It’s commonly believed that few assets hold their value better than art. After all, if hedge fund managers are filling their houses with art then it must be a smart thing to invest in, right? Not so fast. This interesting paper sheds doubt on the idea that art is as good an investment as is commonly believed:
“This paper shows the importance of correcting for sample selection when investing in illiquid assets with endogenous trading. Using a large sample of 20,538 paintings that were sold repeatedly at auction between 1972 and 2010, we find that paintings with higher price appreciation are more likely to trade. This strongly biases estimates of returns. The selection-corrected average annual index return is 7 percent, down from 11 percent for traditional uncorrected repeat-sales regressions, and Sharpe Ratios drop from 0.4 to 0.1. From a pure financial perspective, passive index investing in paintings is not a viable investment strategy, once selection bias is accounted for. Our results have important implications for other illiquid asset classes that trade endogenously.”
By Arthur G. Korteweg, Stanford Graduate School of Business
Roman Kräussl, Universite du Luxembourg
Patrick Verwijmeren, Erasmus University Rotterdam
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.