How Far Will Your Financial Instincts Take You in the Art Market?

How Far Will Your Financial Instincts Take You in the Art Market?
Two men view 'We Are' (L) by Gilbert and George and 'Statue of Liberty' by Andy Warhol at Sotheby's
(AFP/Getty Images)

A recent New York Times article in which the author counseled people to mistrust their basic financial instincts struck me at first glance as, well, perverse. The gist of the story was that an investor’s intuition is often wrong.

But it got me thinking about whether the same might be true of those investing in art. Certainly some of the common investing errors presented by the article’s author, John F. Wasik, seem to be committed by art buyers. He warned, for instance, against misreading short-term results as predictive of future market trends, and against changing strategy in reaction to events beyond the market. He also cautioned that investors often get into trouble early on by trading too actively.

In general, these observations apply equally to art markets and financial markets. Sold-out shows are no guarantee of a long and successful artistic career. Recent events have proved that threats to the global economy don’t necessarily depress prices or the demand for art. And we all know collectors who tell stories of early missteps — tales of unwarranted enthusiasm or of the one that got away.

But there are also differences worth noting between buying art and investing elsewhere, such as the importance of hot streaks in an artist’s career. Seldom does a streak turn into a consistently broadening market, of course, but once an artist finds favor among a group of buyers, they will often remain dedicated. And a comparatively small coterie of collectors can support an artist’s prices for years — long after equity traders would have recognized the investment’s diminishing returns, sold their stock, and moved on.

At heart, the phenomenon of collector perseverance is about the emotional attachment that comes with a purchase of art. In Judd Tully’s profile of Jean Pigozzi in this month's issue of ART+AUCTION, the venture capitalist and voracious collector admits, “Financially, I should have focused on China because the market is 100 times bigger than Japan’s….But I think the Japanese are a step ahead into craziness and weirdness.”

I am not going to speculate on the peculiar psychology that leads perfectly rational and intelligent businesspeople to ignore their better financial judgment and follow their desires when it comes to buying art. But the reality is that many of them do just this, and at hefty price points, too.

We all know the merits of sleeping on a big decision. We have all heard how important it is to take time and conduct research before making a commitment. This is the best way to avoid folly when buying art. Hiring an adviser to shape a broad strategy also helps reduce risk. And yet, knowing all this, the strange thing is that a lot of collectors buy an artwork simply because they like it. It’s a distinction that sets art apart. And in the end, that might be a good thing.

Benjamin Genocchio is editor-in-chief of Art + Auction magazine and