Why Playing The Art Market Can Be Risky Business

Economists have long sought to compare the art market's functioning with that of the financial markets. A major difficulty, however, is that each art work is unique and may remain in the same hands for decades.

In a recent study, economist James E. Pesando of the University of Toronto avoids this problem by focusing on the prices of modern prints--specifically prints by 28 renowned artists, such as Picasso, Matisse, Mir, Munch, Chagall, Klee, Hopper, and Whistler. Such prints were usually produced in Editions of 50 to 100 or more, and several prints of the same work are often sold within the space of a few years. Thus, Pesando was able to analyze 27,961 repeat sales from 1977 to 1992 at leading auction houses in the U.S. and Europe.

Over those 16 years, reports Pesando, prints turned in an average annual inflation-adjusted return of just 1.5%, compared with real returns of 8.1% and 2.5% posted by stocks listed in Standard & Poor's 500-stock index and government bonds. Although this was a volatile period, in which real print prices more than doubled and then dropped 45%, the return on prints even at the peak of the price bubble in early 1990 still lagged behind that of stocks.

The study also failed to support the claims of many art experts that it's better to invest in a "masterpiece" or high-priced work of art than a cheaper work. In fact, a portfolio composed of the 10% of prints that were lowest in price in 1977 (selling for $1,500 or less) produced an average annual real return of 2.3% over the 1977-92 period, compared with just 0.9% for a similar portfolio of prints that originally sold for $15,000 and up.

Moreover, Pesando found some striking anomalies. For example, the prices of identical prints sold within 30 days of each other often varied by as much as 30% or more. And prints sold at Sotheby's in New York tended to bring about 14% more than identical prints sold by Christie's in New York, though no such disparity showed up in the two firms' auction houses in London.

The art market, observes Pesando, is "no place for amateur investors."

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