Why The Wealthy Are Investing in Art – And You Should Too!

Anwar: Hey everyone, thanks for joining us here with another edition of the Noyack Wealth Weekly Newsletter and our expert interview. Today’s topic is more on Art investing. Full disclosure, CJ is actually the founder and CEO of NOYACK, who also happens to have 30 years of experience in collecting art and investing. Thus, we thought we don’t need to look any further and just have him on board to discuss this interesting alternative investment topic. So, CJ, please share a few words before we get started.

CJ Follini: Thank you, Anwar. It’s great to be here. I have spent a lot of my life both investing and collecting in art, so I’d like to give back some of that, all the mistakes I’ve made and the lessons I’ve learned, to our subscribers and readers and the NOYACK family.

Anwar: Awesome, thank you. As we all know, NOYACK provides a special emphasis on alternative Investments, and one of them is fine art. There’s been a lot of misconceptions, and we would like to address them in this conversation. So, CJ, I’ll be asking you a few questions which will be insightful for our audience. I think they’ll be looking forward to your insights from this. Let’s start off with our first question: very briefly, why is fine art such a great tool for diversification compared to traditional assets like stocks and bonds?

CJ Follini: Well, first and foremost, it is different. Each of these are different, but not all of them are non-correlated. A lot of people say, what is correlation? Meaning they move in the same direction reacting to exogenous forces and current events in the exact same way. There’s an election, stocks and bonds move in the same way. There’s geopolitical unrest, stocks and bonds drop in the same way. Gold goes up, that is also a non-correlated asset class. So, the data, don’t ask me why it’s non-correlated, I think it has to do with the fact that it is a discretionary item that is very subjectively valued. All true, but the data does show that art, Fine Art specifically, and we should clarify that it is not all art is considered the same, not all art is considered investment art. You can say that emerging art, art from artists who are very young, that is like Venture Capital. You have a high likelihood of total loss, although you will get to love the art if you bought it for that reason. So, there is a utility, but in emerging artists, there’s a high likelihood that there will be no investment benefit. And then when you have artists who are later in their career and who have a history of being auctioned, who have a history of a market forming, who wants to buy their art on secondary trades, not the ones that are directly from the gallery but secondary trades, well, there is less risk of loss with those artists. Those are like late career, those are like large cap stocks. So, you have venture capital and then you have large cap stocks, that is analogous to emerging art and investment-grade auction-tested art from artists. Got it. Now, the correlation, sorry to continue, the correlation is just data points. It’s just been proven, it’s been studied over 50 years. We have some, I think we have some interesting graphs that are going to be in the newsletter that will show a data-driven non-correlation. So, art moves in different directions than the rest of the asset class. And if you want diversification, obviously you want non-correlated assets. So, they have to move. If everything moves in the same direction, then whether they’re different or not, if they move in the same direction, if they respond to circumstances and current events in the exact same way, that is still not diversification. But when assets are non-correlated to each other, that is true diversification.

Anwar: Got it, thank you, CJ. I think our readers will greatly appreciate the data points which you’ll be sharing in the newsletter. On to the next question: in terms of diversification, I think you just mentioned how it’s different, which is better for diversification, investing in an art fund or buying individual artworks? And could you explain some risks about each one of those?

CJ Follini: Well, I mean, you know, there’s an obvious answer. If you put all of your eggs in one basket, that basket could fall and break, and everything breaks. If you make a single bet versus a group of bets, and this, I’m going to refer to the venture capital analogy again, there is no venture capitalist who has had any success that I have ever met who doesn’t say, “Hey, you have to make a hundred bets in order to hit a few really out of the park.” So, spreading your bets on potentially high-appreciated investments, in this case Fine Art, is the only way to both lower risk and again achieve diversification. So, there’s diversification across asset classes: gold, stocks, bonds, private equity, Fine Art, real estate, etc. And then there’s diversification within the asset class. Diversification within the asset class means multiple, in this asset class of Fine Art, multiple artworks and likely across multiple themes. The risk? Well, if you have one artwork and that artist falls out of favor or is not innovating or their skills have declined for some reason, well, that singular artwork that you have consolidated your investment bet on is going to lose a lot more than if you made 10 or 20 or 30 bets on a variety of artists. So, if you lose on a couple, the rest should keep your investment goals afloat. That is how you spread risk, spread risk instead of consolidating risk, spread diversification instead of consolidating into one type of artwork.

Anwar: Great, thank you. Let’s move on to our next question. Now, it’s more about the price point. Question three: how important is buying at the right price, primary pricing versus auction markups, when building a diversified portfolio?

CJ Follini: Well, everything, it really is everything. I can’t stress that enough. I have spent years, and when I first got started, you know, the art world is very opaque. It’s a world of gatekeepers, and it’s those gatekeepers, AKA gallerists, who sort of act like a socialist economy or a communist economy where price, or they want to maintain the prices at a certain level. Now, I’m not saying that they’re communists or socialists, I am just making an analogy in the price support and price-fixing context. So, when they are trying to manage the price appreciation of a highly sought-after artist, well, they’re also managing the supply, and thus they’re in a way artificially inflating demand because if fewer people can get artworks and these gatekeepers, gallerists, are choosing whom those people are, and these artists obviously have are obviously extremely talented and the artwork is of the highest quality, well, more and more people are going to seek it, more and more people are going to bid those prices up, and that’s how you, and that really is why that primary pricing, the secondary price of that auction, the primary price is from the gallerist. That primary price is almost always much lower than the auction price because the artificially created demand is being realized in the secondary prices at auction because that is the goal and the incentives of auctions. Auction houses make money on a percentage basis relative to the price. They want they are incentivized to drive prices up because the higher the price, the higher their fee because they get 22 to 25% of whatever that price is. So, ergo, high price, high fee. That is the incentive for the auction houses. For the gallerists, it’s a little different. They’re trying to maintain structured pricing over time. They do want appreciation but not in a hyperinflated way, so that’s why they manage an artist’s price rise. Now, in doing so, they choose winners and losers. So, what I mean by that is, there are times, for years in fact, I have an anecdote, I’m not going to use names because I don’t think that’s appropriate, but there’s a gallery based on the west coast, I already gave you a clue, that I tried for four years to obtain and acquire an artwork from an artist, a bipoc artist who is fantastic. The first time I spoke to this gallery, they basically laughed me out of their booth who was at an art fair, and they laughed me out of their booth. They’re like, “I’m sorry, who are you and why should you be, why should we deign to give you an artwork from this fantastic artist?” And regardless of the fact that I had the money, that’s not important. What’s important is, are you influential? Are you a museum? Are you affiliated with a museum that is going to get greater profile for this artist? Are you influential as a collector? Now, of course, I’d like to think I’m all of those, and we are now affiliated with the museum, but after four years, because of that museum affiliation and because of our growing influence as a collector over these years, just two weeks ago in Miami, I went to the very same gallery, the very same person who owns that gallery, and oh, he remembered our earlier interaction where he basically laughed me out of the booth, and it was extremely awkward, and he said, “Not only can you now buy this artwork from that very same artist because of our prior interaction, I’m going to give you a discount.” Now, discounts for investment-grade and highly sought-after artists are unheard of. So, two things occur to me: one, he felt very bad about that first interaction, and obviously our profile as a fund and as a collector has risen dramatically. Two, maybe the art market isn’t strong, and maybe the demand has eroded a bit, and maybe he needs collectors and funds like ours. I don’t have a definitive conclusion. Both of those things can be true, by the way. So, primary pricing is the most important way to raise the probability of being successful in art investing. It’s obvious: you buy lower, you sell higher. If you’re buying at an auction, what that means is you’re competing to pay the highest price. Competing to pay the highest price is a sure way to be terrible at investing.

Anwar: Got it, thank you. That’s very insightful. On to our fifth question: for someone who’s new to Art investing, does a fund make it easier to achieve diversification right away, or is there value going in solo?

CJ Follini: Well, I am not going to talk up our own book, Anwar, and say you have to be in a fund because yes, I’m both an individual artwork collector of 30 years, in fact, and now a fund sponsor and an investor, the largest single investor in our art fund. So, I believe in both paths. But in the context of your question, is it easier, is it advisable? Well, investing success, I mean, collecting or investing in art successfully requires a ton of research and study and understanding the art universe. There is so much time. I’ve been doing it for 30 years, and I can say there are many years of research and learning and self-education that I wasn’t ready to predict success through art investing. It takes a long time. It’s really hard. You have to go to five to seven art fairs a year. You have to talk to 100 galleries per year. You have to read 50 articles. You have to then watch every artist’s Instagram to see the progression of their work and are they pushing the envelope on their medium, etc., etc. So, some of us have lives. We have kids. We don’t have that kind of time. You know, we’re not all the high net worth leisure class. So, does that mean you shouldn’t invest in art? No, it does not. It means you can spread the risk with others in a fund, especially when that fund has curatorial expertise leading it. And I think we do talk in my own book, full disclosure, that’s our plug, but I think there is nothing wrong with getting portfolio alternative investment exposure to Fine Art, which we are explaining why you should for a variety of goals: retirement, diversification, primarily, hedge inflation, family planning, all of these financial goals through a fund. And then over time, by the way, learn, and many funds have a lot of educational assets, educational events, so teaching yourself over time, and then also investing individually because that fund may have access to galleries and primary pricing of artists that you will maybe never obtain or obtain it for a long time. But that doesn’t mean that in case you can obtain a great price on a fantastic artist, you shouldn’t do that too. So, again, both things can be true. It’s not binary, one or the other.

Anwar: Got it, thank you. On to our sixth and final question of the day: how can thematic portfolios, such as emerging artists or female or bipoc-enhanced diversification, while aligning with an investor’s personal values?

CJ Follini: Well, I think the idea of passion, the idea of the love of the artwork, the utility of what art brings is so important that I don’t think, and we don’t, and I don’t think anyone should invest in Fine Art alone. I think you should love it. If you love it, you will then eventually understand it. You’ll drive yourself to teach yourself because you love it because it’s passionate. And usually, when there is a passion, what you’re passionate about has some relevance to your own background, your own history, your own culture. So, if we are, if our goal, again, this is obviously a set of questions talking our own book as Noyack Fine Art, which is our fund, if we are trying to be successful investors of Fine Art, well, then we’re going to want very zealous collectors of these artworks because if we obtain primary pricing, the more people want to buy these artworks, the higher the price will go up, and thus we will be successful in investing. Correct, obvious. It’s supply and demand. Ten want. Well, aligning a collection that has a theme that taps into the passion of art, I think, enhances demand. I think it makes people more zealous to acquire those items which they feel personally invested in, either culturally or from their background, etc. And so, I think it’s good business, it’s good investment strategy to organize a portfolio that is thematic that affiliates with one of those passion elements for people. Yeah, I think so. Does it enhance diversification? Not really. I think the art in itself enhances diversification. Does it provide a better opportunity to be a successful Fine Art investor? Yes, I think it does. Also, it’s fun. The people I see and the things that this collection is talking about, I feel it, or someone else does, and I think that aligning passion with the pursuit of return is a great strategy.

Anwar: Got it, thank you so much, CJ. By the way, you didn’t mention what’s behind me. That is not part of our collection. This is from my personal collection. I love it. You can’t really see it, and I can’t bring the camera much closer, but this is from an artist called Ian Davis. It is a, I think, I don’t know how old he is, I mean, his 40s, he’s a younger white male artist, right? Not part of our bipoc thematic fund, but I love it. And there are artworks to buy for passion, there’s artworks to buy for investment only, but really the real success is when you buy for passion and for investment, and I think that’s where we’re going to leave this. I could go on and on about the art world, and maybe we’ll have some follow-ups, and I do want to dive into NFTs and the digital representation of art. Maybe we’ll do every type of art. Maybe we’ll dive into actually why bipoc artists are interesting and what their cultural heritage is, but right now, we’re going to keep it general.

Anwar: Got it, thank you so much, CJ. I mean, I think this conversation was extremely insightful for our audience who are trying to explore different alternative Investments and Fine Art, especially which is making huge headways in the recent years with NFTs and just general Fine Art overall. Yeah, and thank you, Anwar.

CJ Follini: Yeah, let’s go out there and diversify. Let’s diversify ourselves. Let’s achieve our life goals because, you know, investing for money makes you a fetishist of little green paper. So, let’s go invest for retirement, family, for philanthropy, and of course, diversification. Thanks, everyone.