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 such a spectacular piece of contemporary blue chip art, naturally, has an 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 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. 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? Again, in 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: speculation, artifice or magic

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