Art Versus Traditional Investments – the Power of Compound Interest

Art Versus Traditional Investments - the Power of Compound Interest

Some of the best investments – the ones we dream about as market observers – are those that provide substantial recurring cash flows for many decades into the future.  This is really the ultimate underlying goal of growth, dividend growth and value investing equity strategies.  And proponents of these strategies will claim, to a man, that choosing these stocks is both easy and lucrative.  However, this assertion is one of those devious lies that is so compelling because it contains a bit of truth.  Just a handful of stocks have given their fortuitous owners very high returns over long periods of time.  I wish the aspiring millionaires of the world good luck picking out those specific companies beforehand, though.

Let’s look at an example: Coca-Cola stock.  If you had invested in this iconic American company during its IPO in 1919, you would have come away with a stellar annualized return of 14.27% (dividends reinvested through 2015).  Sounds great, right?  Except, as the incredulous among us already know, the real world doesn’t work that way.  For one thing, for every company that performs to the exceptional level of a Coca-Cola, there are at least a hundred companies with far more pedestrian returns and another hundred companies that never make any money.

So let’s construct a hypothetical stock portfolio that reflects this reality: 1 superb company, 200 mediocre companies and 100 failures.  We’ll assume our superb, Coca-Cola like company returns 14.27%, while our mediocre companies return 5% and our failed companies return nothing.  Once we run the numbers we find that our real life stock portfolio returns a less than inspiring 3.37% per annum, assuming annual rebalancing.

Let’s compare this more realistic stock portfolio to my preferred asset class: investment grade art and antiques.  While performance data is notoriously difficult to find for this asset class, I have cobbled together a return calculation using the 1912 edition of the Sears mail order catalogue.  In particular, I chose a women’s Elgin pocket watch (size 6) with a 15 jewel movement and a solid 14 karat gold hunting case.  This pocket watch sold for $27.60 in the 1912 Sears catalogue and would have been considered a good, but not great, timepiece during the period.  To estimate a current value, I checked eBay for similar watches that sold in the past few months and determined that $900 was a reasonable price.

Upon running the numbers I found our watch’s performance over the last 104 years was 3.41% a year – on par with our real life stock portfolio.  Of course this equivalency charitably assumes the mediocre companies in your stock portfolio stay in business for 104 years!  But that isn’t the end of the story.  You see, I rarely advocate buying new luxury goods as investments.  They generally cost too much to make sense as investments.  The secondary market is a much better place to pick up investment grade art and antiques for cheap.  If we apply this dictum to our pocket watch, the story changes a bit.

I assume that 10 years after the watch was originally sold (1912) you could have purchased the same piece second-hand (in 1922) for 60% of the original purchase price ($16.56) and then spent a generous $4 on servicing it.  These are not heroic assumptions; on the contrary, they are actually quite modest.  I’m sure any half-way competent fine art investor could have done considerably better.  Anyway, our new return number is 4.1% over 94 years, a clear win over our real life stock portfolio.

“But wait!” I hear you cry.  “Your real life stock portfolio wildly understates equity returns because indices like the Dow Jones Industrial Average and S&P 500 have performed far better than this for many decades!”  Ah yes, the good old lie of the index.  First, indexes are not truly passive.  They change constituents on a regular basis, usually once a year.  “No problem.” you reply, “I’ll just invest in an index fund to mimic their results.”

Investing in index funds is a great idea.  Or, I should say, it used to be a great idea.  Passively investing in an index wasn’t possible until stock market guru John Bogle made it a reality by establishing the Vanguard 500 fund in 1976.  There simply weren’t any available investment vehicles in existence similar to an index before this time.  I readily admit that passive index investing was a phenomenal idea in the 1970s, 1980s and into the 1990s.  But then passive investing became conventional wisdom.  And once a concept becomes conventional wisdom it rarely remains a good idea.

The popularization of passive index investing has created two ironic effects.  First, it has caused indices to perform better since the late 1990s than they would have otherwise.  All passive investors, by definition, buy shares in index companies, thus driving up demand for those stocks.  This boosts the prices of these index stocks specifically and the broad indices more generally.  Second, the broadly overvalued indices that result from this indiscriminate, passive investment demand invariably lead to poor future performance.  After all, the most important attribute of any investment is the price you pay for it.  Buy it cheaply enough and even an otherwise unremarkable company becomes a winning investment.  Likewise, overpaying for even the finest of companies will result in subpar investment returns.

Investment grade art and antiques suffer none of the guessing games inherent in the stock market.  The layman can easily choose antiques that adhere to the five principles of investment grade art: as large as possible while preserving portability, quality materials and construction, durability, scarcity and stylistic zeitgeist.  If you follow these simple rules when investing in antiques you can readily achieve 3% to 5% returns – although probably much, much better – compounded effortlessly over a century or more with implicit inflation protection.  In contrast, the average lifespan of a company in the S&P 500 index today stands at only 15 to 18 years.  That seems like an exercise in guaranteed frustration for stock investors as they scramble to cycle flavor-of-the-month stocks in and out of their portfolios in rapid succession.  And the more buy or sell decisions an investor is faced with, the greater the chances he will make one or more crucial errors.  It is clear to me that art and antiques are the better, safer way to build long term wealth.

Paper Jewels – Medieval European Illuminated Manuscripts

Paper Jewels - Medieval European Illuminated Manuscripts
Here is a brilliantly colored leaf from a 13th century illuminated manuscript depicting scenes from the Aeneid, a classical work by the Latin poet Virgil.  The lavish use of bright colors like blue, red and gold is typical of high quality medieval illuminated works.

Long ago, in a more genteel age, the famous Lebanese poet Kahlil Gibran wrote in his moving poem “Sand and Foam” that “We live only to discover beauty.  All else is a form of waiting.”  This is a Truth that we all too often forget as the harsh demands of our hectic day-to-day lives relentlessly engulf us.

It is also an adage that underscores what makes art so special.  Art is concentrated beauty given tangible form.  Regardless of the medium used to create it, each stroke of the artist’s paintbrush, stylus or pen is made with the intention of distilling the divine essence of beauty into a physical form.  And nowhere is this striving for unearthly beauty more obvious then when looking at the sumptuous designs and rich colors of medieval European illuminated manuscripts.

An illuminated manuscript is a handwritten book (or single page of such a book) that has been decorated with colored pigments.  European illuminated manuscripts were manufactured during the medieval period from approximately 600 CE to circa 1550 CE and were usually in Latin, the lingua franca of medieval Europe.

Illuminated manuscript production was driven by two different institutions.  European monasteries, the last bastions of literacy during the dark ages, became centers of book production after the collapse of the Roman Empire.  Later in the Middle Ages, as European commerce and wealth grew, private scribes’ guilds began to form.  These corporate-like guilds typically produced gorgeously illuminated manuscripts for wealthy clients who could afford the high cost of production.

 

Medieval Illuminated Book of Hours Leaves for Sale on eBay

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Illuminated manuscripts cover a wide range of topics, but most of them are religious in nature.  The most common types of texts encountered are Bibles, Psalters, Books of Hours, Breviaries, Bestiaries and musical/antiphonal manuscripts.

Psalters were religious documents intended for private use that contained excerpts from the Old Testament book of Psalms.  Bestiaries were encyclopedic tomes that contained entries of different types of animals, some real and some fantasy.  Breviaries were prayer books used by monks to guide their periodic daily prayers.

Books of Hours were personal prayer books used by private individuals.  Some of the most magnificent illuminated manuscripts to survive from the later middle ages are Books of Hours that were commissioned by extravagantly wealthy patrons.  A good example of this opulence is the priceless Tres Riches Heures of the early 15th century French nobleman, Jean le Duc de Berry.

The creation of an illuminated manuscript was an involved and time consuming process that involved many different stages.  These precious documents were committed to dried animal skin – usually sheep or cow – which was known as parchment, or vellum, if made from calfskin.  Parchment is extremely durable and will easily last for centuries, if not millennia, as long as it is stored in a climate controlled environment.

 

Medieval Illuminated Bible Leaves for Sale on eBay

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Parchment preparation could take months by itself, and a full book might require the skin of 100 cows.  After the parchment was ready, it was ruled so that the written text would be straight.  Then the text itself was added via quill or reed pen.  Next, initials, borders and figures were outlined followed by the application of gold or silver leaf and other pigments.  Finally, all the pages were assembled and bound, usually in a leather or wooden cover.

A typical illuminated tome might have easily taken many different highly skilled medieval craftsmen hundreds of man hours to create.  By the later Middle Ages these steps were usually executed in a proto assembly line process by different individuals, each of whom was a master in his own area of expertise.

Illuminated manuscripts were produced in a time before synthetic dyes.  This meant that saturated, vibrant colors were rare, highly prized and exceedingly expensive.

Gold and silver colors were produced by delicately applying paper-thin gold or silver leaf to a document.  Vermillion, a high quality red, was made from a powdered ore of mercury called cinnabar.  An intense green came from crushed malachite, a semi-precious copper carbonate mineral, while the renowned deep blue of ultramarine originated from another exotic, semi-precious stone called lapis lazuli.  Malachite and lapis lazuli were rare in Europe and had to be imported thousands of miles from the remotest, most inaccessible mountains and deserts of Asia.

Other, more common materials, like lead, iron, or organic matter, were also used in the production of various pigments, but these often resulted in less intense colors.

 

Medieval Illuminated Antiphonal and Music Leaves for Sale on eBay

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The invention of Gutenberg’s famous movable type printing press in 1453 signaled a sea-change in the way books were produced.  Until that time the effort and materials that went into an illuminated manuscript meant that books were expensive luxury items.  And the more richly illuminated a book was the more expensive it became to produce.  In an age of drab earth tones, only the very wealthiest members of society could afford these brilliantly hued repositories of treasured wisdom.

Over the course of the century following its introduction, the printing press changed that situation completely.  Book production ballooned after the advent of Gutenberg’s press, increasing dramatically between 1450 CE and 1550 CE due to the new technology.  Traditional, labor-intensive illumination techniques were wholly unable to compete with the cheaper, faster printing press.  Consequently, illuminated manuscript production rapidly declined until output was essentially nil by the middle of the 16th century.

People crave beauty.  Once our more basic biological needs have been met – food, water and shelter – it is only natural for humans to seek out exquisite objects of refinement and elegance.  And there are few things of greater artistry than medieval illuminated manuscripts.  Laboriously, painstakingly crafted by hand at every stage of their creation, medieval European illuminated manuscripts represent the pinnacle of late medieval art.  And yet these wonders of human ingenuity can be wonderfully affordable investments.

A single illuminated page with modest yet enchanting adornments can be acquired for only around $300.  More complex and colorful individual leaves that radiate distinctive medieval European style are readily available to the connoisseur for around $1,000.  Prices escalate quickly as the amount of decoration increases however, and vibrant, fully illustrated pages can easily sell for several thousands of dollars each.

Fully intact books are usually prohibitively expensive, routinely selling for tens of thousands of dollars – even if imperfect or pedestrian in execution.  Exceptionally fine, complete manuscripts command even higher prices and rapidly enter the lofty domain of major museums and the ultra-wealthy.

If we all live to discover beauty, then surely medieval European illuminated manuscripts are beauty made manifest, descended to earth as a revelation to us.

 

Read more in-depth Antique Sage medieval art investment guides here.


Antique Georgian Period 14K Gold Solid Agate Intaglio Seal Fob ‘Adriana Maria’

Antique Georgian Period 14K Gold Solid Agate Intaglio Seal Fob 'Adriana Maria'
Photo Credit: CJ Antiques Ltd

Antique Georgian Period 14K Gold Solid Agate Intaglio Seal Fob ‘Adriana Maria’

Buy It Now Price: $284.75 (price as of 2016; item no longer available)

Pros:

-This is a very early 19th century Georgian era British agate intaglio sealstone mounted in a fine 14 karat gold setting.

-It measures 1.34 inches (34 mm) tall and is 0.71 inches (18 mm) by 0.55 inches (14 mm) at the base.  The piece weighs 7.0 grams.

-The mottled beige to peach colored agate intaglio sealstone is carved in a characteristically neo-classical, flared octagonal shape.  It is engraved on the bottom with a woman’s name “Adriana Maria”, surrounded by stars and grass.

-Sealstones were both fashionable and practical accessories for refined British men and women from the 18th century until the beginning of the 20th century.  Sealstones were expensive luxury items in their day, but no self-respecting British person of means would be found without one.

-Sealstones were used to impress an engraved design, name or coat of arms into the surface of wax seals on letters, thus insuring a message’s integrity.  Any tampering in an attempt to read the letter before it had reached its intended recipient would break the fragile wax seal and be instantly obvious to even a casual observer.

-The Georgian Period, which extended from 1714 to 1830, was a golden age for the British aristocracy.  Increasing land values and land rents meant that the upper classes became as rich and powerful as they had ever been in British society.  For the wealthy, it was a time of palatial Georgian estates, Grand Tours of Continental Europe and ever expanding empire (with the sole exception of the break-away American colony).

-The solid gold mounting of this sealstone is rendered in a particularly fine, late neo-classical style.  The elegant scrollwork and delicate bright-cut engraving is typical of goldwork of this period.  Given the item’s superb style and solid gold setting, I think the $284.75 asking price is a bargain.

-The seller dates the piece to around 1820 or “maybe a little older”.  I tend to think this example is slightly older, perhaps from the first decade of the 19th century.

 

Cons:

-While the gold setting is in a good state of preservation overall, the bail at the top of the piece is showing some wear.  This is to be expected on a piece of jewelry that is two hundred years old and isn’t a major issue.

-This specimen is fairly light weight at 7.0 grams, but that is typical of the period in which it was produced.  Later settings for sealstones from the very late Georgian Period into the Victorian Age are often much heavier and more massive.

-According to the seller, the sealstone setting is marked “585” – the European notation for 14 karat gold.  But this is obviously a later addition to the piece, possibly indicating a repair or alteration.  Sealstone settings were rarely hallmarked before the 1860s.  While the situation is curious, I believe the piece is inexpensive enough that any monetary risk is strictly limited.

Conventional Wisdom Is the Graveyard of Unwary Investors

Conventional Wisdom Is the Graveyard of Unwary Investors

In our more sanguine moments many of us like to imagine that society has unwritten economic rules.  For example, many people believe that acquiring a college bachelor’s degree is a surefire way to secure a position in the coveted middle class.  And perhaps once, long ago, it was even true.  Now however, a college bachelor’s degree is just as likely to trap the young and naïve in a quagmire of six figure student loan debt and minimum wage work.  These unwritten economic rules – otherwise known as conventional wisdom – all too often become a graveyard for the unwary.

Conventional wisdom feels intuitively safe.  It lulls us into not really examining the decisions we’re about to make.  The fact that 100 million other people are making exactly the same decision gives us a sense of invulnerability.  We’re running with the pack now; how could so many people possibly be wrong simultaneously?  And nowhere is this herding dynamic more prevalent than in investing.

Many years ago, I worked in Boston at a medium-sized mutual fund firm.  It was the spring of 2000 near the peak of the dotcom bubble and I was shooting the breeze with a work colleague named Ryan.  He was of Irish descent and had all the vices of any good Irishman: he liked to drink, smoke, gamble and fight.  Our conversation went something like this:

“So Ryan, have you seen how much the NASDAQ is off its recent highs?” I remarked off-handedly.

“It’s a great time to get in,” shot back Ryan giddily as he took a big swig from his morning coffee.  “All that volatility means there are a lot of screaming bargains out there in techland!”

“I’m not sure I’d want to own many of those businesses,” I countered cautiously.  “Some of those big tech companies don’t have any earnings while others have insanely high price-to-earnings ratios.”

“Look, it doesn’t matter which of them you buy.  They’re all going to do great,” admonished Ryan in an exasperated tone as he rolled his eyes.  “The important thing is to get your money in the game!”

Neither of us knew it at the time, but the NASDAQ had actually peaked a month before.  It would go on to lose over 75% of its value over the next few years.  Speculator darlings such as Pets.com, Webvan and Global Crossing all ended up filing bankruptcy in the ensuing chaos.  “Getting in the game,” as Ryan advocated ended up being hazardous to your wealth.

Years later, in late 2005, I had another, eerily similar discussion with a different co-worker named Dave.  By this time I worked at the mutual fund division of a large bank.  The topic revolved around the high price of housing in the Boston area:

“With real estate prices as high as they are I don’t think I’ll every buy a house as long as I live in Boston,” I commented with disappointed resignation.

“What?  Why wouldn’t you buy?” asked Dave incredulously.

“Because renting is cheaper,” I countered, “a lot cheaper.”

“It doesn’t matter how expensive houses are,” intoned Dave earnestly.  “You have to buy in order to get on the escalator up!”

“The escalator up?” I repeated very slowly in utter disbelief.

“Yes, the escalator up!” chirped Dave with obvious excitement.  “You need to own a house in order to get all those fat capital gains!”

Predictably, this conversation with my real-estate obsessed co-worker coincided almost perfectly with the peak of housing prices in the Boston area.  A couple years later the largest financial crisis since the Great Depression descended, driven primarily by the unwinding of a massive housing bubble.  Dave discovered, rather painfully, that escalators can go down as well as up.

Although both of my former co-workers were spectacularly wrong, their beliefs represented the very best conventional wisdom at the time.  The problem is that today’s conventional wisdom all too often becomes tomorrow’s discredited idea.  This is one of the reasons I like art and antiques as investments; they are about as far from conventional wisdom as one can get at the moment.  I don’t have any co-workers telling me I need to sink my 401-k into medieval European illuminated manuscripts or old mine cut diamonds.  There aren’t any radio, television or internet advertisements screaming that I need to buy ancient Roman Republic denarii or vintage mid-century fountain pens.  Few people even know art and antiques can be investments, and that’s the way I like it.