Art: A Commodity in a Fragmented Market

“The art market is a fickle beast,” is an adage that has long been accepted by collectors and artists alike, but the unique circumstances that allow this mercurial market to thrive often elude the most seasoned of art lovers. Here, we consider art as an investment opportunity and examine why the market can flourish while remaining so fragmented.

In theory, the pricing of any commodity should reflect all available information about its value, but the nature of “art as a commodity” renders this practice nearly impossible. An artwork’s value is entirely subjective, and the intrinsic “value” of a work of art—outside of the physical paint and canvas, or installation material—is strictly a matter of personal taste. In order to create some semblance of objective regulation within the art market, the industry has developed an intricate signaling process whereby a handful of galleries, collectors and museums determines what is valuable. The nature of “value determination,” allows for a very splintered market, as the price of each work is substantiated by other, similar works, usually by the same artist. Not only are contemporary works and old masters handled differently, but within those various arenas, even the artists themselves become a “micro-market” of sorts.

Oscar Murillo’s soar from struggling art student to art-star overnight is a prime example of how investing in contemporary art has become a bit of a gamble. In September of 2013, a Murillo that had been bought for $7,000 in 2011 was auctioned for $401,000 at Phillips; in February of 2014 a three-year-old painting, with BURRITO written on it, sold for $322,000 at Christie’s. Not surprisingly, these sales allowed for the prices of stacks of his other works to soar too, appreciating by as much as 3,000 percent in just two years. Murillo is now courted by blue-chip dealers and inundated by curators requesting a work for a museum exhibition or biennial. And the “Murillo market” is just one of thousands of microcosms that constitute the art world.

To complicate matters, people who love art—i.e. the seasoned collectors who may have a difficult time identifying themselves as “investors”—purchase works for intrinsic, intangible reasons. They understand that they cannot do anything with it, and they do not intend to do anything with it. It serves no purpose but to remain on display (or in their warehouses) and enrich their lives. These individuals could care less about what it’s worth now because they have no intention of selling it, which means that those who are selling similar works have an opportunity to “do better.” In this context, we can often see prices for certain artists spiral into the stratosphere over the course of years, or months—sometimes even weeks.

Despite the multitude of small, niche markets within the art world, there are a few key objective parameters that are often reliable when determining if a work of art will continue to appreciate in value. First and foremost is aesthetics. While the work need not be “pretty,” to look at, it is considered more valuable if it is provocative or moving. Impressionist and modern artworks continue to corner the market because they are beautiful, accessible, and a proven value. (These can be likened to a blue chip company that pays reliable dividends for years to come).  Red art tends to sell more than work that features other colors. And labor can also play a big role in determining price; the size of the painting and the material used often influences price. As an art advisor, the key to advising our clients is to find what moves you first, and then start your research.