This summer has been a world wind tour of where and who has sold the most at an art fair. Yet the “bubble” mania that entities like Forbes seem to watch really are not in a bubble at all. Here is why:
Consider Art and Stock investments. You invest in stocks or bonds with a short investment horizon – say 3 years. Traditional financial planning says you should be sitting in cash for any short, less than 1 year maturity or expectation of needing funds immediately. An ideal investment may seem to be a “grandma” cd making zero point zero percent in today’s confused markets. A short term investment has a holding period of 1 to 3 years and a long term is typically longer – 3 to 30 years.
Meet two investors – the turtle and the hare. Each are talking up a storm about where to find the next great investment. The hare says stock options while the turtle claims fine art. Both know about bubbles but only one is really experiencing it. The hare loves options because of the speed to make money. Owning an in the money call of a high flying stock like Apple is a Cramerica possibility. It is extremely liquid, everybody knows the company if not the daily prognosis of it’s founder, and most people have become ardent fans of the gizmos and gadgets. In 1 day at say $390 a share, the interday volatility can swing the price of the stock $5 to $10 – the equivalent of 2.5%/day. Annually, this quickly calculates to an astonishing 912.5%! Add the firepower of an option – you will either be in Basel next month on a private jet or changing tires at the local Hess station. Of course a straight up ascent is not a market reality – as flash crashes and hurricanes, on top of senior executives resigning, can dampen hope and the prospects of short term flips.
The turtle loves to read Forbes. Likewise is intrigued by the thought of a $5,000,000 painting selling at this summer’s Art Basel. The gallery owner reportedly earned $500,000. Was it in a day? No. A month? No. As Forbes mentioned the painting was owned for 3 years. The percentage gain annually – only 3.3 %. Compared to the stock, the daily gain would be .00904%. The common laws of investing state 7 years are needed to double your money. Fine art typically has an average annual return of 7%. Granted there may be less American’s able to handle a $5,000,000 acquisition – but bubble appreciation is not evidenced by a paltry 3.3% 3 year return. The art market is far from a bubble – just filled with a lot of ooglers, googlers and journalists hyping a story.