mei and Michael Moses, developed the Mei Moses All Art Index. The index analyzes the repeat sales of over 12,000 works of art at auction since 1950 to generate precise return data. The pair reported in an article in Forbes that “during the armed conflicts of lengthy duration of last century, art indexes outperformed major stock indexes.”  When stock markets fell during World Wars I and II, art outperformed the S&P during most of those years, and by 1920 had risen to 125% of its 1913 value (versus 94% for the market). Further, while the S&P 500 increased 67% during the Korean War (1949-1954), art was up 108%, and during the Vietnam War (1966 to 1975) when the S&P 500 fell 27%, art rose 256%. 

However, art’s outperformance of the equity markets is not confined to times of war, but surpasses the more traditional investment vehicles as well when the markets are roiled by a troubled economy, exactly the situation we find ourselves in today.   In an article in InvestmentU,  Mei/Moses analysis of data from the 27 recessions since 1875 reveals that art does quite well in tough economic times. Investors want and need to invest their money but when confronted with volatility-producing uncertainty, the foundation of the bellwethers becomes rocky, and investors turn to art. 

 

For example, in 2000, the U.S. economy was facing many of the same conditions as it does today: declining retail sales, reduced capital spending and tightening bank credit standards. The peak in the Dow Jones Industrial Average that occurred on March 10, 2000 was followed by a loss of almost $3 trillion in market value and an overall loss for the year above 10%. Results for art were much different however with the Mei/Moses Index gaining 16%.  In addition to its outperformance, art has a low correlation with the stock and bond markets which makes it an excellent way to diversify a portfolio, and reduce overall risk. Far from being a luxury, it can be argued that art is an essential component of any portfolio.  

“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.