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FINE ART AND
THE INVESTOR

"Art investors have achieved huge returns but there have also been large losses." Investment in fine art has traditionally provided an exceptional return in the long term. During times that investments in the stock market become higher risk, there is often a flight to asset based investments like art. Art investors have achieved huge returns, but there have also been large losses. The greatest risk of a financial loss for the investor is to purchase a fake or misattributed painting.
    Contemporary art is interesting; however, it also poses the highest risk even when purchasing correct paintings. The risk inherent in the Contemporary market is the risk of fashion. What is fashionable today, may be out tomorrow.
    Without a historical perspective it is very difficult look to the future. Historically, many artists who were fashionable during their day are often forgotten after their death. The Impressionist market has done very well, and those that rode out the price drop in the early nineties are now in a much stronger position than before the drop. However, Old Master paintings have traditionally been the blue chip investments. This market grows rather predictably since fashion or trends have little effect on the Old Master market. Because there are insufficient Old Master paintings, it is not possible to generate a fashion trend. Without fashion trends, there is predicable growth.
    The criteria for any art investment are the same no matter what period is chosen. Of prime importance is the authenticity. A painting might be magnificent, but if it is a fake, it is worthless. The remaining two criteria are quality and the choice of artist. A high quality work is always marketable, even in a down market and it is doubly so if the artist is very important. The more important the artist the better the investment, if there is a possibility of liquidation in a down market. Down markets have a lesser effect on the prices of very important artists. The reason is simple, the disposable income of the very wealthy is generally affected much less by a downturn in the market than for those who are at a lower position in the financial hierarchy. It is the very wealthy who tend to purchase the most important artists.
    Authenticity is a simple matter with contemporary artists. It is only necessary to ask the artist. However after the death of an artist, there is often a rush of fakes to the market. Unfortunately, the friends and family sometimes produce these fakes. This can make their detection difficult, as the friends and family often provide evidence or are the source of determining authenticity. A good example is Amedeo Modigliani, whose friends both finished some of his unfinished paintings and painted numerous additional works after his death. These works entered the market, and some still circulate today as originals. This scam is not unique to this century; it is well documented that copies and student works were being passed as originals in the fifteenth century.
    Once enough time has passed, the originality of many paintings becomes obscured by the mists of time. This is such a problem with Old Master paintings that the major auction houses would rather place a disclaimer on the sale than take the steps to insure authenticity. Look at any recent auction catalogue containing an Old Master Painting. There appears a disclaimer that the buyer will purchase this painting at his or her own risk. Why do the merchants conduct business this way, when there are means to determine with 100% accuracy the true attribution? Perhaps it is because if a merchant can sell a student work as an original with a disclaimer; the profit potential is much greater. Were the merchant to discover through digital verification that the paintings was a student work or copy and have to sell the painting as such, the profit would be much less. This is unfortunately a factor in modern business ethics.
    To be 100% sure of the authenticity is imperative for the investor. To purchase for investment under any other circumstances is foolish. If the quality is lower than perceived, the investor can lose some money. If the artist was poorly chosen, the investor can lose some money. However, if the painting fails the test of authenticity, the investor can lose everything. Herein lies the importance of digital verification. It is the only secure and scientifically sound method of determining the authenticity for Old Master paintings.
    A large number of paintings are in circulation as original works that are actually studio and student copies. Many of these works have expertise from top experts, both living and dead. What will be the situation for the investor who purchases one of these paintings today and discovers when he tries to sell that the painting is a studio work or a copy? The potential for loss is dramatic.
    Some savvy investors are playing to this emerging market. Because Digital Verification is still relatively new in the marketplace, the effect on prices is still minor, but it is growing steadily. These investors are purchasing Digitally Verified works now, as they can still be purchased at today’s prices. The investors understand that as the various bodies of works for the Masters is evaluated over the next years, a large percentage of these works will fail to pass the Digital Verification test. If in five years, there is only half as many works attributed to a "Master" as are attributed today, each will be worth at least twice as much. The price escalation factor may actually be far greater, as so few of the authentic works of the great masters remain in private hands. There is more on this subject in the Art Economics Section, which may be accessed through the Economics Core Area. This is the reason that so many digitally verified works are being quietly purchased at this time. Clearly this strategy will reward the investor well.
  
"...if the painting fails the test of authenticity, the investor can lose everything."
Economics Core Area

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it was last modified : 7 May 2016