Essay Sample on Investing in Art: An Alluring Option for Investors

Art is no longer appreciated only for the aesthetic value it has, but also as a form of investment. Recent trends have shown that the prices fetched or commanded by various pieces of art have significantly increased (Frey and Eichenberger, 1995). This significant increase in prices points towards the alluring nature of the investment in art. The industry has witnessed a growth in its worth and annual turnover, i.e., U.S. $3 trillion and U.S. $30 billion (ATF, 2007). From its indices, the Mei Moses All Art Index, and the Art Market Research, it is clear that the returns are equally as attractive as those in the stock market.

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The uncertainty that has plunged into the stock markets, as well as an economy that is slowing down, has pushed persons or organizations that are high net worth to seek different investment avenues. Art as an investment stands out ahead of the rest owing to the following significant characteristics (Palmeri, 2007): 1) art has witnessed sustainable demand; 2) there is a limited supply; 3) over time, it has proven to endure or withstand various economic downturns.

The art market consists of both primary and secondary markets. While the primary market focuses on the sale and purchase of contemporary art, the secondary market is vested in resales and handles art that is mostly ancient and modern. The artists whose arts feature in the secondary market are usually deceased (Baumol, 1986). Contemporary art refers to art done for the first time, and whose artists are still alive. The main challenge with secondary markets is that the quality arts available for sale are limited. With regards to primary markets, the cost or value of the art is often uncertain and mostly relies on trying to promote the artists (Taylor, 2007). As such, it is difficult to estimate the potential return.

As an oligopoly, the sale of art is determined and managed the most influential auction houses. They limit the number of artists or artistic works that come into the market through the auction route. Artistic works are usually unique. The value one attaches to the product depends on the taste of the dealer (Merrill et al., 2006). The competition in the industry is quite high and intense. The hurdles that ought to be handled before entry into the market, such as the fixed costs, are quite high.

Further costs are incurred through the commissioning of the artists, making advertisements, offering insurance cover, and the distribution of the art after purchase. The market justifies the high costs since it is hard to liquidate the existing assets (Douglas, 2008). The competition in the industry is based on how unique the artwork is, and not the price.

The future of the industry is promising. There has been a rise in the number of markets in Africa and India. As such, there is bound to be progress in the movement of art (Frey, 2003). Further, the ever-increasing reliance on the internet promises to open up new avenues for revenue streams (Porter, 1985). There has also been an increase in the number of persons with high net worth who seek to purchase art for recreational purposes.

Art can, therefore, be quantified as a luxury good, as they both have similar supply and demand. Owing to its limited supply and unique nature, art is highly valued. Further, it is viewed as being exclusive, thus resulting in higher prices (Jyrämä, 1999). Consequently, this affects the curve of demand.

However, the demand curve for art is worryingly inelastic. The following factors point towards this conclusion (Eckstein, 2006): 1) Changes in taste often affect the prices that are attached to the artwork; 2) Changes in income determine the interest people have to various pieces of art- higher-income fetches higher prices for art; 3) Pricing and accessibility which is mostly controlled by the oligopolies; 4) Threat of substitutes since they are several alternatives to investment other than art-such include equities, bonds, etc.

Concerning cost, the golden rule is that the price attached to an artistic work encompasses the production costs incurred as well as its aesthetic value. Several artistic works are quite expensive because of the production costs incurred (Groysberg et al., 2006). Production costs entail the direct production costs involved, the notional salary owing to the time spent preparing the art, the market costs, and the costs incurred from taxes, insurance, etc.

With regards to the uniqueness of the art, the following factors determine it; the quality of the art, the content, and attention to detail put in, the technique used to create it, the size of the work, and the originality of the artist. Both legitimization and reputation have an impact on demand and supply of art (Mei and Moses, 2002). An expert is often required to determine the genuineness of the artistic work, as well as the correct valuation. Auction houses profit more from this customer legitimization need.

Conclusion

The production of art relies on creativity, whereas its consumption relies on the interpretation one attaches to it. Dealers often control the whole process of valuation and purchase (Grant, 2006). Owing to the need to maintain credibility and a good reputation in the market, dealers often re-invest in the market. They end up limiting the supplies and maintaining the high art valuations.

References

Art Trading Fund (ATF), 2007, Art Trading Fund Investor Report, August-October, 2007

Baumol, W, 1986, “Unnatural Value: Or Art Investment as a Floating Crap Game.” American Economic Review, 76: 10-14

Douglas, S, 2008, Larry Gagosian, Intelligent Life, The Economist, vol.1, issue 3, Spring, pp. 100-107.

Eckstein, J, 2006, “Treating Art as an Asset Class,” Investing in Art, Jeremy Eckstein, and Associates, London

Frey, B, 2003 “Art Markets and Economics: Introduction,” University of Zurich, Journal of Cultural Economics, Vol. 21, 2003

Frey, B. and R. Eichenberger, 1995, “On the Return of Art Investment Return Analyses,” Journal of Cultural Economics, 19, 207-220

Grant, D, 2006, “Art investment companies begin to make a purchase,” Main Antique Digest, September 20th, 2006

Groysberg, B, Podolny, J, Keller, T, 2006, “Fernwood Art Investments: Leading in an imperfect marketplace,” Harvard Business School Publishing, Cambridge, M.A., 2006

Jyrämä, A, 1999, Contemporary Art Markets: Structure and Practices, Helsinki School of Economics and Business Administration.

Mei, J.P and Moses, 2002, M, “Art as an Investment and the Underperformance of Masterpieces,” American Economic Review, December 2002.

Merrill Lynch/Cap Gemini and Ernst & Young, 2006 “The World Wealth Report,” New York, NY

Palmeri, C, 2007, “The Artful Investor. New research calls art a smart investment, but skeptics point to high costs and high risk”, Business Week, March 12th, 2007

Porter, M., 1985, Competitive advantage: creating and sustaining superior performance, Free Press, Cambridge, MA

Taylor, K, 2007, “Seeking a hedge for art,” The New York Sun, August 13th, 2007