The Contemporary Art Bubble and Money Managers

Felix Salmon links to this essay which argues that the contemporary art bubble was a classic bubble that's about to pop.

Many hedge fund managers and other money managers participated in this mania. In my amateur psychologist opinion (and getting a sense of the psychology of a money manager is part of the art of money manager selection, no pun intended), a mindset that would participate in this bubble is incompatible with the mindset favorable to long-term investment success.

Anyone who bought this kind of art "as an investment" can be dismissed out of hand--they are speculators pure and simple. Speculation is not evil but should not be confused with investing.

But even those who bought such art as a status symbol--a motivation I can understand--should be questioned, because the status to be gained from owning such symbols would only last as long as the bubble itself, which is to say not that long. Spending two million dollars to get two years' worth of coolness is an expensive way to impress a woman.

Compare this to the 19th century American robber barons who amassed collections of European Old Masters from impoverished continental aristocrats via such dealers as Joseph Duveen: not only did the scarcity value of such works help them hold their value, but the status derived from owning them has endured as well. Now their descendants are called aristocrats and are admired for their taste.

So add this to the due diligence questionnaire: If your potential money manager participated in the tulip mania of our day (and it's not difficult to find this out, as they made themselves known), be wary.

Disclosure: None

Comments

[Crocodilian:]

Collectibles are not an "investment". Their value is determined solely by their scarcity, and future tastes; they have no economic value (even if someone will pay a lot for them). It is commonly forgotten that collecting categories go in and out of fashion, and once out of fashion, many never see their highs again. Two notable examples:

1) signers of the Declaration of Independence. This was a major collecting category of the early 20th century, with super-premium prices paid for the rarest signer, the otherwise obscure "Button Gwinnett". Prices are today, in real dollars, less than they were fifty years ago. There were other, now forgotten collecting categories for completists which are now essentially worthless (Anglican churchmen of the world)
2) books and manuscripts generally, John Galsworthy in particular. The celebrated peak of the rare book market was the sale of the Jerome Kern collection in early 1929-- in real dollars, and in some cases in nominal dollars, seeing prices never equaled since. John Galsworthy manuscripts were particularly richly priced at the time.

All this brings to mind the problem with evaluating the performance of art & colllectibles markets, the selection effect. People look at what's valuable today, and then look back to see how cheap it was some time ago, and then mistake that gain for a return, without considering all the other things people once thought of as valuable, and now won't pay anything for.

Jan 06 11:56 AM

[bertil:]

Since the article is about contemporary art, perhaps we could leave out baseball cards and rare books? Prices go up and down in all art, just as with gold, stocks etc. but I haven't heard of any fire sale of Jackson Pollock, DeKooning, Warhol or Jeff Koons. Like some (equally) famous banks, car or mining companies for example. The less famous - well, compare it to penny stocks. In the meantime, you can always enjoy the art ...

Jan 06 01:19 PM