I was listening to a fairly famous investor’s podcast a couple of months ago when he interviewed the founder of Masterworks, a platform for investing in art. I was surprised that the idea hadn’t been done before, or I believe.
The idea is straight forward. Artists with a track record of selling their artwork or, for dead artists, artwork itself that has a price history, is evaluated by the art experts on the Masterworks team. The artist is profiled. Past transactions are reviewed. They claim the average annual return for the artwork sold on their platform is 20% while they take a fee of, I believe, 1% of the value of the work to cover the costs of storing, caring-for and promoting the art.
Investors don’t need to buy the entire piece. The unique part of their platform is that you can buy a fractional piece of the artwork. If you want to invest $500 in a specific piece of art what might be on sale for $2M, you can. If the value of that piece of art goes to $2.4M within the next 12 months, you would make about $94 or 20% of the $500 minus $6 to cover the 1% management fee.
That doesn’t sound like a bad deal, especially considering the upside potential. But, like a lot of the crypto out there right now, the price someone is willing to pay seems to be inflated and nobody really talks about the downside as much. If I were to buy a piece of art for $1000 and sell it for $2000, I just made $1000. Great. Then, if the person who buys it from me for $2000 turns around and sells it for $5000, they just made $3000. Great. And, so on.
The idea is that everyone buys it, sells it for a profit and then gives someone else the opportunity to buy it and sell it for a profit. This means everyone is making money. Everyone is happy. The model works just as well with $1M to $2M. Able to raise $1M to buy a painting and sell it for $2M, you just made $1M. Simple right. Well, I don’t know enough about art work to know when there is a downside on the price. When does the price go down. Surely it can’t go up forever, right.
Unlike stock or crypto, there aren’t a lot of people betting on the asset to go down. There are no short sellers. Nobody buying art futures for up or down. With nobody making money if it goes down, everyone wants it to go up and that is how paintings end up selling for $300M. There might be something to say about history and that there is no way to put a price on history.
The only down side I see is that the artist that created the art, in many cases, isn’t the one making money on it. Artists often die broke. Sad.