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July 20, 2006

Merrill Lynch Reports That Art is Among the Worst-Performing Investments

In a concerted effort to further beat to death the concept of Art As An Investment, I found this new Merrill Lynch research report worth shredding sharing.

Oh... and for those financial geeks interested in further art financial beatings, please see this wise art Hunter blogger, or that witty floorwalker blogger, or that vulture girl blogger, or this smarty cat blogger, or plus that ultra smart blogger, oh, and not to ever forget this astute but edgy blogger, just to rename a few.. 

The US Investment Strategy team at Merrill Lynch, Richard Bernstein, and Kari Pinkernell, have published a new detailed historical asset allocation study, attached below. They looked at all the major asset classes (stocks, bonds, real estate,commodities, etc) which surprisingly included, ART !  They then compared the historic performance, and relative risks of each of these major asset classes. These results are presented in numerous puffy pretty graphs. As expected, the Art sector didn't fare too well on an absolute return basis, but at least it was included! By Merrill Lynch including the Art sector, they implicitly suggest all investors should consider utilizing art as a regular part of a prudent long term financial plan.

The asset classes with their calculated probability of negative absolute returns for each are shown below for various time periods. The historic time periods spanned over 35 years, from December 1969 to June 2006. For art market returns, Merrill used data that only went back to 1976, which was provided by the auction data focused Art Market Research.

Ml_probability_negative_returns_2

I thought this was one of the most interesting charts in the  Merrill Lynch study

Of the 10 major asset classes, during a 5 year holding period,

  • Commodities had the worst highest probably of losing money, 41% of the time, followed by
  • Gold with a 36% probability, and then
  • Art with a 17% chance of a loss.

But just remember, Wall Street's analysis of any asset class (like art) that they don't sell, maybe very a bit biased, plus it's just one way of looking at the potential risk of owning art. It doesn't take into consideration, non art auction related returns, and the all other non-financial benefits. Additionally, I wish they had analyzed and presented the return correlations between art and other asset classes. Intuition is the Art sector returns should be a better diversification tool than most traditional investments choices. Plus art looks pretty over the sofa, you ever try hanging a mutual fund or stock certificate on your wall ?? Ha! Just kidding.. but you get the point!

Well, you can read the study for yourself, but, the major gee-whiz conclusions of this study are: chasing an outperforming asset class can end up hindering ones performance, and diversification among a broad range of assets is important. Not exactly revolutionary thinking on the part of Merrill Lynch.. so much for Wall Street "Professional" investment advice! Next!

Here's the actual Merrill Lynch Study - Deleted At the Request of Merrill Lynch..  Just Email me at mike@ModernArtObsession.com and I will send it to you.

And, this is a Bloomberg News Story written by Linda Sandler which also reviews the study, Download BloombergNews_MerrillStudy.txt

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Oh, dang! Now we are left to appreciate art for art's sake, again!

Oh my god, I almost read that post!

Thank god I realized this was your blog before I did.

Kisses old man in the hat

;-)

That's funny I recently read an article that stated that "blue chip" art has been around equal investment to bonds and stocks over the past 100 years.

I think the same article (actually from last fall) might have also mentioned that something like only .35% of all paintings made today will be woth anything at auction in 30 years.

Don't ask me for a link, don't quote me on that, and I have no idea how they got their numbers.
__
That .35% ratio is the sad part about the art market. I see gallery shows by brand new artists asking a grand to 10, 20K for paintings. Even if the painting is pretty hot chances really are it will be worthless in 30 years. Just enjoy it in the gallery. And when I can still get a great Warhol, Hirst, Burtyynsky, Sternfeld, even Duchamp etc. for well under $10000. It's a no-brainer to me.

But it's all a house of cards anyway. There's no intrinsic value in any of it. When historical value comes into play that can help, but who's gonna care about your precious photos when peak oil hits? Uh oh, I'm digressing.

My advice, (if you don't have millions to blow uhmm, donate to artists) then... if you can't buy an iconic image don't buy it. And don't bother with the hangers on---second tier artists of a movement, even if it seems more of a bargain, go blue chip. Otherwise just enjoy the work in books and galleries and donate to artist funds.

i have to laughingly agree with jason's comment. i have recently been obsessively looking at buying something, and am horrified to find that my budgeted amount, which previously netted me choice works by amy sillman and tom nozkowski, now is only barely enough to get me a semi-decent piece by an artist with no track record or reputation ( i.e. "emerging").
although the ultimate aim is to find a piece that is entertaining and challenging and beautiful, etc., the fact is that, if one is thinking about amassing a collection that will still resonate beyond the next 20 years, then one wants to "invest" in an artist who is more than a one-hit wonder. when artist are coming out of art school with an ingrained style, and their immediate success leads to ossification of that style ( after all, why change it if it sells ) what kind expectation can we have of the kind of experimentation and growth through challenge that we would hope would be the goal of every artist? especially since most people become less flexible with age, naturally, it is those first 10-20 years of discipline that hold any hope for real breakthroughs.

i feel more and more that we are now in a phase where art schools have figured out a formula for success, and their relationships with galleries/ big collectors/ critics/ museums are becoming a closed circle and morphing into the new "Academies" like those the impressionists and early modernists rebelled against.

guys, ( and gals), am i nuts to be feeling this way?

ps: welcome back, MAO, missed ya

MAO... Interesting post..

But, you should be careful with that "Vulture" Girl comment!!

I stumbled across your blog while I was doing some online research. Your writing style was truly enjoyable and made me laugh out loud several times. And, on top of that, you actually managed to make some excellent points!

I'm interested in your opinion on this, since you're a financial expert yourself. What seems to be missing in the ML analysis is whether the people who lose money INTEND for the art to be an investment or not. Nobody buys stocks and bonds for love, but many people (well, a few anyway) still do buy art for love.

I'm also curious: Have you ever sold any of your own art? I haven't -- I don't want to part with any of it.

Hey Lisa..
The ML study just used and Art Index (based exclusively on auction prices) for their analysis. So they were treating all Art as some type of homogenous product, which of couse it's not!
As for me.. So far, I've never sold an object in our collection. I doubt I ever will.. I tend to take so long, and put so much energy into the decision to buy, it would just kill me to part with any.
Plus Dr. Quiz tends to get so attached, that every object in our loft gets a pet name: "Spot", "Nana", "Whitey", "Cindy", "Arbie" etc.. so now it would be like selling a family member!

But Mike... your art has taken over the guest room!

The key here is buying work that you love, so you can enjoy it and later on pass
it on to someone else who can also enjoy it. Perhaps with a profit.

You will never get as much enjoyment out of looking at a paper, stock.

Richard Lee Barton
www.barton.nl

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