Last night was the opening of the Johannesburg Art Fair for 2016. There was a lot of hobbing and nobbing, with everyone wandering around extravagantly, clutching their bottles of sparkling wine.

I’m a big fan of art investing. I love the idea of an investment that:

1. Can’t be hacked; and
2. Can be moved; and
3. Doesn’t require a trip to a deeds office.

Of course, it’s easy to get caught out – the art world is full of greedy dealers and bad work. But in some ways, that’s no different to a world of financial products – which is full of bad fund managers and Ponzi schemes. You just have to make sure that you have a good consultant, and that you do some background research on the interwebs whenever there’s a potential purchase on the table.

Some Background

Truthfully, if you had asked me a few years 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:
   
10. Buying art looks to have the same return as bonds!
11. 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, at least, I didn’t see it as an investment decision based purely on the art itself. My thought process was:

1. I work in the professional services industry.
2. Which means that I need to connect with potential clients (although, the need for connection is pretty much consistent across the board).
3. Connection doesn’t take place in a boardroom – in there, we’re all business.
4. 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.
5. Five minutes is not a huge amount of time.
6. And 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 craft beers on Friday night? The haphazard Sunday evening of scrambling for leftovers and watching the 8 o’clock movie?
7. That’s not really the stuff that good conversations/connections are made of.
8. What you really need is a conversation kickstarter.
9. 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:

   

10. Because that is a conversation starter.

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.

In truth, I wasn’t in the auction houses because I was suddenly taken by the art. Instead, what I was really interested in was all the money swilling about. And questions like: “Why is all this wealth gathered here on a Saturday afternoon?”

And what I started to notice was:

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. And there are actually some solid economic reasons why art investment could 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 in the current environment, the money is chasing really low returns, and competing with rivals (like High Frequency Traders) who are always faster off the mark.

So the world of alternative investments is taking on a new shine. The risk hasn’t really changed, but they now compete in a world where all the other forms of risk are earning lower returns.

And more importantly, when it comes to artworks – the added upside is that 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 positional goods like art; and
2. The rest of us will have less money to spend on consumption.

So if you’re looking for longer-term investment: 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 mass 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, where said 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).

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

For some circumstantial evidence, I give you this article: “How Is The Art Market Really Doing?“.

My favourite line:

The market has profound growth potential if the thousands of people who spend $1 million are supplanted by millions who spend $1,000. At the moment, it appears that’s exactly what’s happening.

The Case for South African Art In Particular

Three observations that I can make after two years of auctions, galleries, art fairs and First Thursdays:

1. First Thursdays have become a big thing.
2. Adrian Gore and Brian Joffe are backing a new contemporary art auction house, Aspire Art. Their inaugural auction is next month. And according to the two art specialists that are heading it (Mary-Jane Darroll and Ruarc Peffers), part of its reason for being: “Over the last three years we have seen committees and groups of experts and collectors from the Tate Modern, Guggenheim and MoMA New York, and many others, scouting South Africa, meeting with curators and artists, and being intrigued and excited by what they see. It’s encouraging to note how many local artists are moving onto an international stage after so many years of isolation.”
3. When I first started going to exhibition openings, the price lists were in Rands (even the more international artists). Today, many of those catalogues have multi-currency listings.

Those are all trends.

And even if it’s not for you, go and hobnob this weekend. It’s fun.

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.