Contemporary Art as an Investment, Part I:
the value of an artist's reputation
by H.A. Fraser.
Ms. Fraser is Managing Editor of Art Business Magazine.
He squinted fiercely at the painting, chin protruding, hands
clasped tightly behind his back. The thick gobs of red and green paint
started to pulse and quiver. He drew back and opened his eyes, wide. The
thought of owning such a work by such an acclaimed Canadian master, thrilled
him. Is this how all great collectors feel? As if sensing his excitement,
the dealer approached. His Italian shoes made a crisp clack, clack on the
polished cement floor.
"Ahh, the great Kandinsky. A nice addition to your collection, yes?"
The dealer spoke in hushed European tones over the customer's shoulder.
"Hmmm," the customer nodded. He scratched his chin and took in
a deep breath. They both stepped back to get a better view.
"And an investment in such a spectacular piece of contemporary blue
chip art, naturally, is its ever increasing value. In a few years, you
may decide to sell it, or donate it to an art museum for a tax credit."
Aye, here is the rub. Where the speculative nature of the contemporary
art market meets the desire for profit, there is hole worn right through
to the other side of canvas. Buying art because you like it is a very different
matter from buying art as an investment. When you buy contemporary art
with the intention of making money (with resale or donation to an art museum)
you enter a speculative arena and you should be aware of a few things beforehand:
1) the price of contemporary art is speculative -- its value is based on
the artist's reputation as determined by a small circle of critics, curators,
dealers, and the like; 2) there are no special regulatory laws governing
the sale of contemporary art in Canada (as there are for the stock market);
and most importantly 3) few in the system will discuss this speculative
nature because professional reputations are at stake. The system is ripe
for abuse.
THE MARKET FOR CONTEMPORARY ART IS SPECULATIVE, OR IS IT?
The voyage art object 'A' makes from the artist's studio and into the marketplace
where it is purchased, is a complicated and often lengthy one. An important
obstacle to be overcome in the success of 'A's voyage is the establishment
of the artist's reputation. And the building blocks of this reputation
include exposure and opinion -- the opinions of critics, curators, collectors
and dealers that directly affect the monetary value of the artwork. So,
when you see a $10,000. price tag on art object 'A' it means that the artist
has a good reputation, that a number of people moving in that tight circle
of the art in-crowd like his art. It doesn't mean that the painting is
worth it to you or anyone else outside that circle. And this is what makes
this market speculative.
The late Willi Bongard, a German economist and art journalist, might have
concurred with this conclusion. In 1969, Dr. Bongard began to publish a
list of "100 greatest living artists" which he called the "art
compass". Dr. Bongard used a point system in judging the standing of
an artist in the art world. When an artist had a one-man show, group show,
a notice in a periodical or television, etc. Dr. Bongard would assign him
a numerical value: 300 points for each work the artist had in a major museum
such as the Met in N.Y.; 200 a work in other museums such as the Art Institute
of Chicago; 50 if he was mentioned in Art Actuel; and 10 if mentioned in
Connaissance des Artes, etc. The 100 artists having the greatest number
of points were ranked according to their totals. Rauschenberg topped the
list in 1976 by earning 20,490 points. At the time, a representative Rauschenberg
work was selling at $6,000. giving him about .29 cents per point. All 100
artists were listed along with price per point (the published list caused
some outrage in art circles). Bongard did this with the intention of informing
collectors where they could get the most for their money -- a bargain.
As Dr. Bongard explained in "art aktuell" a self-published newsletter,
however, the "art compass" was a "reputation scale":
.... regardless of the artist's sales turnover or price-development
[Bongard's emphasis]. The only guidelines for placement on this list are
the artists representation in major museums, exhibitions and literature.
If you like, you may call this list also "taste list" or "opinion
list", but never bestseller list.
art aktuell, Cologne, Sept. 1974, 4th year, No.18.
Still, the reputation scale does correlate to an increase in the prices
of art. Economist Dr. W. Grampp in his book Pricing the Priceless (1989),
took Dr. Bongard's list and compared it to the actual prices of each artist's
work. Dr. Grampp found that the points assigned to the artist were generally
consistent with the increase in the price of his work. Although not perfect,
the results of Dr. Grampp's study showed that as the number of points increased
10 percent, the price of a representative work increased 8 percent.
An art appraiser would take Grampp's analysis a step further. An appraiser
will tell you that there must be objective criteria for establishing monetary
values for contemporary art. The donor who wants a tax credit for donating
his art in Canada will need a credible appraisal when submitting his donation
for approval to the Cultural Property Review Board. The Board, an arm's
length agency of Revenue Canada, was set up to mitigate abuse in the donation
system. [The story behind its establishment surrounds a donation of an
object to the Royal Ontario Museum -- the object was purchased for a fraction
of its later appraised value. The donor received a tax credit that was
too healthy in the opinion of Revenue Canada.] For independent appraisers,
objective criteria are the keystones of "a methodologically correct
appraisal" writes Stephen Sweeting of Appraisal Associates in Toronto:
Objective criteria must always be the keystones of a methodologically
correct appraisal. When using the market comparison approach to estimate
the fair market value of a painting, the appraiser must:
a) describe the property being appraised and grasp its physical and stylistic
characteristics.
b) identify sales of similar or comparable works of art by the artist in
question.
c) identify the market layer where the sales occur, ie. forced liquidation,
orderly liquidation, wholesale, low retail, high retail.
d) identify elements of quality in the comparables (based on the connoisseurship
of experts such as curators, collectors, art dealers).
e) identify characteristics of value evident in the comparables (through
consulting with dealers, collectors, and analysing various sale results.
(These could be a certain type of subject matter, certain colours, certain
periods, provenance, literature, exhibition history, etc.)
f) compare the painting being appraised with the comparables in terms of
characteristics of value.
g) if possible, quantify the characteristics of value in terms of money.
(i.e.two similar A.Y. Jackson winter views--one with a red sleigh and team
in the scene, the other without. The difference in price would be attributable
to the highly desired red sleigh. A dollar value can be assigned to this
characteristic of value.
h) make adjustments to the sale prices of the comparables to reflect the
characteristics of the subject property--either percentage or dollar adjustments.
The result -- in theory, if not always practice -- is a value estimate based
upon objective criteria.
Mr. Sweeting's "objective criteria" for determining price is very
convincing but, significantly, a large part of the process of valuation
relies on the opinions of professional curators, dealers and the like.
In support of Mr. Sweeting, to use Dr. Grampp's analysis, the price of an
art object is based on the artist's reputation with art professionals.
But what percentage of artists are strong enough, by honest consensus of
that inner art circle, to warrant a collector's investment? Is purchasing
contemporary art an investment or is it speculation? By Dr. Bongard's view,
a good "opinion" does not mean a "best seller".
If the art you purchased for investment purposes, contrary to what the dealer
promised, does not go up in value or is unsalable at a secondary market
or the art museum doesn't want it, you would be hard pressed to make a fraud
case in court. However, if you publicly maligned the dealer or the artist,
you could easily be sued for slander, and lose.
_____________________
Part II: Lack of regulatory laws governing the sale of art; Who benefits
from the lack of rules; Tom Clancey move over...
