The Dangers of Wealth – A Tale of Two Art Investors

The Dangers of Wealth – A Tale of Two Art Investors

Consider these two scenarios:

A very wealth person (Wealthy1) decides that he would like to invest in art and after going through the auction catalogues from the major auction houses for the next couple of months, Wealthy1 comes across a major painting by an extremely well known artist whose work is highly desirable and is always in demand. This particular painting is the most impressive work that Wealthy1 has seen while going through the auction catalogues and the sale of this particular work has received significant press coverage so Wealthy1 decides that this is the best work to invest in. During the auction the bidding for this particular work is very competitive with Wealthy1 emerging as the winner with a hammer price of $1,962,877 against an estimate of $1,700,000 to $1,850,000. Wealthy1 is happy with his purchase even though he paid above the estimate because he has bought a fantastic work of art that he is sure will go up in value.

Another person who is in a more average financial position (Average1) , decides that he would like to invest in art and begins to research his finances to determine an overall budget for how much he would like to invest. After deciding on a figure of $70,000, Average1 researches the art market to find out how to structure a balanced portfolio of art that provides good potential for profit and relatively low risk. The result of the research that Average1 has conducted is a plan that involves the purchase of 5 works in total of which one will be a painting, two will be photographs and two will be limited edition prints. To provide the balance between profitability and risk, Average1 will purchase two works by emerging artists (one photo and one print) and three works by more established artists. Average1 purchases three works from galleries and two from auction after thoroughly researching each artist and artwork while sticking to his plan and not going over the price limits he has set for himself. When purchasing at auction, Average1 identified several works that fit his criteria so that he would not be tempted to bid too high on a work because it was the only option he had identified.

Consider these two scenarios for a moment and then ask yourself which investor has made a better investment. Wealthy1 has purchased a painting that would seem to be a desirable and popular work of art yet he has failed to create a plan or strategy which has resulted in Wealthy1 paying too much for a painting, risking all his money on one artwork, making a purchase influenced by media hype and presuming that an expensive artwork automatically equals a good investment. On the other hand Average1 has done the research and created a plan that has allowed him to make rational, informed and strategic decisions that have maximised his chance of making a profit from his investment. Spending more money doesn’t necessarily get you a better investment in fact the more money one has to spend the greater the potential for complacency and lack of discipline which is why you should always invest as though you are absolutely, 100% bound to a particular budget and in need of a good return, even if you aren’t.

**Nicholas Forrest is an art market analyst, art critic and journalist based in Sydney, Australia. He is the founder of artmarketblog.com, writes the art column for the magazine Antiques and Collectibles for Pleasure and Profit and contributes to many other publications.