Art Puts Away Financial Assets Over Decades, Even Centuries

Whenever I review an academic’s research on art markets that invokes integral calculus equations, I fling such into the circular file under my desk. They speak of Treasuries and common stocks, hardly separated by more than a percentage point, over a century. This is nonsense because it doesn’t capture the fireworks that can unfold or does not unfold for specific sectors like Abstract Expressionism, Impressionism and Realism.

I have a collector’s sensibility, shaped over 70 years ago. Early on, I’d buy paintings from artists without galleries. The going price, early fifties, was $300 for a canvas which you paid out $25, monthly. Peggy Guggenheim, then, was nearly the only collector with serious money. She was advised to grab Jackson Pollocks for a thousand bucks, apiece, and did so. David Rockefeller, similarly well mentored, late fifties, was buying Mark Rothko’s canvases, going as yet for under 10 grand. They were nearly unsaleable in 1954 at $1,200.

If I had Peggy’s net worth, early fifties, I’d rate a contemporary art museum named after me in Venice, too. New York, early fifties, was the world’s capital for Abstract Expressionism. Not just Pollock’s work and Rothko’s, but Franz Kline, Ellsworth Kelly and Jasper Johns. Count in Andy Warhol, Hans Hoffmann, Claes Oldenburg, Cy Twombly and Francis Bacon, painting in London while swigging booze.

Much of this fifties’ work went for under $10,000 even in the sixties. Today, when I see a Warhol Marilyn or a Basquiat canvas knocked down in the 9-figure range, I wince because after all in the sixties, already running money on the Street, I had wherewithal to be a player.

But, don’t cry for me Argentina. Unlike King Midas, I didn’t sit in my country house adding up treasures. Probably decades ago, my financial assets stood dwarfed by art inventory – mainly, art of my generation. Ed Ruscha, Jenny Saville, Philip Guston, et al. Not exactly Currier & Ives lithographs. Throw in Georg Baselitz and Anselm Kiefer, too.

With the exception of energy plays where I’m overweighted, I pass on tech paper because I see the sector as overpriced. I have no edge herein, constructing earnings models for Meta Platforms, Alphabet, Amazon, Apple and Tesla. Won’t own a stock where I can’t build a detailed earnings model 3 years forward. In a frothy setting, the conceptual basis for buying beaten-down stocks makes me more comfortable. I’ll average earnings power over a full cycle. Assume a good year, an average year and a down one.

Retrospectively, your entry point is the deciding factor on whether you’ll beat the market or end up holding trash. Deeply cyclical stocks turn dangerous in an elongated down cycle. The market then worries over whether your ragamuffin can stay solvent. Worst acting stocks during a recession are those with top-heavy balance sheets, overleveraged and finding it difficult to raise capital.

Normally, you eschew iffy paper like airlines, banks and brokerage houses. Auto makers, overleveraged retailers and entertainment houses show vulnerability, too, historically speaking. General Motors needed bailout money in the financial meltdown of 2008 – ‘09. Then, brokerage houses like Lehman Brothers took gas while Merrill Lynch was pushed into the arms of Bank of America. Nobody ever denied that leverage can’t be a killer.

Mike Milken built his leveraged buyout business on a simple equation, the MAD ratio. What gets measured here is the market value of the debt to the market value of a company’s equity. If close to 1 to 1, it suggests the ragamuffin in question can still refinance itself with new debt and equity, thereby staying in business for another year or longer.

If you’re ready to call the next bull market, go ahead and pick up Macy’s, American Airlines, Citigroup, Ford Motor, Halliburton, New York Times and U.S. Steel. Percentage wise, they could outperform Meta, Netflix, Tesla, Apple and Amazon whose stock jockeys stick overly bullish.

I’m not in this camp. I’ll ride any recovery wave with Goldman Sachs, Citigroup, Exxon Mobil and its brethren plus American Express and Boeing. Such paper is inherently leveraged to a recovering economic cycle and doesn’t carry the heavy cross of outlandishly high price-earnings ratios.

Think of it! If I’d spent more time in the art world rather than thirsting after mammon, I’d be like an oligarch. Instead, I’m just comfortable. Forced to plow through quarterly reports, annuals, proxy statements and FRB pronouncements. I still gag on proxy reports written by cagey lawyers who valiantly make it harder to decipher all the ways management concocts to justify the largesse it awards itself. The worst offender is Tesla’s music sheet which makes me gag on how fully Elon Musk has endowed himself.

Our art market deals with a radically different valuation spectrum than the stock market. Valuation for growth stocks can be discounted by 5 years of strong earnings. Early recognition of merit for Amazon, Microsoft and Alphabet, et al. can make you 1,000% over 5 to 10 years.

Consider, it took over 40 years, from 1860 to 1900, for Impressionism to take hold. It was American Robber Barons who finally stepped up to the plate and bought European dealers’ inventory. Manet literally was starving in the 1860s, kept functional by his dealer. Paul Durand-Ruel, inventoried 50 Manet canvases. Bankers’ loans were based on the value of the frames. It wasn’t until 1905 in a London exhibition did collectors warm up to such genius.

Pierre Matisse, son of the painter, was a New York based dealer who backed his stable of painters and ended up a billionaire. Likewise, Leo Castelli and Ileana Sonnabend (once together) built collections around controversial works that they exhibited. I can’t compete with oligarchs today who cough up $100 million for work which sold for $100,000 in the eighties, the going rate for a highly regarded piece.

Linkage between $5 stocks and underappreciated art is an ongoing search. Unless you see everything, on view, devour biographies of artists and peruse their catalog raisonnés you shouldn’t be a player. Visiting galleries biweekly, for me, dates back to the 1950s. Lest we forget, Olympia (Manet’s) sparked a public scandal. It rests now in The Louvre.

As yet, I find no linkage between art prices and the S&P 500 Index past 50 years. But, in the beginning of World War II, wealthy refugees sold their Rembrandts for $10,000 apiece and fled from Hitler’s encompassing deadliness.

Jenny Saville’s canvas, Knead, painted in 1995, is a portrait of a woman exiting her surgery for facial work, the oxygen tube still inserted in her mouth. Her bloated face, swollen, black and blue, eyes just slits, sucked me in. I bought it after it was “passed” at its London auction. I considered the theme, what women do to themselves to stay competitive.

Never asked Jenny whether she agreed with me on the piece’s theme, why I fell in love with it, first sight. A decade later, Saville’s “ugly” paintings came into demand, with prices surging over 1,000%. Perception counts, but it can’t be taught past a certain point. Same goes for money management.