Why you won’t get rich by investing in art

There are bubbles everywhere - the question is: which one will pop first? It could well be the overheated, overhyped art market. And that's no bad thing, says John Stepek.

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Bubbles, bubbles everywhere - but which one will pop first?

One particular bubble which a lot of people have had their eye on for some time, is the art market.

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Despite long-rumbling fears that it couldn't last, prices in the art world have been careering higher for years. For a while there, it seemed that every week a new record was set.

But all good things must come to an end - and it's a good thing too

Prices in the art market - as in much of the rest of the world's assets classes - have shot higher in recent years. According to the FT, the Mei Moses All Art Index has risen at an average rate of 15.5% a year over the past five years, compared to 10.5% a year for the S&P 500 index.

Contemporary artists in particular have been the beneficiary of this boom. In the 12 months to June, the price of postwar and contemporary works rose by 20%, Micheal Moses, co-creator of the Mei index, tells the FT.

Damien Hirst has become the world's most expensive living artist - though does that make him the world's best living artist? I suspect most people would disagree.

However, I'm not going to comment on the relative merits of works of art. I have my preferences of course, like anyone else, but they're not really relevant to this discussion. Ultimately, the financial value of anything is what someone else is willing to pay for it.

But as I've already mentioned in Money Morning a few times before (see: Why buying stamps should be left to the experts) - collectibles like art aren't investments. Yes, you can buy them, and yes, they might be worth more at some point in the future than you bought them for. But they are not what an ordinary investor could describe as an investment.

Just as the occasional highly-interested individual can make money from day trading, or even gambling, so art dealers or philatelists or antiques experts can make money from dealing in those things. But for most ordinary investors, it's just a matter of luck.

And for those who have staked their fortunes on the art market in recent years, it seems their luck may be running out. "A lot of the Wall Street guys now, the ones who were buying contemporary art, are worried about losing their jobs, their bonuses, and when your financial wellbeing is under threat the first thing you stop doing is buying multi-million dollar artworks," Ian Peck of Art Capital Group tells the FT.

"The market is now clearly at a peak." Mr Peck expects a correction' in the contemporary art market, although not a major collapse, as, he says, the market has far more international buyers than it once did.

But in a fashion-driven market like the art world, it's amazing how quickly people can get turned off when a few of their peers leave the party. For many of these buyers, art is little more than a status symbol, something to have hanging on the wall to impress others with your importance. When you already know that you have more money than your peers - because they're all losing their jobs and you're not - then the need to show off with expensive paintings becomes less acute.

Anyway, apparently Hugh Grant is trying to sell an Andy Warhol print of Elizabeth Taylor next week at auction in New York. He's hoping to fetch the princely sum of $25-$35m - not bad, given that he bought it for $3.5m in 2001. According to The First Post, whether or not Hugh gets his price could be the first serious sign of whether the markets peaked or not. We will keep our eyes peeled.

Oh, and even more bad news for the dollar. What was once the world's alpha currency is now having sand kicked in its face by almost every other form of paper money you can imagine. Now apparently Gisele Bundchen, the Brazilian supermodel, doesn't want to be paid in dollars anymore. She's negotiating her contracts in euros only these days, because of concerns about what the US currency will do going ahead.

Now, lots of people might be a bit sniffy about taking financial advice from a supermodel. And I might be more worried if it was Naomi Campbell, who recently paid a fawning visit to that paragon of economic virtue, Hugo Chavez, in Venezuela. But Gisele seems pretty clued up - Forbes reckons she was the world's top earning model last year, and by a great deal more than the next name down the list.

However, I would suggest that if she's looking for some real diversity, she should consider negotiating to receive a portion of her fees in Japanese yen - after all, that currency can't go much lower. The euro may well run into some trouble if real economic problems start to erupt in regions like Spain and Ireland which are enduring housing market collapses.

And then of course, there's gold. Alan Greenspan once said that gold was the currency he'd most like to be paid in for his various speaking engagements. I'm not sure if he's achieved that or not, but I suspect most companies would be more willing to make the effort to bend the rules for Ms Bundchen than for the octogenarian former central banker.

Turning to the wider markets

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In London, an afternoon rally saw the FTSE 100 pull back some of its earlier losses, but it still ended the day 69 points lower, at 6,461. Sainsbury's led the fallers with a 20% drop as a Qatari investment fund abandoned its takeover bid for the supermarket. Bank Alliance & Leicester was also lower on rumours that it had sought futher funding from the Bank of England. For a full market report, see: London market close

Across the Channel, the French CAC-40 ended the day with modest losses in line with Wall Street, closing down 35 points at 5,684. And in Frankfurt, the DAX-30 fell 41 points, at 7,807.

On Wall Street, the major indices clawed back earlier losses as investors overlooked ongoing troubles amongst financials and bought into other sectors. The Dow Jones ended the day 51 points lower, at 13,543, as Citigroup weighed heavily. The tech-rich Nasdaq was 15 points lower, at 2,795. And the S&P 500 was down 7, at 1,502.

In Asia, the Japanese Nikkei fell 19 points to close at a 7-week low of 16,249. And in Hong Kong, the Hang Seng was down 495 points to close at 29,438.

Having dropped nearly $2 on the Nymex yesterday, supply worries saw crude oil rebound by over a dollar to $95.12 this morning. And Brent spot was at $92.11.

Spot gold hit its highest level since January 1980 this morning - $814.10 - following the jump in the oil price, before falling back to $813.50. And silver hit a high of $14.84 before easing to 14.83.

In the currency markets, the pound was trading at 2.0859 against the dollar and 1.4363 against the euro. And the dollar was at 0.6885 against the euro and 114.6 against the Japanese yen.

And in London this morning, high street retailer Marks & Spencer announced a 40% rise in H1 profit to £393.2m. Clothing sales rose as the company used celebrities such as Take That and Twiggy to promote new lines, whilst pension credit and new food stores also contributed to gains. However, sales in the second quarter had slowed considerably. M&S shares had risen by as much as 2.1% this morning.

Finally, our recommended articles for today...

Is silver about to take off?

- Gold and silver are both looking strong of late, but silver's gains have been nowhere near as spectacular as the 28-year highs its fellow precious metal has been hitting. So have the two diverged? Chartist James Turk looks at the key level which, if hit, could mark the start of a stellar uptrend for the metal (and we've already come close to hitting it today). To find out why you should be watching silver very closely right now, see: Is silver about to take off?

Why it's time to bet on Europe

- The dollar may be falling fast, but don't be beguiled into buying knockdown US property. Instead, you should be looking at ways to protect yourself from further dollar - and sterling - weakness. Merryn Somerset Webb looks at the European funds that could help you do just that: Why it's time to bet on Europe

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.