Calculating Constable
June 28 2012
Picture: Christie's
A reader alerts me to an interesting article in the FT about the value of Constable's The Lock, shortly to be sold at Christie's. The picture sold for £10.8m in 1990, and is estimated at £20m-£25m now. The FT asks:
[...] will this wonderful masterpiece actually reap a profit for its vendors? We asked the FT’s finest number-crunchers to calculate, taking into account inflation, costs and other factors, how it has fared as an investment over a 22-year period.
The FT's answer, as you can see from the chart above, is that The Lock was a turkey of an investment. You might think that potentially doubling your money between 1990 and 2012 is quite a good bet. But the FT introduces an extra 'cost' in owning the painting - the so-called 'opportunity cost' of having your money tied up for the 22 year period. The argument goes that you will have lost out by not investing that £10.8m elsewhere, and earning interest or a dividend on it.
I'm often asked 'is art a good investment?', so these figures are a useful case study. A look at the stock market today suggests that the FT is right. In July 1990 the FTSE 100 was at about 2300 points. Now it is slightly more than double that, at about 5500 points. With interest or a dividend at, say, 5% annually and reinvested, you would be looking at quite a bit more than doubling your original investment.
As an art dealer, you might expect me to say that art is a brilliant investment, and the ideal alternative asset class. But on a purely financial and short-term level, I would tell you it isn't, as the FT argument proves. Art is very illiquid, hard to sell quickly, and worse, it's hard to buy, or at least buy the right thing. In order to guarantee not buying a dud picture (say, one in bad condition) you have to use expert advice, and that is often expensive. And then there are charges relating to the purchase and sale of the art - at auction, anything up to a combined figure of 40%. All these costs need time to fall away in relation to the picture's capital accrual, so you have to keep your painting for the medium to long-term. The 22 year period for for re-selling The Lock at auction is, I'd say, probably too short for a picture so well known.
On the other hand, art as an asset class has the benefits of stability. Unlike Enron, a famous Constable cannot go bust. If the FT had done its calculations in early 2009, when the stock market crashed, The Lock would have looked like a far sounder investment than shares. And of course art lovers everywhere will know that to value a painting in terms of its 'opportunity cost' is philistine reductionism. The dividend of pleasure from owning such a work is incalculable.
So to view art as an investment is daft in the short-term, potentially quite sensible in the medium term (if you buy well, with good advice), and usually very sensible in the long-term. After all, when James Morrison bought The Lock in 1824, he paid 150 guineas for it. That's less than £20,000 today.
Update - a reader writes:
That FT piece is interesting. If you look at the far left column in their graph, you'll see they have adjusted the £10.8 million paid in 1990 for inflation - £10.8 million has become £20 million or thereabouts. Let's say the picture sells for £25 million, as the FT imagines. Take off the fees you paid for buying and selling it, plus any other costs, and you're still left with about £20 million. In other words, your money has stood still, after you've taken inflation into account. This is precisely what the FTSE100 has done in your 1990 and 2012 snapshots - the number has doubled but the purchasing power of the number has remained flat. Remember, we were entering a rather bleak global recession in 1990, which in the UK turned out to be the longest since the Great Depression of the 1930s. Black Monday was a recent memory. With the benefit of hindsight, it's easy for financial analysts demonstrate how you should have invested your money over the past 20 years. But I think this old master painting was actually quite a good bet at the time, and hasn't performed badly.
