The Weekly Trader

Why Billionaires (and Everyone Else) Loves Art Basel

By Michael Sincere (Columnist, MarketWatch/The Wall Street Journal)

Commentary: Art Basel in Miami Beach was a huge hit with regular folks and billionaires

In December, I went to Art Basel at the Miami Beach Convention Center not only to see contemporary and fine art but also to find out why billionaires, celebrities, artists, and regular people flock to this huge art show every year. Art Basel, which this year featured 267 international art galleries, is the place to go to enjoy great food, view contemporary and traditional art, watch people, and if you can afford it, purchase paintings and sculptures.

The show was very crowded, especially on the last day, and also financially rewarding for many artists and galleries. Many of the sales were for pieces between $50,000 and $300,000, but several million-dollar sales were also made, including an oil on canvas painting, “Man in Blue VI” (1954) by Francis Bacon. The asking price was $15 million. A Picasso was also sold, “Buste au Chapeau” (1971) with an asking price of $10.5 million. In addition, many sales were made in the $5,000 – $10,000 range.

Although $10.5 million might sound expensive, Picasso’s 1955 painting, “Les Femmes d’Alger (Version ‘O’) was sold last year for $179.4 million at Christie’s auction house, which was a record high. And billionaire collector Liu Yiqian paid Christie’s $170.4 million for Modigliani’s “Nu couche.” (1917).

At Art Basel in Miami Beach, visitors flocked to the Matisse & Picasso exhibition at Hammer Galleries’ booth, which featured numerous paintings by these two giants of twentieth century art. Howard Shaw, gallery president, explained: “Though known primarily for showcasing the latest contemporary art, Art Basel also includes blue-chip, museum quality works by modern masters.”

Art Basel only allows works created after 1900, and Hammer Galleries exhibited two of the earliest works at the fair: Picasso’s Danseuse espagnole (1901) and a rare Matisse, Le guitariste debout (1903). The two artists had a friendship that lasted a lifetime, but they also competed with each other artistically. Each recognized the other as his only true rival and as his greatest measure of success.

Some people might wonder why collectors pay millions of dollars for certain paintings. Both of these works have fascinating histories and share a connection to the legendary dealer Ambroise Vollard. The early Danseuse espagnole was included in Picasso’s first major exhibition in Paris at Vollard’s gallery, only a few months before he was to embark on his famous “Blue Period.”

Additionally, the 1903 Matisse (shown below) was originally owned by Vollard. After Vollard was killed in a mysterious car crash, it later entered the possession of Vollard’s young Croatian assistant, Eric Slomovic. Slomovic stored this painting and hundreds more in a bank vault in Paris. After Slomovic died during WWII, the paintings remained in the vault for 40 years. When a painting such as this has not been seen on the market for decades, it is much more desirable for buyers. After all, even billionaires like a good story.

Billionaires Love to Collect Art

One group of people, billionaires, are especially keen on collecting art, which is why so many attend Art Basel. John Mathews, head of Private Wealth Management at UBS Wealth Americas, explains. “Art Basel is one of our main events because it’s important to our clients,” he said. “Many are avid collectors or are inspired by art.” UBS has been a long-time supporter and collector of contemporary art. They are the global lead partner of Art Basel.

Do billionaires invest in art like they do stocks and bonds? “When we put together asset allocation models, we don’t include collectibles like art,” Mathews said. “It’s hard to put a value on art because there is no daily market value like a stock. The wealthier you become, collectibles become a substantial part of your overall net worth. Real collectors buy art because they like to look at it and enjoy it and are passionate about it.” They also like to show the work to their friends and family and often decorate their houses with the purchased pieces.

To better understand whether to buy art or invest in the S&P 500, I spoke with Mike Ryan, CIO of UBS Wealth Americas. “When the economy is expanding, when GDP is positive and personal income growth is rising, these are usually important drivers for demand for art.”

And what happens when GDP is negative and the stock market is plunging? “Our high net-worth clients see crashes and corrections as opportunities,” Mathews says. “Instead of panicking, they are thinking how to benefit from it. Many of our clients made a lot of their wealth because of actions they took in 2008, 2009, and 2010. It’s not only buying the S&P 500. They might have bought an office building, raw land, or art. Typically, when the economy slows down, art investment slows down. Art is just one piece of the puzzle but it’s an important piece.”

At Art Basel, I spoke with gallery owner Xavier Hufkens, who pointed out that buying art was not just about making money. “People buy art because they love the work, not just for investment,” he says. “I love to be surrounded by art. That is how I understand the world. I explain to buyers who the artist is, the history behind the work, and why I like it. One of my jobs is to help people learn how to appreciate art. To me, art is slow attention. It takes time to appreciate the work.” Learning about the history behind the painting is an important part of the process.

By the way, although there were record-breaking art sales last year, overall sales in the art community have slowed from previous years. It’s too early to say why, although some experts say that some of the buying reached near bubble proportions.

Art Basel in 2016

I highly recommend attending Art Basel in Miami Beach in 2016 (it’s always in December). The fun isn’t only at the Miami Beach Convention Center (where the main event is held). All week, there are parties, concerts, and art events in Wynwood, an area of Miami where most of the galleries are located. If you are an international traveler, you can also attend Art Basel in Basel, Switzerland (in June) and Hong Kong (in March). Attending exhibitions and viewing fine art is one way of escaping reality while being entertained.

Matisse 21

 

I was talking to a 67-year-old woman who is close to retirement and wanted me to review her financial portfolio. She has a money manager with a well-known full-service brokerage firm. She was upset because she lost $30,000 in the last month. When I looked at her portfolio, I was shocked. The money manager had her 100 percent in stocks. Whenever she asked him to reduce the allocation, he protested: “It’s not a real loss until you sell,” he told her. Hogwash.

To stop the bleeding, she finally got the courage to sell all her stocks and move into cash (i.e. money market) until she finds another financial manager. Good move. In a bear market, most stocks, even stocks of good companies, will sustain severe losses. The market might go down by 20 percent but many individual stocks will go down by 40 or 50 percent. This is not going to end well for millions of people who own individual stocks. If you’re close to retirement or retired, in my opinion, you should be reducing the number of stocks in your portfolio. 

By now, most investors and traders know what happened to LinkedIn (LNKD). After the company reported earnings, the stock plunged by 40%, smashing the portfolios of pros and amateurs alike. LinkedIn has a history of booms and busts after announcing earnings. In the future, before any stock announcement, there are two actions you might consider:

  1. If you are long a stock, you can buy short-term (weekly) put options for insurance. If the stock plunges (as happened in this case), the put options would reduce (but not eliminate) the pain. The downside is that puts on some volatile stocks are pricey, especially if you choose a long expiration date. 
  2. Instead of being exposed to a large and expensive stock position, replace the stock with call options before a major news announcement (assuming you are long the stock). With LNKD, although you would have lost the entire amount of the cost of the option, instead of losing a small fortune, you may have lost a small amount. Example: Instead of losing $8,000 with 100 shares, you might have lost $400, the total cost of the option. 

In a bear market, put options are your friend. Use them for protection or for speculation. For more information, read my book, Understanding Options 2E (McGraw-Hill).

During the next few weeks and months, I think it will be evident we are in a bear market. Some of the most recent signs are the many failed rallies as well as a lack of follow-through (i.e. rallies that don’t last longer than a day or two). If this is a typical bear market, it can last from 18 months to three years, which means it could end in 2017. If I’m right, you have several choices of what to do (you can also read my interview with Mark Cook for his suggestions: http://goo.gl/JX1zQP).

Here are some other ideas: 

  1. First, you have to be objective. Many investors are bullish simply because they own stocks. If underlying market conditions continue to deteriorate, and stocks continue to fall over time, don’t fight reality but accept the market is in a downtrend. Many investors will deny the existence of a bear market until they’ve already lost 30% or more of their position. Before the media announces we’re “officially” in a bear market, take steps now. 
  2. Most investors believe they can “ride out” the bear market because they are thinking long term. That is a very courageous stance but I guarantee that some individual stocks will not survive a vicious bear market. If you are going to grit your teeth and hold through an extended downtrend, you’d be better off holding an index fund such as the S&P 500 than holding stocks. Be prepared for months or years of pain before the index recovers. 
  3. The easiest choice is to move most of your money to cash. For some reason, most investors won’t do this, and most money managers won’t, either. As for me, I’d rather make 0% in cash than lose 30% or more in a bear market, but that’s me. I know I’m in the minority. 
  4. For those willing to learn how to trade, buying and holding inverse ETFs (non-leveraged) can be a wise choice. Keep in mind that bear markets do end eventually so you cannot hold these funds indefinitely. You must be willing to sell your inverse funds when there is a bottom, usually when bullish investors give up and capitulate. You have to be patient and alert to identify when a bottom has been reached and the market is headed up again. Look at what happened to oil and gold. Eventually, oil and gold will hit bottom and head higher. Stocks could take a similar path.
  5. For aggressive traders, buying put options in a bear market can be lucrative if you are disciplined and knowledgeable. I recommend buying my book, “Understanding Options 2E” if you want to take this route. Buying options is less risky than shorting stocks, but there is still the risk you can lose your entire investment. Because of leverage, buying put options in a bear market and call options in a bull market can increase gains dramatically. However, it’s easy to make and then lose money trading options if you are not alert. Trading options can be intense, and when holding them you sometimes feel like you’re playing a game of “hot potato.” That’s why I always recommend selling options quickly when you have a substantial gain. 

Soon, you should see more signs that we are in a bear market (the pivot point was actually several months ago). With each failed rally, continued deterioration of leading stocks, and false hope that the worst is behind us, it will become more evident that the bear has arrived. If you want to learn more about bear markets, read everything about trader Jesse Livermore, who was an expert at trading in downtrends. Mark Cook is also an experienced bear market trader, and there are others including Bill Fleckenstein and John Hussman, to name a few. 

If you have a money manager, this is the time to find out what he or she is doing to protect your account. A few months ago, one money manager wrote me, “If there is a bear market, I will sell stocks that are going down and buy stocks that are going up.” If only it was that easy (but it’s not). Trading bear markets are difficult for most investors, including most pros, as you will soon find out. You could also take the advice of a guest on one of the financial programs: “People, my advice is simply not look at your monthly statements!” this person suggested. Oh, okay, and when you wake up in two or three years, Humpty Dumpty will be put back together again and all your losses will magically turn into gains. 

Bear markets are not fun for most investors and believe me, I’ve seen people ruined by them. Rather than burying your head in the sand, come up with a plan and strategy and make a decision what to do. If you’re a long-term investor, you’re hoping the bear market will last a few months, not years. Suggestion: Prepare for a worst-case scenario.