Buying art as an investment.
by Andries Loots 
25 August 2003, revised: 17 May 2004
In  recent years more and more emphasis has been placed on the investment value of art and artworks in South Africa and numerous articles have been published online as well as in local South African magazines speculating on what determines the price of an artwork and what to keep in mind when " investing "  in art. This keen interest can be attributed to the fact that certain South African artists are achieving international status and are now represented by established international galleries like the Gagosian , Marian Goodman and Jack Shainman galleries.

Charcoal drawings by artist William Kentridge are selling locally for more than R 400 000 and the big International auction houses like Sothebyís, Christieís and Phillips now regularly include South African contemporary art in their sales. A charcoal  drawing by William Kentridge was sold on 12 May 2004 at Christies New York for 53 000 US$ and another work by the artist was sold at Phillips NY for 57600US$, two colour c-prints, edition of 3 by artist Zwelethu Mthethwa sold at Christies NY for 10 755 US$. The biggest success story however is that of South African born artist Marlene Dumas, permanently living and working in Amsterdam.  An oil "Young Boys" with an estimate of 250, 000 - 350, 000 US$ sold for 993,600 US$ at Phillips NY on the 13th of May 2004.

What determines the value of a painting or a work of art? A simple answer would be that it is determined by what the buyer is prepared to pay for the work and what the current owner is willing to sell the work for. Secondly the economic principle of supply and demand applies: when an artist dies, the supply ceases and if the demand increases, it results in higher prices. Sometimes the death of an artist could have a negative influence on prices as collectors start selling their work, leading to over supply of work. Various other factors like provenance, current supply and demand, period, style, quality of material, framing, whether it is signed and the period of time in which the work is to be sold, should also be considered.

Art should however never be seen or bought as investment only, but the purchaser must be fully aware of the long-term increase or decrease in value of a work. When the aspiring collector decides to buy a work of art as an investment there are certain guidelines to follow and considerations to keep in mind:

Art does not like some other investments, provide  a steady and constant income. The value of a work ( bought for investment ) will however increase as long as it hangs on the wall but it will only become tangible upon selling the work. The correct timing of the sale is of paramount importance.

Not all works of art are valuable to collect and therefore one can not expect that each and every work will be an investment.

When you do decide to buy a work it is very important to do proper research on the the artist and the work, see how the artist and the work relate to the art market as well as to the potential buyers. It is important to buy a good book on South African art which provides some guidelines. Also talk to as many art collectors and Gallery owners as possible. They will provide you with valuable information and also visit your local Museum. Always get two or more opinions as some people are biased by personal taste - it will also be more reassuring especially when a large amount of money is spent.

See if an artistís work has been taken up in museums, and/or other important public and private collections.

Beware of auctions which are held in storage facilities or hotel lobbies especially if you are new to the business as fakes have often found their way there. You will not get your money back when a fake is discovered. The auctioneer will often assure you that he will issue a certificate as proof that according to his or her knowledge the work is an original. Rather buy from reputable galleries or reputable auctioneers and always enquire about the history and provenance of the work.

Typical works by any artist are in some cases the most sought after by collectors and therefore the more expensive, a good example is the Mapogga studies by the artist Alexis Preller which fetch higher prices at auctions. The opposite can also be true. Cubistic treatment of the landscape by the artist J.H.Pierneef regarded during his lifetime as not very typical, are now in higher demand. 

Art should never be regarded as a short term investment since it might happen that a specific work might not sell in the short period of time when the the money is needed. It is true that for each painting or work of art there is a specific buyer, but it is also true that that specific buyer might not have the resources available at the time. It is however also true that it is better to sell a work after a short period like a month for a lower percentage profit ( 10% ) and thus create funds to reinvest in the next artwork than keeping it for a longer period like six months and then sell for  50% more than it was bought for resulting in a 8,3% return  per month.  Do not expect to buy a painting and then leave it for 20 years and get a good return; you must keep informed of the current market value constantly so that if your work is not increasing enough in value you can still get  a market related price. It is important to know when to buy, how long to hold and when to sell. 

Artists whose works already sell at auctions provide the collector with a secondary market and their work would be easier to sell again. Also establish if there is an international market for a work.

It is well known that some Galleries would like buyers to believe that in South Africa today, ď Black art Ē is more important in a collection than Euro centric art. The fact is rather that good art ( quality materials, good composition and good provenance ) will always be a good investment no matter who created it. Now more than ever, in this competitive investment market where more and more money exchange hands, artists are judged on merit and artistic ability and not by the colour of their skin. 

Older works increase in value as they become scarcer because many are taken up into collections. These artists are likely deceased and there is no further supply of work. Also keep in mind that lately younger artists are recognised for their contribution to art history sooner than in the past where artists only got recognised towards the end of their careers.
Bigger is not always better, sometimes a work becomes too big ( not movable, affordable by a smaller market resulting in less demand )

Subject matter of a work could also influence its value when the context of the content changes. A portrait of a hero who later falls into disgrace would be a good example.

Inspect the condition and framing of the work.

Keep in mind that individual works will gain value if they are seen in context of a carefully curated collection.

How to collect Art ?

An essential part of collecting art is to create a honest relationship between oneself as the collector, the art you intend buying and the dealer you are going to buy it from and to learn as much as possible. Always remember your hobby is the Gallery's business. This professional relationship should grow with time as you become more comfortable with allocating portions of your investment portfolio to art. Art is like another way of diversifying a portfolio. One should look at your art collection the way you regard your house - you donít necessarily look at your home as an investment, but you also want it to retain its value. It is however comforting to know that there is always a stable secondary market for   " good "  art which provides some security when you have to sell. It is a good idea where possible to buy more than one similar work at a time, one can then later be sold to recover part of the initial expense.

It is always good as a new collector to learn more about different artists and to have different works in your collection than to focus on a specific artist. Some works that you will see in galleries will attract your attention immediately but might not be the best works to buy. A well documented work featured on the invitation or in the exhibition catalogue could provide guidelines regarding the importance of the work.

Where should one start?

Spend lots of time looking, look at works by different artists in different settings. The same work can look very different in different surroundings. Visit all the galleries you can and also go to alternative spaces like museums and auctions. Add your name to their guest-books so that you can be invited to future exhibitions. Move cautiously, look around and most of all, ask questions. Remember ď Visual literacy Ē requires practice. As you learn more, you learn to get comfortable with different kinds of images. Remember that there are probably only 5 artists at the top of the success triangle, they are usually the leaders of groups of artists, mentioned in books on the history of art. These artists show in the most prestigious galleries and are usually in their fifties. Below them are about 20 practicing artists more or less in their forties who generate a living from their art. Then follow the artists who practice part-time with other careers like in teaching. At the base of the triangle are thousands of struggling artists. Age, dedication, persistence, experience and income from art increase from the base of the triangle upwards. Work by artists in the middle of the triangle have the most potential and finding artists who will reach the top quickly forms part of a winning investment strategy.

How and where can one meet more experienced collectors ?

It always helps to have a friend or mentor with the same interest and knowledge in the same field. Find somebody with some experience to share. This doesnít have to be a professional adviser but somebody who has been collecting and who is living with art.

Museums have groups like the Friends of the Museum, that one can join. Try getting involved with one of these organizations. Here you will not only meet people with the same interest as yourself but will also see the way the museum makes its selection when acquiring works for their collection.

What should one buy first ?

It is a good idea to start a collection with a good graphic work by a well known artist rather than an oil by a lesser known artist, whom the dealer would like you to believe will still become famous. Donít be fooled by art dealers who would like to assure you that an oil painting is worth more than a graphic work . This is not always the case. Start slowly remember you canít run before you can walk. You also have to go out and see what is available and make up your mind what you like and in which direction you want your collection to grow. If you decide to collect a specific artist it is always good to have work from different periods. Also discuss payment terms as not all works are easily affordable. Donít race around to find a master piece, Rome was not built in one day. Buy something you can afford. Try and locate artists whose work is undervalued at the time.

What is the right price ?

It is common belief that the highest prices for any artwork are paid for early works by an artist, it is however important to remember, when looking to buying a work for investment purposes,  that a work needs to have some historical importance apart from it's aesthetic merit. The reason for this is theoretically harder to get an important early work than a recent one. Investing or buying art like any other money related investment needs some research. Look at the latest prices at auctions like Sothebyís or at the latest exhibitions. One must also remember that works bought in the secondary market by any artist will sell for much more after the artist has been exposed to the auction market. Talk to the dealers and ask them if they would mind reselling a work in future if you want to upgrade your collection. One very crucial point to remember in the very fast growing art market is that the gap between generations are becoming smaller and smaller and in some cases a contemporary artist's prices might even be higher that that of an older artist,  the reason for this is that because of the multi International exposure of artists, the public can recognize an artist's contribution to art history far earlier in his/her career. 
Read more: [ '
The science of attaching  the right price to a work of art' ]

Should one have a professional adviser ?

Having a professional adviser can benefit  if you are a new collector, but donít fall in the clutches of a given dealer or adviser because the pleasure of collecting is to explore the possibilities and to find your own personal way. Each and every of these professional people have their favourite artist or artists who they will promote. Buying from a good dealer has the further advantage that the works for sale will already have been selected.

Where to buy ?

In other words, where to find a dealer that can be trusted ? One should never be ignorant and think that all dealers are selling art because they love art ... Galleries tend to be more expensive as they operate on large commissions on artwork on a short term. A good dealer should always steer the new collector towards the best works. You as a new collector might respond favourably to something in a Gallery or at an exhibition purely out of emotion. A good dealer will make sure that you always take home a work that he can sell again. You should develop the relationship with your dealer based on trust. Be careful to get too involved with your dealer as you might be unduly influenced to invest in the stable they represent. It is very important to learn as fast as possible as , ď the more you know, the less it is a matter of trust Ē ... this however takes time and requires effort.

Buying at auctions - what makes one work more expensive than another by the same artist? 

Buying at auctions requires skill, luck and a a good understanding of the current market value of the artist and the work. Other factors should also be considered. A portrait of an attractive lady will be in higher demand than that of an older man or woman and nudity still sells well. Brighter colours tend to attract more attention than duller ones. Paintings with cows are much harder to sell than ones with ducks or geese. Landscapes and seascapes fetch higher prices than their upright counterparts. The paintings in the headlines are usually those where no comparable work have previously been sold.  Again quality, size,  period,  condition,  provenance and the timing of the appearance on the market all play a very important role. Three dimensional work in an edition are not all equal - serious collectors will pay a premium for the best-quality casts.
If a work has been shown around before an auction it will lower the price and if the estimate is too high, it will discourage buyers. Collectors prefer to buy a typical painting by an artist rather than something where the style is not easily associated with the artist. When a work originates from an important collection or was shown in various exhibitions and reproduced in articles and books it will fetch a higher price. When comparing prices of what works by the same artist went for before at auction it is very important to also make a study of market conditions prevailing during that time. There will be a decline in demand for works from the same edition sold in a successive manner. It is critically important to inspect a work before bidding on it and to request a condition report from the auction house.

When should one be careful of a deal ?

When a dealer is trying to sell you an art work as a commodity of which they know nothing about. Dealers who know and believe in what they are selling donít have to justify the work by the resale value but by art history. Ask questions and find out how much they know about art and the artists they represent. Never buy simply because the dealer says this is the last one or the price is increasing.

Never buy a work because they told you that it will increase in value, this way you will never have a good collection, you will only have a record of what other people thought was going up in value.

Be wary of works found in somebody's garage or attic with no provenance. Always make sure that the work is signed and that edition works are numbered.

Look at the artist and his/her exhibition credentials.

To give some suggested artists to look out for that is worth while collecting with investment in mind,  will vary from Gallery to Gallery and collector to collector but if one is serious about your investment or your collection's credibility you will have to do your homework, track the performance of the artist's overseas exhibitions and very important where they exhibit ( which Gallery and with which director or curator ) It is very easy to exhibit in a small Gallery, that nobody knows about,  either in London,  New York of Tokyo but to be included in the " Right Gallery "  takes more of a doing.

What are the biggest mistakes a new collector can make ?

buying art that you have not seen without being able to exchange it after receiving it.
If you are not well informed you will buy a piece which doesnít have the kind of depth a work of investment art should have or you might be too conservative and miss the opportunity to buy something only to  realize later that you should have bought it. It might become available again, but at a higher price or at a time when it does not suit your budget
buying forgeries like some of the works of Winston Saoli, Frans Oerder and Anton van Wouw. Rather pay too much for a good piece than little for a bad work. If you are the only person bidding at an auction, you are either paying too much or there is no interest in the work, it is better to attend an auction than place an absentee bid or to bid over the phone.
acquiring a piece in desperate need of restoration without knowing it
framing a work on paper at a framer of ill repute who cuts or pastes your valuable work, or does anything to it that is not fully reversible
buying a watercolour and displaying it in the brightest spot in the room to impress your friends
to never pay attention to the condition of your collection - the conservation of a collection requires regular inspections for possible damage caused by moisture or insects
having no insurance cover on your valuable works

Buying art as a commodity, results in stock certificates on the wall, you should always be able to live with whatever you buy, develop your visual literacy, listen to your heart but also to your head.

© 2004, Andries Loots, all rights reserved worldwide

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