Joney Talks!

Is investing in art a good investment? A short interview with Scott Lynn, the founder of Masterworks

You have probably heard of expensive artwork being sold at famous auction houses like Christie´s or Sotheby´s for millions. The latest notable stunt being the shredded Girl with The Balloon of the author Banksy (this one went for $ 1,4 million just before the gavel dropped).

And you might think, sure it would be nice to hold an intact painting from Andy Warhol for several years and make a fortune when reselling it but investing in art is way out of reach for me.

Well, if you are an admirer of fine artwork and are looking at owning a Picasso one day (or at least a fraction of it), your uncle Joney has got the right solution for you.

Last year at the Fincon conference I have had the opportunity to meet with Masterworks.

The initial plan was to just have an informative meeting with them, but as I was talking to the Director of Marketing I thought why don’t I simply record the discussion! In the video below Scott Lynn, the CEO and founder of Masterworks gives a brief overview of how Masterworks can help you diversify your investment portfolio, what exactly you are investing in when joining the platform and we also get a short glimpse at the story behind it (which is actually the part I prefer).

The interview was a little bit on the fly from my end 😅 and we were pressed by time but I am still excited to share it with you! And thank you, Scott, for your patience

 

Key takeaways :

• Blue-chip Artwork is typically multi-million dollar paintings created by the top 100 most selling artists: Andy Warhol, Picasso, Monet, Magritte, etc. (Most of them are not living)
• Bluechip art has appreciated 8.9% a year since the year 2000 and has historically not been correlated to other asset classes.
• The art market was worth $65 Billion in 2019. 62% of that market is considered blue-chip.
• The minimum investment varies between $1000 dollars up to $10 000 dollars per painting and it is for us retail investors as well as for accredited investors. Good news, Masterworks is open to international investors as well!
• I really liked the story and mission behind Masterworks: To allow investors to invest in blue-chip artwork that has historically outperformed the stock markets and that is traditionally only owned by the ultra-wealthy.

PS: The term blue-chip is also used when talking about a well-established company with a healthy balance sheet. Think of companies such as McDonald´s, Disney, Berkshire Hathaway, Microsoft, etc.

How it works

This is all great, but how does it work in practice.

1. Masterworks selects a painting, buys it, and registers it with the SEC (US Securities and Exchange Commission).
2. The registration with SEC makes the painting securitized (or “investable”, it becomes an asset in which you can invest in)
3. Masterworks then sell shares of that painting to the investors.
4. When Masterworks holds the painting for 5-10 years (and even showcase them in their New York gallery)  and then sells the painting, you benefit from the increase (or face a loss) in value for the proportion of the painting you have purchased.
5. By clicking here you can find an example of the most recent SEC offering circulars for the Banksy painting, Monkey Poison. The funding is already at 95% funded at the time of writing, and will most likely sell out very quickly.

Additional points to consider

if you are looking into participating in this opportunity.

• It’s the only way to gain exposure to art.
• Average annual returns of 8.9% since 2000 according to Artprice, which is 180% greater than the S&P (after dividend reinvestment). I am curious to see the 2020 index as well.
• Art is a great way to diversify your portfolio, especially since it’s not correlated to the stock market. In fact, in 2018 the S&P declined by 5.1% while the art market returned 10.6%. Citi did the first correlation study on art in 2015 and found the correlation between art and the S&P to be 0.11 (which is very low)
• The proposed offerings are SEC-qualified: Having the offerings qualified by the SEC  brings a higher level of trust and transparency, and also allows retail investors (you and I, rather than only accredited) to invest.

Would I invest in it? Here is my “Joney score”

Opportunity- 5/5

It is great that blue-chip art is made accessible to retail investors and from all over the world. I love the mission to make fine art accessible to more art enthusiasts and investors.

Reliability – 4/5

Given the SEC qualification, and having met part of the Masterworks team in person makes me confident in the platform. (I do not give them 5 because I have not used the platform myself).

 

User-friendliness – 3/5

Based on their website, I would expect easy and intuitive navigation but again have not tested it.

Fees – 3/5

You pay an annual 1.5% commission plus a 20% commission at the sale. This reduces your profitability especially if the painting did not appreciate significantly well. If you invest 1000 USD in a painting appreciating with 10% every year and Masterworks sells it in 5 years, you will, in the end, make $610,51-$75 (the 1,5% commission) – $107,1 (the 20% on the profit) = $ 428,4 which equates to a 7,4% which is still decent. But the fees are pretty hefty.

Risk – 3/5

While I can appreciate a nice painting, I am not the guy you will randomly meet at the art gallery. The world of fine artwork is foreign to me and at this stage, I would feel uncomfortable investing in an asset class I do not understand well. What I can say however is that the investment is pretty illiquid, meaning once you have purchased a fraction of a painting, your money is blocked until there is a sale. Masterworks has however recently created a secondary market though where investors can trade shares, but it still remains a less liquid market compared to say, the stock markets. The Buy & Hold strategy is the way to go if you intend to profit from this type of investment. Masterworks was founded in 2017 which makes it both a modern platform but as well a platform with a limited track record. Time will tell how investments have worked out.

On the positive side, the fact that Masterworks buys the painting before offering it to the investors gives some “security”. Why would they buy paintings if they do not believe the value will appreciate? They have the sales commission incentive as well. In addition, the art price index has outperformed the S&P500 in the last 20 years (I could not find the numbers further than February 2020).

The platform gets a “Joney score” of 3,6/5 which is very good considered I have not even used it. If I was an art collector, this would probably go up to 4-4,5, the only “negative” which is in a way also a safety factor is the hefty sales commission. Right now investing in art is not my priority but I could easily consider investing a portion of my fun money after more thorough research (and I´ll gladly write an extended review should I buy shares of a Picasso).

Bringing it all together

Investing in art can be a great diversification to your asset portfolio. If like Scott you are passionate about fine arts and are very knowledgeable, acquiring small fractions of various multi-million dollar paintings can make investing through Masterworks a fun experience. If you are an art collector, how fun would it be to brag to your friends about owning a Claude Monet? Okay, a fraction of it 😁.

For another point of view on Masterworks, you can also check my friend Menard´s review here. (He has an “interesting story” about Scott in his post).

What about you friends? Have you considered investing in art? Do you know anyone that could be interested? Make sure you share this post with them and let me know in the comments if you have any questions or experience with investing in art!

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