Let’s talk about South African REITs. Because they do so well.

At some point last year (around the time that I was writing the blog series on Unit Trusts), I met someone from the property industry who told me in no uncertain terms that REITs were the place to invest my money because they were the best performing asset class.

And it was quite true at the time – REITs (Real Estate Investment Trusts) were the place to have had your money up to that point (I went and checked).

But because I’m contrarian by nature (and easily offended by no uncertain terms), I pointed out that it would make no sense to invest in listed property (which is what REITs are) if their performance had already been stellar. Because, well, why would you buy something that’s expensive when you could buy other things that are (relatively) cheap?

Of course, that argument was a bit spurious – because I had no idea whether REITs were expensive or not. But my general rule of thumb: if a layperson tells me to invest in something, it’s probably a good time to sell it.

I realise that sounds a bit arrogant, but here is the economic reasoning:

  1. If something is a good deal, then we’re saying that there is a mismatch between value and price. Specifically: that the price is lower than the value.
  2. How does that happen?
  3. Usually when the demand is not there to bump the price upwards toward value.
  4. As more people become aware of this “deal”, general demand picks up for the underpriced asset, and prices start to rise.
  5. That is: the price correction towards value is driven by the flow of information.
  6. Here is a summary of the information flow:
    1. First on the scene are in-the-know industry insiders.
    2. Second on the scene are people in the industry who are watching what the industry insiders are doing.
    3. Third on the scene are the industry observers.
    4. Then comes the media.
    5. Then comes the general public.
    6. At this point, in all likelihood, the in-the-know industry insiders are starting to cash out before the wave of public opinion turns against them (don’t forget, if the public starts to buy into these assets, then someone is selling them).
    7. At this point, the market is likely to become overvalued, risking a price correction in the other direction (ie. the proverbial bubble burst)

So What Happened To REITs Last Year?

Listed Property people love to show you this graph:

But really, they should also show you this graph:

And specifically, you should look at what happened in 2013 and 2014 on the right there…

According to the SA REIT Association, the results from 2013:

  • Listed Properties gave you a 7.1% return (and we should note here that an 8.1% was made in the first quarter, after which the market stagnated and shrank).
  • The Bond Market yielded 0.6% (pathetic).
  • The Equities Market provided a 21.4% return.

And actually, let’s look at the 2014 year-to-date (up to the end of July):

  • Listed Properties – 8.2%
  • Equities – 12.8%
  • Bonds – 4.4%

So the market in listed properties tanked a bit. And I guess I should point out that listed properties fell by 7.1% in the first three months of 2014. There’s been a correction since.

What I’m saying: it’s not that listed properties are a bad investment – but I recommend skepticism when there are too many people talking about a great deal.

Tomorrow/Thursday: what exactly is a REIT, where does it get its value from, why it’s a great investment (in some ways), and some thoughts on whether or not a particular REIT is going cheap…

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

Snapchat: and why it’s worth $10 billion. Perhaps.

What’s the first thing that pops into your mind when you think of Snapchat?

…Sexting, amirite?

I mean, what else is the point of a messaging app that deletes your messages/photos/videos almost as soon as your receiver has read them?

Which is probably why there is plenty of aghast in the blogosphere at rumours that “highly regarded venture-capital firm Kleiner Perkins invested an additional $21.44 million into Snapchat, which raised its valuation to a lofty $10.71 billion.

Some Observations, like, “that $10.71 billion is not a real number”

  • However you feel about it, no one has actually paid $10.71 billion here.
  • Someone has possibly invested $21.44 million.
  • And if they have done it, they’ve bought 0.2%* of the shares with that $21.44 million (which seems absurd).
    *The math: if shares bought for $21.44 million imply a company valuation of $10.71 billion, then you can only have bought 21.44 million ÷ 10.71 billion = 0.002% of the available shares.
  • More importantly, the rumours aren’t really talking about ordinary shares – they’re talking about preferred shares.
  • Preferred shares (ie. preference shares) are essentially debt pretending to be equity.
  • So to use preference shares to imply a valuation seems, well, insane.
  • But perhaps that’s just me.
  • In any case – it’s all just rumours.

That aside, I thought that it would be worth asking Google why anyone would actually want to own a piece of a sexting app.

Apparently it’s not a sexting app

So there are some studies out there (I’ve quoted wikipedia, who quote a study that seems too new to be online):

  1. Only 1.6% of Snapchat users primarily use Snapchat for sexting.
  2. Although 14.2% of people have used Snapchat to sext.
  3. Everyone else just seems to use it because it’s fun – but not in a sexual way?

The Hierarchy of Communication Method

Of all the explanations that I’ve heard for these bizarre usage statistics, the one I like most belongs to Cathy O’Neil (she of mathbabedotorg and Slate Money fame). It goes something like this:

  • We live in the age of the millenial.
  • Millenials are weird.
  • And even though I’m technically a millenial, it seems that there is a split developing between millenials born in the 80s and those born in the 90s.
  • The 90s millenial, on average, ain’t really a facebook fan. They’re more ephemeral in their tastes (as I understand it, this drives Facebook crazy), and even more ephemeral in their habits. It’s all a bit too flexible for this 80s millenial over here – but there it is.
  • And in this ephemeral world of the 90s millenial, there is a signalling effect that attaches itself to the communication method that you use.
  • For example:
    1. A phone call – means that the conversation is serious and urgent and you absolutely must answer/respond/call-back.
    2. A skype call – means that the conversation is largely unimportant, and you’re allowed to do other things during (like play World of Warcraft).
    3. A text message – means that the message/invitation is serious and serious things could come of it.
    4. A whatsapp – means that the conversation is not that serious, but it definitely demands a reply from you.
    5. A snapchat – means that you’re just being kept in the loop, but nothing so serious that you’re expected to respond. As in “Hey, I sent you this funny picture because you might laugh. Whatever. I don’t need to be affirmed with a haha or a lol.”
    6. A yo – is the 90s millenial version of a facebook poke. A response of next-to-no effort is expected. Maybe.

Why Snapchat might be worth something

In the interests of being journalistic, I downloaded Snapchat this morning (I also downloaded Yo – but that’s for another time). As it turns out – I don’t have too many friends on Snapchat (interestingly, I have zero friends on “yo”). But the Snapchat friends can mostly be split into four camps:

  1. 90s millenials (my siblings)
  2. 80s millenials who have siblings that are 90s millenials
  3. Those that I’m pretty sure were just checking this thang out.
  4. A disproportionate number of people that might be part of that 1.6%.

So I tried to use it – and it is surprisingly fun, actually. Sending a photo that you can hand-doodle captions on? Pretty awesome.

But here’s why I think that advertisers in particular might like it (and full disclosure – I have basically plagiarised this idea from Jordan Weissmann):

  1. In order to view a snapchat photo or video, you have to hold your thumb down on the touchscreen. That is: it requires your undivided attention, or else you lose it.
  2. Question: how many things get that level of focus?
  3. If an advertiser can get you to read an advertisement with that level of attention, then that would separate Snapchat advertising from almost all the other kinds.
  4. And even if the advertiser fails to get your attention for quite as long as he needs, consider that the data from Snapchat will indicate just how long, on average, people are viewing the message before they stop? That’s not just an impression on a Google page that may or may not be glanced at – that is a clear indicator of a very specific view of the advertisement.
  5. As I understand it, that type of advertising data is pretty close to priceless?

I mean – I hope so. Because as hypothetical as it is, a $10.7 billion valuation for a company that has never generated even a smidgeon of revenue (never mind profit!) needs that kind of priceless idea to justify the craze.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

Big Data: it’s a thing

One of my new favourite things about a Saturday is the release of the weekly update of the Slate Money Podcast, hosted by Felix Salmon. I realise that this makes me a nerd. But the Slate Money podcast is very satisfying – and its length conveniently lasts the drive from my house to almost anywhere in Johannesburg on a Saturday evening.

One of the regulars on the podcast is Cathy O’Neil, a former finance quant turned anti-Wall Street activist who I disagree with most of the time because extremism is extremely tiresome and often inconsistent and almost always impracticable. But she does talk about Big Data a lot – and Big Data is all the rage. What with Edward Snowden and the NSA, etc.

Although I gather that most people who know anything about Big Data are bit like “NSA? Yawn. You really know nothing about these things. The NSA is the least of your big data concerns. No but seriously. But you really know nothing.”

Personally, I’m a fan of the “Everything is probably already known – so best enjoy the fact that you no longer need to watch adverts for products that aren’t really applicable – like tampon ads for guys” school of thought. Also known as the school of silver linings.

Anyway – I recently saw a clip that gives you an idea of the scale. Because I think it’s something that we miss.

So watch it here - it’s breathtakingly magnificent.

For the email subscribers – you’ll need to click through to the webpage to watch it, or you can click on the link to take you through to vimeo.com where it was originally posted.

Happy weekend!

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

South Africa, Ebola, and Border Closures: Shares to Short?

So it seems that the ebola crazy is spreading a lot faster than the virus itself.

And it’s the panic that will do real damage. To quote the Economist:

The economic costs of epidemics are often out of proportion to their death toll. The outbreak of Severe Acute Respiratory Syndrome (SARS) in 2003 is estimated to have caused over $50 billion-worth of damage to the global economy, despite infecting only about 8,000 people and causing fewer than 800 deaths. That is because panic and confusion can be as disruptive as the disease itself. Studies of past outbreaks have shown that lethal diseases that lack a cure tend to provoke overreactions. This is true even if the risk of transmission is low, as is the case with Ebola.”

Also, this:

deaths per day greater than ebola

I don’t see anyone closing borders to the HIV positive amongst us. Or to those that are dehydrated due to unexpected bowel liquidity.

Nevertheless, it seems that any Port Health authority that has any sort of general proximity to an outbreak is hauling itself out of the back office, erecting barriers in airport lounges, and being generally inquisitive about stamps in your passport. I say this because my passport has seen a lot of latex glove in the last month.

A case in point: Botswana has closed its borders to West Africa and the DRC.

Botswana is in Sub-Saharan Africa and has no borders with any of these countries. In addition, in terms of international flights to and from Gaborone, here is the list of direct destinations/points of origin:

  • Lusaka, Zambia
  • Harare, Zimbabwe
  • Cape Town, South Africa
  • Johannesburg, South Africa
  • Nairobi, Kenya

If you wanted to fly to Gaborone from anywhere else, you’re going to be catching a connecting flight (probably through Johannesburg).

And even then, I feel like we’ve forgotten that Africa is a giant of a continent. Botswana is over 5,000 km away from Liberia. Here is a list of countries that are geographically closer to Liberia:

  • France
  • Brazil
  • Spain
  • The UK

Here is a graph of the export trade that takes place between Liberia and the rest of the world:

Screen Shot 2014-08-28 at 9.22.38 AM

Do you see Botswana on that list? Not even a little bit. And it’s even less present in the graphs for the other affected West African countries. Meaning that any travel between West Africa and Botswana would be incidental, if it happened at all. So what real risk does Botswana face that required it to take such a dramatic step?

But at the same time, I guess you could say “Well what harm is there in it, really? It’s not going to be especially disruptive economically if there’s not much going on between Botswana and West Africa…”

Well, there’s nothing wrong with it, except precedent. Because now that travel ban has extended to the DRC, and anyone coming from the DRC.

The Economic Implications for South Africa

Another graph – only this time, South African export destinations (net exports):

Screen Shot 2014-08-28 at 7.48.32 AM

5.51% of net export trade takes place with Zambia. 3.86% of net export trade takes place with the DRC.

Earlier this week, Botswana placed a travel ban on anyone coming from the DRC. Yesterday, reports started coming through of trucks stranded at the Kazungula border between Zambia and Botswana due to the Botswana travel bans. South Africa has put similar bans in place for DRC nationals. And yesterday, the Zambian government introduced screening at the Kasumbalesa border at the DRC.

In some places, the screening process will leave you banned from entering a country if you have a body temperature higher than 37.5º celsius. I mean – we’re talking about equatorial heat here – you can run that kind of fever just because it’s a hot day. You can also give yourself a fever by:

  1. smoking a cigarette (takes about 20 minutes for your body temperature to return to normal)
  2. lying (and I’m told that’s not altogether too uncommon at a border post)
  3. eating anything with chilli or cayenne pepper
  4. having a cold

Anyway, thanks to an ebola outbreak (of a different strain, no less) in the north of the DRC, and some slight overreaction from the Health Authorities, the borders are starting to congest in the most uncomfortable way.

Thanks to this website

Thanks to this website

What this may mean for South Africa:

  1. Cross-border trade will slow
  2. That’s 4% of our net export trade (in the DRC)
  3. And probably a bit more when you consider the congestion that will start to take place at the borders
  4. This is particularly impactful for any South African mining companies with interests in the cobalt and copper mines in the south of the DRC (see map above).
  5. As well as for some of the bigger listed transporters. Supergroup springs to mind, after their pretty great 2014 results last week. Especially after their CEO said something along the lines of: ‘New clients in consumer goods and “quite good” commodities cargoes out of Zambia, the Democratic Republic of Congo and Zimbabwe through Durban harbour had boosted the group.’

Shares to short this Thursday?

Screen Shot 2014-08-28 at 10.33.39 AM


Just a thought. Particularly if the border closures continue to escalate.

Which they probably will.

Because crazy.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.

The Investor Diaries: Week 23

Good morning, all

So it’s Wednesday. And I’ve spent this morning updating spreadsheets of portfolios. For the new readers, you can see the quick guide to this series of posts in The Investor Diaries: Week 22.

Where I’m going with today’s post:

  1. I’m going to start with the Once-Off Investor portfolios. Which, I’m realising, are really just a guide to what you should have done on 19 March 2014 with R3,500, if you had R3,500 – although there is some value in knowing in general which types of options for small investors are out there.
  2. Then I’m going to move on to the Monthly Investor portfolios. Which are much more useful – because they show that the real power of investment is the saving habit, and when compared to that, where you choose to put your money is much of a muchness. That is: you’re unlikely to make it big with a small portfolio of stocks. But you might just make it big if you’re a habitual investor.
  3. Finally, I’ll take a look at the SA economy.

The Once-Off Investors

Twenty three weeks in:

Screen Shot 2014-08-27 at 7.52.25 AM

In pictures:

Screen Shot 2014-08-27 at 7.54.17 AM

The Monthly Investors

It’s the last week of the month, so they would have just added another R1,000:

Screen Shot 2014-08-27 at 7.53.40 AM

In pictures:

Screen Shot 2014-08-27 at 7.58.11 AM

You’ll notice that the Naspers investor is having quite a ride… This is normally the point at which someone talks about the Power of Dollar Cost Averaging. Not quite sure whether it’s that, or “the power of the debit order”?

The Economy

Screen Shot 2014-08-27 at 7.53.59 AMThe good news: we’re “not in a recession”, because the GDP growth rate for the second quarter was positive (and a recession is generally defined as “two consecutive quarters of negative GDP growth”).

The bad news: well, we’re still worse off than we were in January. We lost 0.6%, and then we recovered by 0.6%. But the base changed, so 100*(1-0.6%)*(1+0.6%) < 100.

But obviously, that had a lot to do with the strikes. The stock market seemed entirely bored by the news:

Screen Shot 2014-08-27 at 7.53.17 AM


As was the exchange rate:

Screen Shot 2014-08-27 at 7.52.39 AMThe government bond yield, however, did react a bit positively (I know that the yield looks negative – but it only goes down when the bond price goes up, and people buy bonds when they’re feeling more positive, so it was actually a positive reaction):
Screen Shot 2014-08-27 at 7.52.49 AMOn the international commodity front, the price of crude oil continues to drop:
Screen Shot 2014-08-27 at 7.53.06 AMSo hopefully, a fall in the fuel price at some point. On a less happy note, the gold and platinum prices are also going down – which is a bit of bad news for our mining sector:Screen Shot 2014-08-27 at 7.52.58 AMIf you feel like something a bit more technical, I have recently become a fan of the SAfm Market Update with Moneyweb podcast. It’s on iTunes, but you can also find it here.

Until next week.

South African Art: How it gets its value. And why it’s cheap.

So yesterday, I explained why I think that the art market is an investment powerhouse that is only due to get stronger. Basically, for two reasons:

  1. Increasing Wealth Inequality; and
  2. The power of asymmetric information.

Asymmetric information is my favourite part of the story. I love an informationally inefficient market-space where you can be on both sides of a transaction.

But that aside, I believe that there is something particularly special about South Africa’s contemporary art market. In order to explain why I’ll need to start with a basic outline of the art industry. The Art Industry will have to correct me if I’ve gotten it wrong.

To begin with: Contemporary Art

Before I get going: when I talk about the “Art Industry”, I am not referring to all art produced by South African artists.

This weekend past, I went to the Johannesburg Art Fair. Specifically: I went three times. And from what I saw there, and from the discussions I had, and from the talks I listened to, it appears as though an artist can do one of two things:

  1. Test the boundaries – in terms of subject matter/technique/both/etc; or
  2. Sell out.

Pieces produced by artists in the first category become part of the body of work collectively known as “contemporary art”.

The second category is anyone that is not a contemporary artist, as dictated by people in the know. That is: if your work could be sold in…*shudder*…. a furniture shop, or in a gallery that specialises in wildlife paintings, then you won’t be invited to an Art Fair.

Personally, I think that’s a bit snooty – I quite love wildlife art. But if I can offer an analogy, it may be a lot like the foodie world:

  • Talented contemporary artists: are the molecular gastronomists, the high-end chefs, the secret bistros and all things fine-dining and deliciously extraordinary. The food is not necessarily to everyone’s taste – but it’s not meant to please every palette.
  • Bad contemporary artists: are the establishments that generally get shut down owing to lack of patronage. Of course, you do get those that are supported by rich parents and friends in the hopes that they will one day produce good food – and there’s lots of fanfare and branding in the interim – but the food critics are rarely deceived after a visit. Ahem. Conor Mccreedy, ahem.
  • Wildlife artists (and the like): are the large chain restaurants. The food is reasonably priced and pleasantly seasoned. It’s generally quite profitable because of its mass market appeal – but it’s not the stuff that legends are made of.
  • Furniture store artists: are fast food outlets. The work is produced en masse. It’s cheap. Although a real foodie would rather starve.

And in case it’s not clear, because my art friends are all of the food critic varietal, I’m going to talk quite specifically about the Contemporary Art scene.

An Introduction to the Art Industry

The key players:

  • Artists (obviously)
  • The Galleries (the primary market)
  • The Auction Houses (the secondary market)
  • The Big Collections (museums, large corporates, highly-esteemed private collectors)
  • The Bigger Money (the large art funds, the billionaires)
  • The Smaller Collectors (the private individuals)

Within that, you also have “The Experts”, being those people that have studied art for years (its history, its techniques, its movements, etc), and have assiduously developed a refined eye.

Again with the analogies: I think of this “refined eye” as similar to the refined palette of a sommelier: they’re able to taste a vintage, and tell you where the grape was grown, and in what year, as well as the components of the blend, and what flavours you should be picking up. I, of course, won’t get all of that – but if an expert starts to point a few things out, I might develop a deeper appreciation for the wine I’m drinking.

I’ve not separately identified the “Experts” – because you’ll find them sitting in all those categories. Many of the art academics in universities are also prominent artists. The experts curate the art galleries and the collections. Experts also run the auction houses, and form part of the body of collectors. They’re the bones of the art world: providing structure for movement. The rest of us are the muscle (that’d be the collectors) and the fat (the collectors that are more interested in the investment than the art – too much of it and you start to get coronaries).

How I see those key players interplaying


  1. Artists produce new work and sell it to galleries (and/or galleries sell the works on behalf of artists);
  2. The galleries then hold exhibitions to on-sell the art to collectors. They also try to place the art in prominent collections.
  3. Once the galleries have sold the art – trade in those pieces then has to take place on the secondary market. So the collectors also buy and sell art through the auction houses (there are other players in the secondary market – but auction houses are the important component here).
  4. When the artists produce more work, there is an informational feedback loop that takes place: prices for their new work will depend on what happened with their work in the primary market (how quickly did it sell and at what price and to whom), and what is happening with their work in the secondary market (how are their works faring at auction, who is selling them, who is buying them, and why are the works being sold in the first place, etc).

Whence cometh the value?

Firstly an observation – given the way that the market operates, I think that you’ll find the expert opinion is pretty pervasive:

  1. Experts run the galleries – so they’ll price the works they prefer higher than the works they dislike.
  2. Experts run the large important collections – so they’ll buy the works that they believe are “important” and “strong” from the artists that they believe are “going somewhere”.
  3. Experts run the auction houses – so they’ll make estimates based on their expert opinions, providing price-anchors for everyone that’s not an expert (and I do love some behavioural economics in the mix).
  4. And while we’re at it – most of the large art investors are hardly about to spend millions of dollars/pounds/rands without consulting an “expert” (although, I’ll admit, arrogance could probably supersede that for some).

So when we talk about price-setting in the art world, it isn’t that subjective. At every point, you have these “refined eyes” playing the pivotal role in both the selection and the pricing of a piece of art. And what is amazing is how consistent that “eye” can be. It’s trained to look at technique and subject matter and originality and so on.

Again, just like food critics have general consensus on the quality of food prepared by a particular chef (based on his/her use of ingredient, combination of ingredient, originality, presentation, etc), there is general consensus on works of art. Even if a critic doesn’t necessarily like the piece, that doesn’t change his opinion on the strength of the work, or its importance, or what it should be priced at given the stage of the artist’s career and the artist’s prominence in a particular movement and/or cultural period.

In some ways, it’s a bit like pricing a share. Any trained financial analyst will look at a company and be able to tell you whether a share in that company is over-priced, fairly-priced or cheap. How do they come to that opinion? Well they certainly look at the financials and past performance. But they also consider the growth trajectory of the company, the industry and the economy; they look at the quality of management and margins and capital investment. Those are all fairly subjective things to look at – and yet somehow, you usually get general consensus, with a few outliers that the market ignores.

So to summarise, when talking about the “value” of a work of art, that value is driven by a number of factors:

  1. The artist – or, rather, how the artist is regarded by art experts (usually indicated by how often the artist is reviewed in professional art publications).
  2. The presence of the artist in significant collections (of the famous art museums, in particular) - because that is a clear indicator of just how widespread the expert regard for an individual artist actually is.
  3. The strength of the work – because all the way along, experts in the primary and secondary markets will be judging and evaluating that work based on how representative that particular piece is of the artist’s work and/or the artist’s work during a particular phase of their career.
  4. The demand for the artist – although, again, I would think that this is a bit of double-counting – because high expert regard and having the art in significant collections tends to generate the demand for the artist.

Of course, you get exceptions. But generally speaking (and to be clear, “generally speaking” is sufficient when you’re talking about diversified investments), a good work from an artist that is well-regarded and featured in prominent collections is going to be a fairly valuable item to own.

At that point, it’s really a question of deciding whether that value is fairly represented by the price that’s presented to you. And for that, there are two options:

  1. Ask an art critic (because they’re in touch with the art world, so they’ll have a fairly good idea of what is, and what is not, a good price); or
  2. Try and see what that artist is doing at auction for yourself.

Probably better to do both.

Coming Back To The South African Art Industry

The South African Art Industry, in many ways, is still rapidly growing. But in particular, there is not an especially developed market demand for the art. That is: investors continue to treat art investment as more risky and more subjective than it actually is.

That perception = depressed prices for art sold locally

Meanwhile, the international market has a growing interest in South African art.

Take the US as an example. In the late 1980s, you had all this university endowment boycotting against apartheid. Boycotting that was driven by student action. That is the kind of cause that creates deep vested interest in South Africa and what it produces.

The students of the late 1980s are now in their mid-40s and early 50s. Just about old enough to be real investors in the art game. Wealthy investors that were once deeply involved in the anti-apartheid cause…

So it should come as no surprise that anti-apartheid artists like William Kentridge do so well in New York. And yet you find his work still going relatively cheaply here Johannesburg.

You know what else isn’t surprising? It isn’t surprising that you get articles in the Business Day saying that there is increasing international interest in South African art, and that South African auction results are starting to cruise high above estimates.

It makes me want to say “Come on, South Africans. You are missing out!

Get out there and make friends with the art world. Because they can tell you what to buy and when to buy it. They can also tell you what not to buy, and that’s important too.

Also, it’s a far more satisfying spend than a new Audi.

Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.


South African Art: The Economic Reason To Buy It. Immediately.

If you had asked me a few months ago about my opinions on buying art as an investment strategy, I would have made the following observations:

  1. Hmmm.
  2. I see.
  3. So what you’re saying is, you’d like to veer clear of productive assets in favour of the persnickety tastes of the art world?
  4. Sounds risky to me.
  5. More risky, in fact, than the return would substantiate.
  6. And what exactly do you know about art?
  7. Art seems an awfully subjective thing.
  8. And where do you start?
  9. Also, here’s an art index from Citadel:

    Thanks, Citadel. You're awesome. I love me a graph.

    Thanks, Citadel. You’re awesome. I love me a graph.

  10. Buying art looks to have the same return as home-owning.
  11. And you know how I feel about home-owning.
  12. So just buy equities. They’re productive assets. Come now.

But then I decided to buy some art.

And if I’m entirely honest, I must confess that I didn’t view it as an investment decision – or, rather, I didn’t see it as an investment decision purely for the sake of the art. My thought process:

  • I work in the professional services industry.
  • Which means that I need to connect with potential clients (although, the need for connection is pretty much consistent across the board).
  • Connection doesn’t take place in a boardroom – in there, we’re all business.
  • Connection has to take place in the five minutes before we step into the boardroom, while the cappuccinos are being prepared, and the pleasantries are being exchanged.
  • Five minutes is not a huge amount of time.
  • And so often you can end up with awkward silences and the standard “So how was your weekend?” question. Which, when you think about it, is a really weird question to answer – do you talk about the personal issues you had with your spouse? The slightly too many draughts on Friday evening? The haphazard Sunday night of scrambling for leftovers and watching the 8 o’clock movie?
  • That’s not really the stuff that good conversations/connections are made of.
  • What you really need is a conversation kickstarter.
  • Which is why I went out to try and buy a Diane Victor smoke portrait – painted with a candle. Here’s an image of her at work:

  • Because that is a conversation starter.
  • And there are few things to beat a shared moment of admiration for ingenuity.

Sadly, I didn’t manage to get a smoke portrait. The bidding war bested me, and I left my first art auction with nothing.

But I did go back to subsequent auctions. And I started visiting galleries.

Not because I was suddenly taken by the art – but because of all the money in the room. And I was beginning to ask the question: “Why is all this wealth gathered here on a Saturday afternoon?”

Here is what I’ve realised:

  1. The value of art is not that subjective. Incredibly.
  2. Artworks are actually not all that hit-and-miss. Some are hits. Some are misses. And there are people out there that can tell the difference. As in: real experts that would share the same opinion independently.
  3. There are solid economic reasons why art investment should be high on your list of “places to put your money”.

So I’m going to start with the last.

The Economic Case for Investing in Art

How the wealthy spend their money

We live in a world of increasing wealth inequality. So if you’re going to follow the money, the question to ask is: what do the really wealthy do with their money?

I mean: there are only so many homes one can own; there is only so much vacationing that one can do; there are only so many cars that one can buy; there are only so many cool gadgets that one can use.

And, of course, there is the market for shares and bonds and commodities. But that can get tedious after a while – and every new company acquired becomes yet another headache to deal with. And besides, where is the status in that?

So while the wealthy might put much of their wealth into the traditional things - there will always be some allocated for the higher things of culture and scarcity.

And art – art is almost the ultimate positional good.

By that, I mean a good whose value is derived from the fact that other people don’t own it but would like to. There are others (rare books, coins, stamps) – but few that can be so gloriously hung from a wall for others to covet.

The further implications of wealth inequality

At the same time, looking forward, I think we can agree that the growing proportion of the wealth in the hands of the wealthy means two things:

  1. The wealthy will have more money to spend on stuff like art; and
  2. The lower classes will have less money to spend on consumption.

So if you’re going to invest for the long-term: should you invest in art, where there is growing demand? Or would you rather invest in companies that are going to squabble over the remnants of lower class consumption?

I also wonder whether art won’t become one of the last few private sector transfer mechanisms for wealth – where the wealthy spend money on new art being produced by up and coming artists, and these artists are always up and coming from the lower classes (it’s a statistical thing – if the 99% are the lower classes, and the production of art is classless, then they should produce 99% of the raw artistic talent).

Personally, I’m also a fan of art investment because it has that “Indian Cow Effect” (ie. Why do poor Indians invest so much money in cows when they demonstrate a -64% annual return after you take into account man hours? Answer: because the saving process feels like you’re spending money – and everyone likes to spend money).

A world of asymmetric information

My final observation about the art industry/world – there is not a lot of transparency. So to backtrack, the art world is split into two markets:

  1. The primary market – where artworks are sold for the first time. This is the province of art galleries and the artists themselves.
  2. The secondary market – where artworks are sold between investors. This is the auction space. But the art galleries and art dealers and so on are also often involved as well.

The crux is:

  1. You can’t easily see listed prices of works for sale in the galleries (you have to request prices).
  2. And you can only see listed prices of what an artist achieved at auction if you pay to subscribe to online databases.

One final component before I get to my point: from what I’ve seen, galleries hold old stock of an artist’s unsold work in their storerooms – and they’re not all that fastidious about keeping their price lists up to date. Although they do try – which is probably why prices are so rarely publicly quoted.

What that means: if you see an artist do surprisingly well at auction on a Saturday, then in all likelihood, the galleries that act as agents for the artist won’t have updated their price lists by the Monday morning. So if you’re a bit liquid, and you’re prepared to put the research time in, there is opportunity to score bargains by taking advantage of the short-term discrepancies between pricing in the primary and secondary markets.

It doesn’t happen all the time. But when it does…

So the economic summary:

  • There is increasing wealth inequality
  • Meaning that the wealthy will have more money
  • Which makes for a promising future for art
  • Because art is a positional good
  • And art is also traded in an informationally-inefficient market

For some circumstantial evidence, I give you this article: “Billionaires scramble for world’s finance art pieces“.

The Case for South African Art

So putting the big picture to the side, and assuming that you agree with me so far, there are good reasons why the South African market, in particular, is an area of growth.

As a teaser, I’m going to refer you to last week’s article in the Business Day: Art takes off in SA as a diversification strategy for investors.


Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.