Why Do Rich Persons Buy Expensive Trophies Instead of Looking for “Better” Returns?

The overwhelming number of sales and sales records last week has captured the attention of the popular press in ways that probably are not healthy for the art market as a whole. The overarching theme of much of the coverage has been to goggle at the prices or tote up the supposed returns as if anyone could have foreseen buying a Giacometti sculpture in 1970 for $250,000 and eventually selling it for $126m 45 years later.

John Gapper responded to the sales with a column that gets closer to the truth of what’s going on in the art market where those with surplus cash are buying art as cultural and social capital:

The true value lies in owning a painting that the Tate or Getty museums would love to display in public, and being able to dazzle yourself and others in private.

The only way to prove that you are the kind of person who is both cultured and wealthy enough to own a major Picasso is to buy one. Auction houses prosper by holding it in front of you briefly, while offering to sell it to your rival. “They suddenly say, ‘I am never going to get this chance again’, and go all the way,” Mr Pylkkänen says of the world’s ultimate art collectors.

Gapper goes further with this concept but also tries to warn against the mirage of art investing which is not really a practical option for any but the most committed and lucky of buyers. Here Gapper suggests some of the risks:

One is that measuring financial returns on works that are sold and later resold at auction ignores those that never resurface, possibly because they have fallen in value. A second is that the art market is highly illiquid and opaque — no painting, even by the same artist, is exactly equivalent to another work. A third is that the transaction costs are extremely high — auction houses charge buyers about 20 per cent.

Oddly though, Gapper reverses course in the next paragraph by asserting something that is both nonsensical and unsupported:

The oddest aspect of the market (among many) is that the wealthiest collectors take the least predictable financial risks, at least when bidding at auctions rather than buying works privately through galleries. Masterpieces such as “Les Femmes d’Alger” often underperform in the long term, while less-glamorous paintings stand a better chance of achieving a stable return.

A person paying $179m for a Picasso isn’t looking to display keen insight into art history or pick talent. That’s what Victor Ganz was doing for his own personal satisfaction when he bought the painting from Picasso’s dealer. He took all 15 works as required and kept the ones that interested him. He didn’t profit on the sales of the discarded works. He simply chose the paintings that were dear to him, intellectually and emotionally. The Saudi buyer who followed and the latest owner were using money to substitute for time, opportunity and the passionate effort that gave Ganz the chance to buy the works in the first place. Ganz paid for his Picasso with more than just cash.

Outsized returns in the art market are often the result of luck or passionate commitment. You can’t calculate those as investment returns. The collector who bought Warhol’s Lemon Marilyn from the original 1962 show for $250 and sold it 25 years later at auction to Jeffrey Gundlach for $28m was probably both lucky to have been at the original show and willing to spend $250 on the work and committed to have not sold it at any point along the way for a lesser return.

Among the less glamorous works that Gapper references, there are a tiny few that offer a stable return and massive number that will become worthless over time.

Picasso is not just a valuable abstract (FT.com)