Addison:
This is our New Installment of Surviving and Thriving in the Post Pandemic world in 2021. We
have our special
guest today, Scott Lynn, the founder and CEO of Masterworks. We're going to introduce a new idea
that you should
include fine art in your investment portfolio. We'll talk about the reasons why, the platform
that Scott
developed to make it possible for people who aren't going to buy actual art, but you can invest
in the pieces.
We're going to talk about how to do that. Welcome Scott.
Scott:
Thanks for having me.
Addison:
I wanted to just give a little bit of background if you don't mind. I'm curious, how did you
get into dealing
in fine arts and then thinking about it as a securitized investment?
Scott:
I guess, I don't really think about myself as dealing in fine art, but yeah, I guess we kind of
are.
So look, I've
been starting technology companies for 20 years, everything from casual gaming to several
advertising companies and
then FinTech. So I've always thought of myself as an entrepreneur. That's what I've done. My
skill
set is really
tech and finance, but also throughout that period of time, I've been collecting art and I got
into
the art market
really in the late 90s. It was a very different market then and I can talk about why that is,
but
basically built a
collection, which today is a top 100 collection in the US focused on abstract expressionism.
People
like Pawlik,
Rothko, Klein, De Coning, well-known mid century American artists.
And then throughout that period of time I saw the value of my collection appreciate. So to me, it
was
always a very
interesting asset class, but the challenge to invest in it, as you had ten millions of dollars
to
buy these
paintings or tens of millions of dollars to build the portfolio. So it's really not accessible,
it's
not investible,
nobody's ever productized it. You have to know a lot about the art market. You have to go to
galleries, really
understand how that world works, which just doesn't make sense for most investors. So when I
started
Masterworks, my
idea was how I approach or everything in life is. How could I build a product that I would have
wanted 20 years ago?
And that's really what we built today, a platform where people can learn about paintings, learn
about artist
markets, learn about the market in general, look at data, which is a very non-art market and
make
decisions from
data on what to invest in.
Addison:
So you approached it more from a technology standpoint? Other than educating people?
Scott:
I think I approached it from a product perspective, right? Like Masterworks would make it super easy
for people to
understand how the asset class is appreciating, understand how a particular painting is appreciating
and make
investment decisions based on that. And it's really, that sounds simple from any other asset class,
but the art
market doesn't talk about these things. So for example, we have the only research team today in the
art market that
analyzes these returns. We're the only firm that does index construction. And we power a lot of the
understanding of
private banks in terms of how they think about the asset class, like next week we're publishing that
leadership with
a group of Fidelity, last week we published that leadership with Nomura. So we're actively educating
really everyone
at this point on how to think about art as an asset class. But historically people haven't really
looked at it in
the art market.
Addison:
Well, they've historically looked at it as sort of a collectors item. And maybe you
approached that
originally?
Scott:
I think when collectors today are buying these paintings and you have to contextualize it, right?
Like most of these
people are ultra high net worth individuals that are worth hundreds of millions or billions of
dollars. They're
buying $10 million paintings. And they assume that it's a very good store of value, which it is in
the asset classes
has shown that historically, and that they might make money, but they don't know how to quantify it.
Right? They
don't know that Claude Monet's market is appreciating at 7% a year. And Basquiat's market is
appreciating at roughly
18% a year. We're really the only firm that understands data at that level within the art market.
Addison:
How can you evaluate the data, and how can you evaluate which market is going where? You're
just collecting
auction prices, right?
Scott:
So it's really interesting. A lot of people look at the art market and they're like, "Oh, it's a
big
market that
sells whatever $50, $60, $70 billion a year, depending on what number you look at. And it's very
opaque and
accessible and all of these things." But the reality is half of the market trades at public
auctions. And at least
in the US, Western Europe and the UK, there's federal or state laws that require those auction
houses to report the
value that those objects sell for correctly. I believe that they have fair transparency
reporting
rules. So that
data's incredibly reliable. And there's a huge dataset. And a lot of people don't realize this,
but
Sotheby's, and
Christie's, which are the two main auction houses in the art market, have been around for
centuries,
right?
Sotheby's just went private on the New York Stock Exchange. It was the oldest company on the New
York
Stock Exchange,
at 275 years old. So these companies have been doing this for literally centuries. So there's a
big
dataset that you
can look at and understand, how different segments of the art market are appreciating today, how
they were
appreciating 50 years ago. And in some circumstances how they were presented 100 years ago.
Addison:
Let's use Monet and Jean-Michel Basquiat since you just brought them up. How do you
differentiate between the
two? You look at the data set and then see where the market is moving?
Scott:
Those are two very interesting examples. So in any asset class, you look at the headline return?
What
is the
predictability of that return? And then how does the return in that asset class correlate or
trend
with other asset
classes? So when we think of portfolio construction, we're trying to think about how art as an
asset
class performs
relative to public equities? How has it correlated to public equities? So if the financial
crisis
happens and public
equities tank, does the art market necessarily tank as well? And then what do we think about,
how do
we advise our
clients to allocate to art as an overall part of a portfolio? So when you look at Monet and
Basquiat, they're
similar, but different markets. So in the art world, almost everyone listening to this has
probably
heard of both of
these artists.
Monet is obviously a much older artist, right? He was painting in the late 19th century. And
Basquiat
is really well
known for his early 1980s paintings. Monet, out of any artists we track, has the lowest
volatility.
Meaning the
predictability in his returns are incredible. Actually for your listeners who are finance geeks
and
thinking about
Sharpe ratios, which is a risk adjusted return, Monet has a Sharpe ratio above one, even though
his
headline return
is somewhere around 6 or 7%. So his returns are very predictable. We think of him as an
excellent
store of value
within the art market. Now, Basquiat is very different depending on the year that you're looking
at,
his return is
somewhere between 18 and 20%. He's really just kind of defied all odds at appreciating at that
rate
for the past 20
plus years. Now, his volatility is higher. So his predictability in returns is less predictable,
but
still has a
risk adjusted return or a Sharpe ratio about one. So it's an example of two artists who have two
different returns,
two different volatility profiles, but ultimately a similar risk adjusted return.
Addison:
So you're just looking at the market and the data points. Do you have an opinion on the art
that you're
looking at?
Scott:
I have an opinion on everything, but I don't know if it necessarily matters. At the end of the day,
we are looking at
data to determine which segments of the art market we think are most investible. Once we determine
which segments
are most investible, our acquisitions team goes out and sources work by those artists. And they
primarily make
decisions on what paintings to buy on two different criteria; one is what price are we paying? Value
obviously
matters. We want to get the lowest price possible. And two is, is the painting a representative
example of what you
would think of when you think of that artist? Just how recognizable is it for that particular
artist's style? We
have 55 artists markets that we're actively buying from today. There's roughly 7,000 artists that
trade at public
auctions. Out of those 55 artists, we've been offered just over 7.5 Billion dollars a work. And this
year I think we
bought 150 or $200 million so far. So we're really selective around what we buy versus what we see.
Addison:
Using Basquiat as an example, he was relatively unknown for a long time, and then suddenly
he's like the
toast of the town. Right? How does that happen and how does that figure into the way that you
think of
this?
Scott:
Basquiat was actually a celebrity during his lifetime. There's a famous magazine cover, I'm spacing
on the name of
the magazine with him on the cover of it during his lifetime. He died super young, I think from a
drug overdose. He
didn't paint that many paintings. So one of the things that we look at is total supply in these
artists markets.
Most asset classes there's growing supply, right? Like there's more homes built every day, there's
more companies
started every day. Well, while there's certainly more artists that come about every day, they're
really great
artists. The top 100, which control the majority of the art market. Most of them are long gone. And
their paintings
that exist are slowly being donated to museums or institutions and the supply is decreasing. So in
Basquiat's market
there's not a lot of paintings left that you can buy, which I think has driven some of the extreme
prices and
continues to drive returns.
Addison:
And also he's been trending in popular pop culture.
Scott:
Yeah.
Addison:
I'm sure that contributes to the desire to hold one of his paintings. One of the questions
I've always had
about the art market is, it's just paint on canvas. Basquiat represented somewhat of a movement.
Right? A lot of
street groups, stuff like that.
Scott:
Graffitis. Yeah. Street painting. Yeah. The pop culture thing is super interesting. Because we have
artists today,
like, Pas, like Banksy, they've just become huge pop culture brands. That's pretty new though.
That's almost like an
Instagram dynamic. We've never really seen that before in the art market or within our industry. So
we're not
entirely sure how to think about it, but it's interesting.
Addison:
Banksy is not producing canvases. Things that you can hold.
Scott:
He does actually. He does produce paintings that you can actually buy. Masterworks was an early
supporter of his
market, which was at the time a controversial decision because the art market can't really support
Bansky. He's an
anonymous guy. He doesn't have a dealer. So there's no art world infrastructure that's built around
him. He deals
all of his art through an organization called Pest Control, who also authenticates his paintings.
But it's a weird
dynamic with someone who's anonymous. But his price, he's probably out of any artists we track, has
accelerated more
in the past year. I think his prices have gone up more than 100%. It is obviously not that
sustainable, but his
market's been on fire.
Addison:
I'm just going to pull back a little bit and ask you why you think it's important that
individual investors
include art in their portfolio. I think it’s an important distinction to make. Why would people
take their
investment funds and dump it into Wall Street or an alternative like fine art?
Scott:
I would say that it's important to include alternatives. I think a portfolio, even if you're not
including art and I
can talk about art specifically. But today we live in a world where public equity evaluations
are
almost at an all
time high. There's concern about inflation. We've seen kind of the rapid volatility in at least
US
public equities.
I guess global equities as well from COVID. There's really nothing to be earned from fixed
income.
So I think from a
portfolio construction perspective, you have to think about how do I add things in my portfolio,
which are
uncorrelated to public equities? So if something does happen with public equities, I'm
generating
returns elsewhere.
I think without fixed income, that really means you're focusing on alternatives.
The challenge that I have personally, and this is a personal perspective, not a Masterworks'
perspective with things
like venture capital and private equity, is that correlation factors with public equities are
like
0.6, 0.7, 0.8. So
if I'm allocating to those asset classes, I'm paying really high fees and I'm basically getting
a
high correlation
to public equities. So maybe they are net of fees, 100 or 200 basis points more, but it doesn't
feel
that compelling
to me. So I think the argument for art is just very simple. It's an uncorrelated asset class. If
you
look at
contemporary art, which was created after World War II, it appreciated 14% from 1995 through
2020.
That's an interesting argument. Now the challenge with investing in art, and we tell all of our
investors at
Masterworks this, is it's an illiquid allocation. We do have a secondary market now where people
are
trading shares
and paintings, but you still need to think of it as a three to 10 year illiquid hold. That's
going
to be a component
of your portfolio that you're not trading in and out of. So that's the biggest objection to the
asset class, but the
returns in correlation are really interesting.
Addison:
Let's talk about the correlation a little bit. So let's say we'll take 2008 or even like 2016
or '15 when
commodities crashed, what happened in the art market during those times. The headline news was
that the stock
market's going down. What happens to art during such a period?
Scott:
The correlation factors with other asset classes outside of public equities I don't think a lot
about, so I don't
have those in my head, but I do have the correlation with S&P in my head. If you go back to
the
financial crisis
of '08 or '09, that was the highest correlation factor ever that art had with public equity,
with
the S&P
specifically. And that correlation factor was about 0.4, meaning that the art market declined
40% of
what the
S&P declined during that time. Now 2016, if I recall correctly, the art market actually
declined
when public
equities increased. And we've been asked that question before about why we think the art market
declined in 2016?
And our best guess is if memory serves me, either Brexit, which I think was in 2016 or capital
controls in China.
And capital controls in China, I think, is an interesting one.
So when you think about the art market qualitatively, it's really a currency neutral asset class,
right? I can buy a
$10 million Monet in New York and I can fly to Hong Kong and sell it. So it's not country
specific.
It's truly a
mobile asset class that has very little carrying costs. I think there was a point in time where
China was roughly, I
think 35% maybe plus of the art market. And a lot of very wealthy Chinese individuals are buying
paintings and
potentially sending them out of China. So I think the Chinese government clamped down. That
could
have driven price
decreases in that year in the art market, but I'm not sure exactly.
Addison:
So is it possible that people were also selling art in order to invest in the stock market
because 2016
wasn't a bad year for the stock market?
Scott:
I don't know how to think about that. We just never get good data in terms of what's actually
happening at the
individual collector level, like why people are selling? Why are people buying? Again, most of the
people that are
buying and trading these paintings there're $100 million dollar plus net worth. I think they just
behave differently
sometimes than the rest of the world. But yeah, it's unknown.
Addison:
Can you discuss the base level, like how it works? Basically you're operating a platform for
individual
investors to get in and buy shares at different pieces of art that you've found and
trade?
Scott:
We basically securitize a painting by taking a painting and filing it as a public offering with the
SEC, and then we
sell shares as an individual artworks. So when you go to the Masterworks website, you can literally
pick and choose
individual paintings to invest in. Each painting we show you how similar sales of that painting, or
think of those
as comparables of the context of an asset class like real estate, have appreciated historically. So
you can
understand how those paintings are similar to your painting appreciating? We give you info on the
artist market, the
total volume in that artists market, how long that artist market has been selling. And most of our
investors make
investment decisions based on that data. We write up what we call an investment thesis, which is
from our
acquisition team's perspective, why they think it's a good painting, but lots of our investors are
just looking at
those offerings. We launch one every seven to 10 days and you can choose which ones to invest in.
Addison:
Why is the SEC involved? Because it's securitized?
Scott:
In the US to sell a security to anyone, not just accredited investors, you have to file it with the
SEC and get to
qualify.
Addison:
Do you think that the environment that we're in now with stimulus spending and then the
Infrastructure bill
and all that kind of stuff, there's a lot of money floating around. Do you think that's going to
change the
valuation? Do you think money is going to flow into the art market?
Scott:
We get this question about inflation. We get this question a lot. We're not macro people. We don't
know how to think
about inflation ourselves. It's a complicated topic, but I can say the smartest investors we work
with, many of
which are our fund managers, believe that inflation is coming in a big way. And they're looking at
real assets as a
way to hedge against that risk. So we don't have good data. I mean, in my lifetime, I've never lived
through a
rapidly inflationary economy. I think most people haven't. So we don't have good data on how the art
market really
behaves during that. But, if you believe in real assets, I guess in that environment that art should
theoretically
be a good place.
Addison:
Can you compare art to gold and art to crypto?
Scott:
I don't know how to think about crypto. So art to gold, yeah. Out of any asset class, we look at when
we go back to
the correlation factors, art has the highest correlation to gold than any other asset class. The
correlation between
art and gold is somewhere between 0.2 and 0.3. So it definitely does exhibit some of those store
value
characteristics that the gold does.
Addison:
When people are flooding into gold, does it go up?
Scott:
I don't know the answer to that question. Yeah, we don't have data on that.
Addison:
Other than paintings, are there other pieces of art you're sourcing?
Scott:
There's not. When we look at returns in the art market, and we look at things like prints, for
example, or drawings,
the appreciation rate for those works just tends to be much less interesting and much more
unpredictable. So we
really very narrowly focused on this. There's one to $30 million per painting category. Blue chip
paintings,
well-known artists that have had more predictable returns.
Addison:
How does the platform make it easy for somebody who's interested in what you're talking
about? How do you
actually do it?
Scott:
So you go to the Masterworks website, you basically request access, get on the phone with our
membership team. Our
membership team will run you through how you're investing today, what your portfolio looks like,
what your risk
tolerance is. Talk about liquidity, both from a three to 10 year horizon until we sell a painting,
as well as our
secondary market. Activate your account, and then make recommendations based on your investor
profile and offerings
we have on the platform.
Addison:
How many offerings do you have right now? And how often do they come? You said every seven to
10
days?
Scott:
I think we're the largest filer of public offerings with the SEC now. Filing one every seven to 10
days. We've done,
I think, 70 something offerings now. So they're coming out faster and faster. I think in the past
four or five
weeks, we've done six or seven offerings.
Addison:
So if you go to the website you'd be able to view whatever inventory you have?
Scott:
Yeah. And we generally see million dollar paintings sell out in a couple of days. $10 million
paintings sell out in a
month, $20 million paintings sell out in two or three months. So depending on the size of the
painting, it sort of
determines how long it'll be on the platform.
Addison:
So I was wondering how the shares work. Does it, if you're saying sell out, that means you're
essentially
selling shares independently?
Scott:
Yeah.
Addison:
How do you determine what the offering is?
Scott:
Our shares are $20 a share. So we just divide up the painting by that amount. And then people can
really invest in
whatever they want. We'll work with investors on whatever minimum investment makes sense after they
go through that
investor profile. But, we work with smaller investors and bigger investors, so anyone can invest.
Addison:
So 20 bucks a share is for everything?
Scott:
Yep.
Addison:
So if I signed up on the website I could look at and choose the paintings I want to invest
in?
Scott:
We have a secondary market too, so we're just talking about the IPOs right now, but after the IPOs
are closed, the
securities are available in the secondary market 90 days later. So people can just trade there.
Addison:
All right. I want to get your opinion on NFTs.
Scott:
Do you know my opinion when you're asking that question?
Addison:
No I don't. I actually want to know your opinion.
Scott:
Yeah. I'm an outspoken anti NFT person.
Addison:
Explain why that is. And I'm going to guess first, and then you can correct me if I'm wrong.
Because you're
dealing in hard assets. Like a real product and NFTs are in our parlance might be fictional. But
people are
buying for large amounts of money. Before you answer, you just described that,
it's a non
fungible token, meaning it's a digital asset that people can own on the Blockchain and they can
trade it because
they have ownership in it. But it could just be a picture.
Scott:
So here's why I think. Let's say NFTs are a scam, but, here's why we don't believe in NFTs at all.
When we buy a $20
million Basquiat, we don't own the copyright to that painting. The artist foundation owns the
copyright or the
artist by law. So copyright does not transfer with the object that we buy, at least in the US. So
when we think
about NFTs from our very narrow perspective, you're taking a digital image that you have no IP
ownership in. You're
putting it on the Blockchain. And because it's on the Blockchain, you're claiming that it's
something, even if the
person who's buying that token has no ownership rights to it. Like I own all of these digital images
in NFTs, just
as much as the people that paid millions of dollars for them. So we don't understand what's going
on. Right? Like it
just seems like total craziness to us.
Addison:
We were thinking about taking the first episode of the Daily Reckoning and turning it into an
NFT and see
what would happen. But then we couldn't find it.
Scott:
I mean, look, I think NFTs for creators are great. People can make millions of dollars selling this
stuff. I just
don't know. I don't know who buys it down the road.
Addison:
Yeah it's down on Canal Street, right? You don't know what you get.
Scott:
The only thing I would say is that I do think there is a real world. I mean, there's obviously
billions of dollars
that are spent on virtual goods like video games and things like that every single year. Right? And
people are
spending $50 for those virtual goods or a hundred dollars or $200, $300 like that. That makes total
sense to me that
I understand. I just don't understand NFTs, in the context of fine art, where people are spending
millions of
dollars on a digital image.
Addison:
While it's happening.
Scott:
It's happening.
Addison:
All right, Scott, you know my middle name is Scott.
Scott:
Nice. I didn't know that. I think that's a good choice for your mom.
Addison:
I grew up and until I met my wife, everyone called me Scott, and then she discovered a piece
of mail that had
my formal name Addison on it and I had it changed. There you go. All right. It's good to talk to
you. I'm sure
we'll be back in touch. There's a lot that we can discuss. I appreciate you taking your time. I
know you had a
busy day and you have one tomorrow. So, thanks for joining me. And we'll talk again.
Scott:
Thanks for having me.