In the past fifteen months, pension funds have suffered approximately $2 trillion in losses. Over the past five years, the S&P 500 has lost 5 percent, and is flat for the past ten. With analysts continuing to revise their earnings expectations downward on an almost everyday basis because, despite the daily trickle of negative economic news, the modeled implications of the negative impact on our consumer society of this loss of wealth is almost too much for the popular business press to publish.
David Dreman and Eric Lufkin produced a study in 2000 titled “Investor Overreaction: Evidence That Its Basis is Psychological” which examined just why it takes so long for a stock to make a new low once negative information is out. Less favored, or known, stocks often get penalized despite favorable fundamentals. It’s the classic Growth vs. Value phenomenon. What Dreman and Lufkin concluded is that the facts are far less important than peoples’ perception of a company when it comes to stock performance. It’s all about the psychology. Not so far from the results outcome reported recently by the real estate website Zillow.com which found that, despite widely reported year-on-year declines of 16 percent in average home prices, residents in the Northeast U.S. continue to overestimate their homes’ value.
What, you may ask, does any of this have to do with art? Well, in the same way that stock market investors get into the habit of attaching too much worth to their favorite stock despite all fundamental evidence to the contrary, artificially upholding its value ‘til the very end, art enthusiasts too often ‘place their bets’ based upon name, or brand, recognition, when it is more often than not the lesser-known artists who are the better value.
Two economists at NYU’s Stern School of Business, Jiangping Mei and Michael Moses, have developed one of the most respected art indices. Their work centers around an examination of the auction results of over 11,000 sales transactions. Interestingly, in research reported in the magazine Registered Rep, they found that in over 4,500 cases it was not the most expensive paintings which provided the most return for investors, but those at the lower end of the pricing scale.
As society grows more comfortable with the idea of art as a legitimate investment vehicle, the necessity of appropriately guaging the potential posed by emerging artists versus the few known, hot commodities increases. Emerging artists lack the price premium, and therefore the risk, of the more established, “growth” artists. Notwithstanding his works’ aesthetic appeal, the time to have bought Damien Hirst was when he was relatively unrecognized, or in investment parlance, when there was actually alpha relative to the art market
Like any other inefficient market, the opportunity exists in the art market to realize outsized gains via active management of a portfolio. When it comes to value investments, the greatest gain is always realized by buying the stock whose price is the furthest below its intrinsic value. As a group, emerging artists fit squarely in the value camp, with equally strong prospects. Why assume that a tiny minority of artists, blessed with the impremateur of a small pool of art dealers, would produce the only art worthy of collector’s attention and investment?