How do professionals trade the art market? Do fundamentals even exist in the art market? There are indexes, but since the art market if fairly illiquid compared to the financial markets, they are very volatile. It seems to that it is purely based on insider information (or simply gambling).
1) You could operate under the basic assumption that it tends to correlate to the S&P-500. 2) During times of prosperity, people flaunt their wealth via paying top-dollar for "expensive" art. 3) During bear markets, auction participation dwindles and people buy stuff sculpted from excrement.
As someone who has their Master's Degree in Art theory (contemporary) and experience in the commercial art market, I have to say you have pretty much hit the nail on the head with regards to the art market. It is one of the last remaining "unregulated" markets in the world, and it pretty much revolves around "insider information" and "gambling". For the last 4 or 5 years it was pretty easy to make money in the art market, as long as you had a bit of money to start with. All oyu had to do was buy a Warhol or Hirst, hold it for a few months, and sell it for a profit ranging from 10% to 100% or more. These two artists however, have seen some of the largest declines in value over the past few months. The illiquidity of the art market is the most nerve racking thing about it. You buy a piece of investment art for anywhere from a couple thousand to a multimillion and you are stuck with it for a set period of time. It is bad for an artist's work to be heavily traded (good galleries are very protective of their artists), so when you do decide to sell your work at auction, you are in essence indirectly hurting the value of the very piece you are trying to sell, as well as your own reputation from the very person you bought it from. For those interested in diving into the investment art world, it pays to do these three things: 1. Do your homework, buy books, get art magazine subscriptions, go to gallery and museum openings, take a few college level art history classes 2. Buy your first works at auction (preferably from the established auction houses), that way you know that at least there is someone out there who was willing to pay almost as much as you did for the exact same piece. 3. Buy only what you like, it could be worthless tomorrow. For anyone who is interested in discussing art investing further with me, feel free to send me a PM!
1) I may have "snuck in" while you were composing your response. 2) What you described above is "correlation to the S&P-500".
I guess everything correlates to the S&P 500 in one way or another... there has just been a general loss in wealth over the last 6 months, I can't think of a single large market that hasn't seen a decline in value lately...
Haha, I guess that's an anomaly... I did make some very tidy profits from selling Obama related artworks*** that more than offset my stock market losses from last year. I think however, that these works were sold at the peak of the market and might never be worth significantly more. In fact there is a good chance, in my opinion, that they will be worth much less in a few years. *** I don't consider any Obama related memorabilia to be a part of the serious art market
Thank you very much for your post, James. Your comments are much appreciated. I thought so, I was simply applying basic the basic concepts of the financial markets to try and understand the art market. I'm not such a disbeliever in the EMH to think that potential returns of several 100 percent in a relatively short time aren't accompanied by large risks. As you mentioned, trading in the long direction in most asset classes has been quite easy due to an excess of credit. Once this excess credit is pulled, so too goes the artifical demand and true value is revealed... this is also where my question about intrinsic value of an art work comes in. We are not dealing with cash flow or balance sheets, but rather visual trends. Below is a price chart of Damine Hirst's art prices. It's fair to say that his market is actually fairly liquid. The spread is also a killer (auction house commissions). No way to scalp this market. Indeed, when trading penny stocks or small-caps, you are actually significantly droping the price as you exit a long position. This is similar to what you were describing about selling/buying a work of art and is common to all illiquid markets. Sounds similar to the dilution warefare that occurs at the small-cap/penny stock level. Facinating stuff!
S&N, You are right about Hirst being fairly liquid. In fact, the more expensive an artist's work is, the more well-known he or she tends to be, and as a result, the more liquid their art tends to be as well.