Rinker on Collectibles

RINKER ON COLLECTIBLES — Column #1780

The Masterworks Meanie

During the 1990s’ Beanie Baby craze, I was known as the “Beanie Meanie.” I appeared on numerous radio and television shows with a simple message: “This too will pass.” I was pitted against the Beanie Baby pundits who saw Beanie Babies as the second coming of Hummel figurines. In reality, Beanie Babies were a second coming of Hummel figurines, only they crashed and burned in less than a decade rather than requiring two generations to go down in flames.

Recently, Chuck Jaffe, host of the show “Money Life with Chuck Jaffe” (www.moneylifeshow.com), asked me to be a guest on one of his broadcasts. During a pre-show interview, Chuck wanted to know what I thought about Masterworks and similar businesses designed to create syndicates to invest in artworks. I was unaware of these programs. When Chuck explained what they were attempting to do, my initial comment was: “Are these investors out of their minds? Who would be stupid enough to fall for such a scheme?”

Since talking with Chuck, I checked out the Masterworks and several similar websites. After doing so, I came to the conclusion that it is time for me to launch a second “Meanie” crusade. This column is a notice to Scott Lynn, Masterworks’ founder & CEO, that I am ready to serve as the Masterworks Meanie for any media outlet willing to talk with me. Once again, my message will be a simple one: “This too will pass.”

The Masterworks website www.masterworks.io touts that it is “A complete platform for investing in art.” It claims to be “the first platform for buying and selling shares representing an investment in iconic artworks. Build a diversified portfolio of iconic works of art curated by our industry-leading research team.”

The justification for investing in their syndicate (more correctly, scheme) is: “According to Artprice, blue-chip art has outperformed the S&P 500 by 180% from 2000-2018. Deloitte estimates the total value of art to be $1.7 trillion….” The process appears simple on paper. The research team identifies a below value (in their opinion) piece of art for sale, purchases it, creates an offering circular that is filed with the Securities and Exchange commission, holds the art for 3 to 10 years, and then sells. After Masterworks’ fees are deducted, investors will receive their pro rata proceeds. Investors can sell their shares in the work of art on the secondary market, provided they can find a buyer for them. Investors pay a 1.5 percent fee a year in the form of equity at no out-of-pocket expense and 20% of profits from all sales going to Masterworks first before any payouts to the investors. Management fees cover professional storage, insurance, administrative costs (I will return to this later), regulatory filings, and annual appraisals.

There is an old adage: “If it sounds too good to be true, it probably is.” Although carefully worded, the Masterwork hyped sales pitch on its website takes a “how can you possibly lose” approach. The answer is the investor can lose and will lose more often than not.

The concept that there is blue chip art is a fallacy. I learned early in my career that there is no crystal ball, or human skill for that matter, that allows anyone to accurately predict the long-term value of art, decorative arts, antiques, or collectibles. Every object has an upper limit. When that limit is reached, the winners are all the owners who sold along the way. The loser is the individual or syndicate that paid the highest price and is unable to sell at any price near that which had been paid.

There are no fixed values of art, decorative arts, antiques, or collectibles. Value is directly related to time, place, and the current economic marketplace. Further, value is associated with individual pieces, not groups of related objects.

There are two truths that need to be considered. First, numbers can be made to lie or manipulated to prove any point one cares to make. More often than not, they are. Second, today’s numbers are not tomorrow’s numbers.

Grouping blocks of art, decorative arts, antiques, or collectibles is the quickest method to achieve false data. Each object stands alone, no matter whether it is one-of-a-kind or commercially produced. The Masterworks’ website claims that Andy Warhol’s art has appreciated 12.17%, Keith Haring’s art 12.60%, and Mark Rothko’s art at 13.00%. The site notes the percentages are based on historical appreciation as “defined as the median annualized appreciation rate across paintings (unless noted otherwise) that have sold at least twice at public auction by a given artist…” Again, this sounds too good. What about examples that were offered for sale but did not sell because they did not meet reserve, that were sold once for far less than the presale estimates but never reported, or pieces that were privately traded for lower prices.

Almost all the artists touted by Masterworks are mid-20th century or later artists. Have these artists proven their ability to stand the test of time? Will Andy Warhol, Keith Haring, and Mark Rothko enjoy the same art world prestige in 25 to 50 years when the first two generations that revered them die off? Are they the Rembrandts of 20th century art? Absolutely not.

Masterworks will argue that they are taking a short-term rather than long-term approach. Approached from another direction, they are betting the speculative market for these artists will continue to grow. Time has shown that such an approach is extremely risky.

Almost two decades have passed since Sotheby’s launched its Art Index, an art reporting system designed to track the economic growth of the value of artwork by a specific artist. The index lasted for less than five years. It disappeared when the numbers turned south for the works of a great many of the artists on the list. Sotheby’s had no interest in informing individuals that art had the potential for bad investment.

[Author’s Aside: I tried researching the history of the old Sotheby’s Art Index on the internet. I could not locate information about it. How easily, quickly, and completely the past is forgotten.]

Sotheby’s now issues the Mei Moses index, hoping once again to convince buyers that art is a good investment. Madelaine D’Angelo’s article entitled “What Sotheby’s Mei Moses Doesn’t Tell You” [https://medium.com/@madelaine_arthena/what-the-mei-moses-art-indices-dont-tell-you-d556b9c41aaf] notes: “Analyzing art as an investment has two major obstacles. The first is the relative lack of data, as art sales happen much less frequently than financial trades. The other is that every piece of art is different, so it becomes difficult to compare how one piece sells with respect to another.” I could not have stated it better.

The Masterworks’ website contains a list of its staff and advisors. It is not my desire to analyze their level of expertise. In a field where experts are a dime a dozen, the staff contains a great many dimes. Of concern is the annual cost to maintain a staff of this size. Do not forget to add in operating costs. The annual operating budget of Masterworks has to be well above a half million dollars per year. This money has to be generated by the continued purchases and sale of the art. If administrative and overhead cash is in shortfall, the only way to raise the needed moneys is to sell art. A sell decision based on such a necessity is not a favorable one.

Masterworks makes no guarantees to its investors. The good news for Masterworks is that it makes money whether the sale generates a profit or a loss. Their percentage comes off the top no matter what the selling price.

Masterworks is another Mint-in-the-Box scheme (or scam – a more applicable term). What is next – Masterworks-type syndicates for baseball and other sports cards, comic books, Concours d’Elegance automobiles, or posters? Heaven, forbid!

“Fools and their money are easily parted” is a well-known phrase. If fools want to invest their money in Masterworks, far be it from me to stop them. But if they wish to listen to a devil’s advocate (the Masterworks Meanie), I will be delighted to consult with them.

Harry L. Rinker welcomes questions from readers about collectibles, those mass-produced items from the twentieth and twenty-first centuries. Selected letters will be answered in this column. Harry cannot provide personal answers. Photos and other material submitted cannot be returned. Send your questions to: Rinker on Collectibles, 5955 Mill Point Court SE, Kentwood, MI 49512. You also can e-mail your questions to harrylrinker@aol.com. Only e-mails containing a full name and mailing address will be considered.

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