Outside the Box

Untitled (Bubble)

(Oscar Murillo) painted something called “Untitled Burrito”, which to the lay eye would seem to be a bunch of yellow squiggles over which is written the word – freehand – “Burrito”…There are cycles and vagaries of taste in art, as there are cycles and vagaries of taste in finance and investment, and I dare say in hairstyles and everything else.

Jim Grant, investment writer

Beauty is in the eye of the beholder, as they say. But then a fool and his money are soon parted, as another old saying reminds us. The contemporary art market strikes me as one that’s full of scamsters ready to pick the pockets of the gullible wealthy, or foolishly beholden. But the vagaries of the art world can teach us valuable lessons about all investing.

To create most contemporary art, first take equal measures of hubris, pretence and scam. Mix thoroughly, dilute with pseudo-intellectual babble, and add just the tiniest pinch of artistic craft, according to personal taste.

I’ve long thought that most, but not all, contemporary art is a kind of joke. Literally. If you want a good laugh you just have to spend an afternoon in the Tate Modern gallery in London, or its equivalents dotted around other capital cities of the world. (London has plenty of galleries full of the real thing, though. I recently spent a fascinating few hours at the National Portrait Gallery, which I recommend to anyone visiting that city.)

I remember visiting the Tate Modern about a decade ago, not least because there was no charge for entry. Three “works of art” have stuck in my mind to this day.

The first was a typical men’s urinal found in public conveniences the world over. Seriously, just one of those things that humans of the male variety relieve ourselves into. Some bloke had written something on it and then said it was art. Pathetic. (A quick check on the internet informs me that it’s called “Fountain”, by a certain Marcel Duchamp. Literally, taking the p…)

Another was a black and white film, repeated over and over again in a loop, of a naked man jumping on a bed. Thrilling.

There was yet another gem that I didn’t even realise was a piece of art at all. At first I thought they were refurbishing that part of the gallery. But then I saw the label explaining that the pile of junk on the table, which consisted of old tins of paint and assorted tools, was supposedly a piece of sculpture. Tragic.

Of course the standard response from the art crowd is that people like me don’t “get it”. They say that because I don’t buy into their pseudo-intellectual drivel that I am somehow stupid. This is just the typical stance of demagogues or their brainwashed followers, whatever the field of thought.

Another standard line is that something qualifies as art because it provokes a response in the viewer. British artist Tracey Emin famously forgot to make her bed one day in 1998, and then decided it was artistic. (And by the way, this pile of dirty linen was shortlisted for a highly coveted Turner prize. No…seriously…it really was.)

Maybe she was feeling particularly lazy and uninspired that day (a real challenge judging by most of the other stuff she has “produced”). So now every teenager has an excuse for not making their bed in the morning. “I’m not being lazy Mum. I’m expressing my inner artist in the hope of provoking a response from you.”

Well, sorry folks, but that’s not good enough either. I can unexpectedly poke someone in the eye and be pretty sure to get a response out of them. But that hardly qualifies as artistic, in any way shape or form.

These thoughts were dragged from a hidden corner of my brain this week whilst watching an interview by Forbes magazine with Jim Grant. He’s the venerable author of Grant’s Interest Rate Observer, a financial market commentary produced since 1983. (You can see the full interview here, covering topics from gold to art to Russian shares.)

We can see in a relatively simple way that art has most likely been experiencing a bubble recently. This is by looking at the share price chart for auction house Sotheby’s (NYSE: BID).

Sotheby’s (NYSE:BID)

The price spiked in the late 1980s (stock market boom, Japan bubble), then again in the late 1990s (technology bubble), and in 2006/2007 (real estate bubble and stock market boom) and in 2011 and 2013 (money printing bubble). Art’s fortunes are often linked to financial markets, since a lot of the buyers are wealthy financiers seeking to add a sheen of sophistication to their otherwise humdrum lives (or at least their bored wives are).

If you feel like speculating on art markets in future, but like me you don’t feel inclined to spend years learning about it or turning up to auctions, then Sotheby’s shares are a convenient way in. Just not right now. According to this chart the bubble may be bursting.

Back to the interview. In it Jim Grant highlighted a painting by a Colombian artist named Oscar Murillo. Sr. Murillo is alive and well. In fact he’s still on the right side of 30 years old, having been born in 1986. The painting is called “Untitled (Burrito)”, named after the Mexican meat sandwich, and you can see it here.

(Did you get the joke? It’s called “untitled” but it actually has a title! Oh, how I laughed….er, not one bit…)

This “masterpiece”, produced just three years ago, was recently sold at auction at Christie’s in London for £194,500 (US$331,000 at the time of writing), compared with a pre-auction estimate of £20,000 to £30,000 (which would still have been a hundred times too much in my view, but then I’m stupid, remember?).

This isn’t exactly headline grabbing Jeff Koons territory, an American artist whose works sell for tens of millions of dollars. But all the better for it. I’m not interested in the most hyped end of the market, but rather the meat in the middle (in this case, minced beef).

Of course the fortunate new owner would have paid much more than the reported price. There’s a 20% “buyer’s premium” that Christie’s charges on top, taking the full price up to £233,400 (US$397,000). Oh, and the previous owner also got to pay a seller’s commission, probably in the 15-20% range.

This means the auction house gets about 50% of the net price received by the seller (120% divided by 80% equals 150%). And you thought stockbrokers charged high fees!

I don’t wish to pick on Senor Murillo specifically. In fact I wish him the best of luck. And I give him some advice for free. Why stick to Mexican food when you could go for really big country snacks? What about China or India? After all there are only 121 million people in Mexico. Each of India and China is around ten times the size.

So show some real ambition, Sr. Murillo. If your “Untitled (Burrito)” can sell for a few hundred grand, then surely “Untitled (Pork Dumpling)” and “Untitled (Samosa)” could sell for millions. Go for it!

Untitled (Burrito) - Oscar Murillo -
Untitled (Burrito) – Oscar Murillo

There are some serious investment points to this, fellow OfWealthers. I’m not just having a rant against the art market (okay, well maybe I am, just a tad).

Quality: Anyone can draw some squiggles on a dirty canvas and write the name of a greasy snack over the top (my young kids spring to mind). But very few can paint a truly unrepeatable masterpiece, with the high degree of artistic craft that is required.

In the same way, any company could choose to produce a sweet and fizzy brown beverage, but only one company can call it “Coca-Cola”. This is what Warren Buffett refers to as a “moat”, which is essentially a barrier to entry into a field of business.

Price: Even food-based squiggles have an intrinsic fair value. But it’s a low one. In the same interview with Jim Grant (mentioned above) he highlights a biotechnology fund that has a P/E ratio of 2,000 times. Most of those companies will fail, and even if they don’t the fund investors are highly unlikely to make a profit, or escape without a big loss. Make sure you don’t overpay, whether it’s for shares in the most stable companies in the world or for highly speculative technology stocks.

Costs: Try to keep them down by trading little and shopping around for competitive pricing in relation to service. Difficult to do in the art world (and many other markets for collectibles), but entirely possible when it comes to stockbrokers and fund managers.

Fashions change: A painting such as Leonardo Da Vinci’s “Mona Lisa”, painted some time between 1503 and 1506, may still be a highly valuable masterpiece in hundreds of years time. Mysterious and beautiful women never go out of fashion.

But a food themed scrawl is unlikely to stand the test of time. It may be worthless within a few decades, or less. It has no sense of mystery. It’s a pure, short term speculation.

Things move faster in the financial investment world. Today’s hot stocks, such as Facebook (NYSE:FB, current P/E 88) may be reduced to nothing within the space of just a few years. Don’t follow the speculative investment “in crowd” if you want your investments to stay intact (especially if it involves overpaying for the privilege).

And finally, remember that successful investing is an art and not a science.

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.