Averaging Down on Art: Does it Kill?
In my previous piece, I mentioned being politely asked to move on from the law firm where I’d been an associate. On my last day, I told one of the partners that my plans were to do some writing1 and invest some of my savings in stocks. (At the firm, full of inside information, we were not allowed to own individual stocks.) The partner, whom I’ll call Lawyer X although his real name is Elliott Stein, handed me a book, saying that if I was serious, it was a great place to start. The book was Benjamin Graham’s The Intelligent Investor, the Old Testament of value investing.
When I asked Elliott what value investing was, he gave an example to differentiate it from how most people trade. If you had bought a stock that you thought was good, he said, and the price went down, what would you do? – “I don’t know, sell?” – “No,” he said, “you’d buy more.” I seem to recall gaping at him. The idea that the market could simply be wrong and that you could be smarter about a stock immediately appealed both to my egomania and my naturally contrarian personality.
As a neophyte, I didn’t know that there was a term for that scenario – “averaging down”. In the 30+ years since that talk, most of which I have in fact spent value investing, I have done plenty of averaging down.2 If we are confident about our analysis of a company, we must average down occasionally. To identify the right occasion, it’s useful to consider Ben Graham’s heuristic “Mr. Market”.
Mr. Market, i.e., the stock market, is the hypothetical bipolar co-owner of your private business, who sometimes wants to sell his stake to you for more than it’s worth and other times wants to sell it at a bargain. If the partner is having an episode, so you know his bargain offer has no basis, you might take him up on it. Similarly, if you have bought a stock and a week later the market pushes it down for an identifiable reason that you are sure is wrong, then you should average down. On the other hand, if the stock goes down for no reason, you might still decide to average down, although this is riskier: there may be a problem that the market sees, and you don’t.
The decision to average down is easier in a general market selloff, if you are confident that the triggering event doesn’t hurt your particular stock. Facebook shares fell 30% in the first two weeks of Covid-19 along with the whole U.S. market, though if anything the big tech companies were more likely to benefit from people’s lives being forced more online. Within two months it had recovered the entire loss. If you owned airline stocks, on the other hand, you would’ve been smarter to sell into the decline – as Warren Buffett did – than average down.
It is important to note that this discussion relates to investing based on fundamental value – a company’s earnings and dividends – because the world of traders is different. Traders usually have thin knowledge about a stock and determine whether to buy, sell, or hold based on multiple factors, including technical analysis, the rumor mill, or whether they saw a bad omen on the way to work. Of course, these days most trading is quantitative, so you are less likely to find a guy on a desk reciting old maxims like “don’t catch a falling knife” or “averaging down killed more Jews than Hitler”. But if it is statistically true that averaging down is lethal to traders, whatever their religion, it will be built into the computer programs and algorithms.3
But averaging down on stocks is not what I wanted to write about.4
Averaging Down on Art
I recently bought a painting at auction that is similar to a work I’d bought by the same artist eight years ago, from her gallery. The latest purchase cost 75% less than what I paid the first time. If it were a stock and had fundamental value, I could say I’m averaging down with confidence, but it’s an artwork with no inherent value – in that it produces no cash flow. (The opposite, if it’s insured.) Does that mean that from an investment perspective all artworks can be viewed only as “trades” and if an uptrend in an artist’s market is broken, any further buys are just throwing good money after bad?
This analysis requires separating the art market into two general groups: artists like Van Gogh, Cezanne, and Picasso, with long sales histories and historical importance, and the rest.
Investment Grade Artists
There have been many sharp corrections in the art market over the last hundred years. When the correction is a general one, coterminous with a market event such as the Global Financial Crisis, it should be safe and maybe even a great idea to average down on investment grade artists like Van Gogh, Picasso, and Warhol, whose work has since the 2009-10 decline risen to new all-time highs.
The rest can be divided into two groups: established mid-career artists and younger ones, including the New Hot Artists (NHAs) that are always coming along, recently often straight out of grad school.
NHAs
Galleries hype NHAs with splashy openings, media coverage, and stories of waiting lists. When an NHA’s work first comes up at auction, maybe via an early buyer looking to take a profit, the result is often eye-popping, confirming the validity of the gallery-set primary prices. Of course, nothing stops the gallery from itself buying the auctioned work or arranging for one of their best clients to bid in exchange for some later accommodation, thereby keeping the game afoot. Things go on in the unregulated world of art auctions that, if done on Wall Street, would land people in the pokey.
On the other side of the equation are collectors ready to gobble up an NHA work that will “go up for sure.” A few years ago, I was “allowed” to buy a painting by a highly touted young painter. I had to go to the gallery’s private room to view it and tell no one that I had jumped the queue. I did (and still do) believe it was great, and the artist had already had museum exhibitions, but still I was grasping like any sucker. The prime suckers are inexperienced collectors buying without good advisors. In the 2010’s, I read a magazine story about Jared and Ivanka Kushner’s apartment in the Flatiron district and noticed that the walls were crammed with the NHAs then being flogged by galleries – most of whose markets I think have crashed by now. The earlier in an artist’s career the speculative boom occurs, the less likely their prices will rebound from a crash, because the artist never had time to build a real collector base.
Especially among non-investment grade artists, the art market can be inefficient. I have a friend who spends his day scouring online collectibles auctions for anomalies, e.g., a silver service at a French auction that would cost 50% more in New York, and vice versa. The artist I just bought at a 75% discount is represented by a New York gallery, which will price her next show at their same previous price, as if my auction buy hadn’t happened. If prospective clients do research and ask the gallery about the auction result, they’ll say that it was an online day auction and it just fell through the cracks. Or maybe that the work I bought wasn’t as good as the new ones. Or there was a distressed seller.5 People will buy the new painting at the higher price, if they love it. And they will be right to do so.
Mid-Career Artists
There are questions collectors ask when evaluating an expensive purchase that can also inform a decision to average down on a well-known but non-investment grade artist. Is the artist’s reputation established with critics? Is their work in museums and major private collections? Do they have a strong gallery behind them? Artists like these whose prices dropped and later rebounded to new heights are Yayoi Kusama, Cindy Sherman, Anselm Kiefer, and George Condo.
The work of younger artists lacking all such distinctions has therefore the characteristics not of value stocks but of options. Still, there are plenty of non-financial reasons to buy their work, e.g., supporting them and their galleries, participating in the fun art world, and nourishing your soul by surrounding yourself with beauty.
In truth it is healthier to think about art this way than as a pure investment asset, because even a Van Gogh or a Picasso comes with no guarantee. Of the Metropolitan Museum’s 2 million artworks, no more than about 4% is on view at a given time; I’d bet that many of the works in storage would not be worth a lot if offered for sale. This could include artists once highly coveted. French academic painter Ernest Meissonier sold works in the mid-1800’s at such stratospheric prices that he bought a palace. Meissonier would have seemed the epitome of investment grade, but his style was supplanted by century’s end by movements like impressionism, and he is now largely forgotten.6
Value retention does not apply even to an investment grade artist’s whole oeuvre. Late Renoirs don’t fetch the prices of peak ones, Warhol portraits of Marilyn Monroe are in a different realm than those of 1970’s celebrities like Pia Zadora, and an early painting by the late Frank Stella can go for millions while his late work hardly sells. Only an elite group within investment grade can command high prices even when the art is mediocre – there’s always going to be a rich man or museum that “has to own a Van Gogh”.
So, a painting by Meisonnier, who in the 19th century many considered the greatest living artist, can now be had for a couple thousand dollars more than a good landscape by Morris Katz, listed in the Guinness Book as the world’s fastest and most prolific painter (also known as “The King of Toilet Paper Art”).
No Guarantees on Anything
Let’s take this a step further and agree that any investment lacking cash flow to support its value can become worthless, including not only art but Bitcoin – and gold. You say, “But with an ounce of gold you can buy the same amount of wheat today as you could when the Bible was first in bookstores.” I say, “So what? Tomorrow the ounce could buy half as much, or none.”
Well, at least stocks and bonds are stable stores of value. Are they though? Anyone who averaged down on WeWork, Lehman Brothers, the venerable Dow leader Sears, or – as I stupidly did – First Republic Bank, lost more of their money. How about the safest of all investments, U.S. Treasuries? I guess the U.S. will never inflate away their real value or devalue the dollar. Never ever.
The fact is that investing in any stock, bond, ounce of gold, or pricey artwork begins as an exercise in balancing risk and reward and in the end relies on a belief about the future. When you average down on art, as with a stock, you may turn out to be right or wrong, but at least you can enjoy it on your wall, unlike a Sears stock certificate.
My novel The Education of Rick Green, Esq., was published in 1995 by Simon & Schuster.
I’ve also done plenty of averaging up and am a big fan of buying a small stake and adding more as the stock goes up, which is discussed in my post Taking a Psychological Stock Position. I suspect that most of the profits I’ve made in my funds and in my personal account have come from averaging up.
The phrase “averaging down killed more Jews than Hitler” is freighted with so much context that it would take a professor of linguistics to unpack it all. I’m Jewish, my parents were Holocaust survivors, and yet I always found it funny and still do, even after recent events. More people would find it offensive in these sensitive times, and I understand that – but they should know that a saying like that is the essence of Jewish dark humor.
This reminds me of another joke. An agent calls a producer and says, “Max, it’s Morty. There’s a guy hiding in the bushes outside your window. He’s got a gun, and he’s pointing it right at you. But that’s not what I was calling about.”
The “distressed seller” story is also used by stockbrokers to keep buyers from shying away from low offers.
Some of the impressionists who eclipsed Meisonnier have themselves fallen from favor. Work by artists like Pissarro and Sisley is selling at auction for much less than it did 10-20 years ago.
Elliott Stein and your former law firm did you a favour counsellor. The book recommendation led to a more enjoyable journey IMO. But I am biased. Thanks for sharing.