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The Expanding Asset Bubble in Art and Collectibles

Last update on: Feb 25 2020

Recently I was talking to a friend who spends a lot of time with wealthy people, primarily trying to raise money from them. He said that when he asks them what they’re doing with their money these days, many saying their eschewing financial assets (stocks and bonds) and buying things: land, timber, art, wine, etc. It’s a common theme I’ve seen elsewhere. Before you rush to follow the rich, consider a few points. One is that many of these assets aren’t investments. They’re collectibles, hobbies, and similar pastimes. They might prove profitable over time, though I suspect most of the buyers simply are trying to to maintain purchasing power

A second point is that they’re illiquid. You can’t sell them when you want to. You have to wait for a buyer to show up who’s willing to pay something close to your price. Most of these markets are fairly liquid right now, because of the number of wealthy people interested in them. But history shows that doesn’t last.

That brings us to the third point, which is that price and value matter. At least a few of these markets have been so popular the last few years, that you have to wonder if they’re in or near bubbles. Read this piece from Miami’s Basel Art Show arguing that at least part of the art market appears to be in a bubble, asking unreasonably high prices for certain pieces.

These markets might prove good investments. But you have to know what you’re doing. You can’t simply walk into the market and start buying, thinking you’re going to do well against people who’ve been in the market for decades because they’re very interested in the field, not because their main goal is to make money.

The reason I’m certain that today’s contemporary market is due to deflate is because people like me will make it happen. We won’t do it on purpose, tempting as that might be. We’ll make the bubble pop in the normal course of things, as all of us—critics, curators, and art lovers of all kinds—decide that today’s market darlings are tomorrow’s ?also-rans. We’ll prick the market’s bubble by deciding that a Richard Prince nurse is about as central to our culture as Ernie Trova’s sculptures turned out to be. And when we burst reputations, we deflate prices, too. History proves that most judgments about art will be shown to be wrong, as the roster of noteworthy talents gets whittled down. (I’m utterly sure of the importance of the living artists I admire—including Koons and Hirst, as it happens. I’m equally sure that I’ll turn out to be mistaken about many of them.)

The scholar Michael Moses, now retired from the NYU business school, has spent years building an index that tracks the prices of artworks sold at major auctions—of the art, that is, already on top of the heap. (Auction houses won’t even accept lesser works, which include most art that gets made.) And Moses points out that, over the long run and on average, even this high-end art tends be a worse investment than equities, however well some of it has done over the past year or two. His index tracks single works that have come up for auction a second time, and of those “sale pairs,” about one third actually represent a drop. In the long run, Moses says, the fancy, flashy treasures whose sales the auctioneers trumpet most loudly don’t yield the best returns. ?Moses points out that to match a normal 10-year stock-market return, today’s $80 million Rothko would have to soar to an unlikely $160 million.

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