Wiggin Sessions

Surviving and Thriving The Post-Pandemic Economy 2021, Episode 57

Featuring Scott Lynn

Addison Wiggin

Hosted By:

Addison Wiggin

The Wiggin Sessions, conceived during the COVID-19 pandemic and tornado warning in Baltimore, Maryland. Addison started interviewing key thinkers on Politics, Science, Economics, Philosophy and History to find out how their ideas impact financial markets and our financial lives. Key thinkers include Jim Rickards, Bill Bonner, George Gilder, James Altucher and over 50 others.

In 2020, he launched a new project called Consilience, which is an enlightenment era term that means “the unity of knowledge”. He is the co-author of the New York Times best-selling books Financial Reckoning Day and Empire of Debt, as well as The Demise of the Dollar and The Little Book of the Shrinking Dollar. Addison is the writer and executive producer of the documentary I.O.U.S.A., an expose of the national debt, shortlisted for an Academy Award in 2008.

Scott Lynn

Featuring:

Scott Lynn

Scott Lynn has been an active collector of contemporary art for more than fifteen years and has built an internationally-recognized collection of Abstract Expressionism that has included works by Clyfford Still, Barnett Newman, Mark Rothko, Willem de Kooning, and more. In addition to Masterworks, Mr. Lynn serves on the board of v2 ventures(Adparlor, Giant Media, Reachmobi, Amply, and Sellozo), Payability, and the Brooklyn Rail (a non-profit publication in the art industry).

“Adding Fine Art to Your Investment Portfolio”

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.

“Evaluating Fine Art as an Asset Class”

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.

“Why You Should Consider Alternatives”

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.

“How Art Investing Works”

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.

You can purchase shares in great masterpieces from artists like Pablo Picasso, Claude Monet, Andy Warhol, and more, when you join an exclusive community of art investors with Masterworks. Click here for details.

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