The most comprehensive how-to guide of its kind, Skate’s Art Investment Handbook demystifies art investing. It provides a detailed, dispassionate look at the global art market and outlines an original analytical model and rational strategies for profiting from this alternative asset class.

2. THE INFRASTRUCTURE
OF THE MARKET FOR
INVESTMENT-QUALITY ART
1
s an alternative investment, how should art be valued, and how
A does the valuation process work? How can the investment perform-
ance of art be measured? These are just a few of the questions addressed
in this opening chapter.
Art can be an extraordinarily attractive investment. Tales of astonish-
ing financial returns abound, adding some merit to the argument that in-
vestors who move part of their funds into art can improve the risk-return
profile of their portfolios and achieve optimal diversification (see Table 1-1).
However, art investments are also distinguished by a number of less
quantifiable benefits. Investing in art is arguably more intellectually, aes-
thetically, and socially rewarding than investing in other asset classes.
Owning important art has a significant “hands-off” element, meaning that
investors do not need to worry unduly about whether their assets will be-
come embarrassing liabilities as a result of poor management, adverse
market conditions, or other events outside their control. A cherished work
of art may decline in value, but the public will be unaware of this unless
the work is brought to market. If a negative return does occur, the joy of
ownership can compensate for the financial loss. These less tangible at-
tributes of art investment do not apply to other asset classes, aside from
residential property and flagship commercial real estate.
1

3. 2 S K AT E ’ S A R T I N V E S T M E N T H A N D B O O K
Table 1-1 Top 10 Investment Returns Achieved on Repeat Sales of Artworks from Skate’s Top 1000
Initial Holding Exit
Year of Investment, Period Price,3
ERR1 Rank2 Artist Title Creation ($) (Years) ($)
86.29% 77 Francis Bacon Three Studies 1976 5,168,000 3 25,000,893
for Self-Portrait
42.09% 982 Jean-Michel Untitled (Head) 1981 1,799,500 3 5,097,092
Basquiat
40.09% 297 Joan Miró Le Coq 1940 2,996,415 4 11,662,114
39.01% 874 Gerhard Richter Abstraktes Bild 1992 467,175 7 5,500,000
33.95% 108 Andy Warhol Liz 1963 3,580,750 6 21,000,893
30.60% 249 Gerhard Richter Abstraktes 1987 3,367,500 5 13,000,893
Bild 625
30.11% 594 Roy Lichtenstein Still Life with 1972 640,500 9 7,148,265
Stretcher, Mirror,
Bowl of Fruit
28.15% 556 Andy Warhol Campbell’s Soup Can 1962 2, 415, 500 5 7,500,893
(Pepper Pot)
27.75% 833 Paul Cézanne Carrière de Bibemus 1898 3,190,000 3 6,000,000
1 Effective rate of return, calculated on an annualized basis with all transaction values (if not in dollars) converted to dollars as of the transaction
date, with the buyer’s premium paid capitalized as part of the initial investment and the seller’s commission deducted from the proceeds to the
investor, all in nominal dollar terms, before ownership costs and taxes.
2 Artwork’s rank in Skate’s Top 1000 as of April 30, 2009.
3 Hammer price before seller’s commission.
Source: www.skatepress.com.
Art differs considerably from most other investment classes in that the
valuation methods and investment strategies employed are fundamentally
different from those used for traditional investments. The investor who
can recognize and adjust to this reality will be well positioned to consider
investing in art. There are five key reasons why art is such a special alter-
native investment:
1. No standardization of product. From a financial point of view, it would
be ideal if major artists produced artworks in standard series. Stan-
dardization would make pricing and performance measurement far
easier. Unfortunately for financial minds, art is generally not created
in standard product series the way bonds or equities are, although there
are certain exceptions to this, such as prints, sculptures, and photo-
graphs.1 Generally speaking, in the fine art segment, each individual

4. THE INFRASTRUCTURE OF THE MARKET FOR INVESTMENT-QUALITY ART 3
asset—each work of art—is unique. Complicating matters even more
is the fact that value drivers such as provenance, cultural relevance,
aesthetic preferences, and the emotional context of art transactions
have significant influence on the value of art, further limiting a buyer’s
ability to apply universal, quantifiable rules to art investment (see
Chapter 4 for a thorough discussion of valuation drivers). These valu-
ation drivers diminish the accuracy and reliability of any benchmark-
ing, indexing, or price research for artworks. This lack of reliable
benchmarks is something for investors to bear in mind when they are
confronted with upbeat statements from art funds and auctioneers
boasting of skyrocketing prices. At certain times, prices in general may
seem to be rising, but for individual artworks, performance varies con-
siderably over time. No index-tracking investment strategy is possible,
as mimicking the performance of an index requires the ability to allo-
cate capital to the constituents of that index.
2. Lack of sufficient price data for art transactions. Even though it is esti-
mated that the auction houses’ share of the art market is no more than
50 percent, auction results and catalogue listings—being publicly
available and readily assembled—continue to be the principal sources
of data on art sales.2 Art transactions other than these are generally
handled privately, and as a result, no price records are publicly avail-
able. Museum acquisition reports and financial statements from art
funds are becoming increasingly important and interesting sources of
price data, but this emerging information flow remains minor in the
overall scheme of things. Thus, price transparency is fleeting, since a
significant share of price information for art sales remains inaccessible
to the greater market community.
3. Unequal access to information. As in any public investment market,
knowledge is the cornerstone and the foundation of a profitable art in-
vestment. Most important are the knowledge of a work’s ownership
history, price data, historical facts and cultural connections, authenti-
cation standards, and collecting habits and preferences, or what Wall
Street would call buyers’ investment policies. In short, such knowledge
and related data allow a person to value an investment target or design
an optimal exit strategy (generally referred to as deaccessioning in the

5. 4 S K AT E ’ S A R T I N V E S T M E N T H A N D B O O K
museum and collecting communities). In the conventional public in-
vestment market, the equivalent fundamental valuation elements are
available to investors through channels born out of laws and standards
imposed by governments and regulatory agencies. By contrast, in the
art market, accurate and complete information, which is key to deter-
mining profit potential in any marketplace, remains private and is
closely guarded by market professionals such as collectors, dealers,
galleries, and auction houses. In these secretive and private domains,
knowledge often varies among parties to a significant degree. The un-
willingness to share knowledge and the emphasis on secrecy are not
merely benign idiosyncrasies of the art world; rather, this control of in-
formation is more sinister, for it is the means by which market pro-
fessionals gain and retain an advantage over other market players.
Without access to key information, market newcomers and investors
struggle under a handicap that will limit their investment returns and
profitability ranges.
4. No recurring cash-generating capability and high ownership costs. Unlike
equities, which may pay dividends, bonds, which pay interest, and real
estate that produces rental income, art does not generate cash. While a
few innovative ventures and some art funds do rent artworks from
their portfolios, the rental market remains limited. At the same time,
there are unique and sizable ownership costs involved in art invest-
ments. Insurance, security, climate control, restoration, and access
management, which means viewing and travel, are examples of own-
ership costs that result in an artwork’s consuming cash rather than
generating it.3 This is an unfortunate quality for an investment asset
to have. Although restoration and access management costs are tradi-
tionally considered to be ownership costs, they can be treated as value-
enhancement expenses that can be capitalized in a work’s valuation
step-up as a part of a rational art investment process. (See Chapter 5
for a more detailed discussion of this topic.)
5. Significant transaction costs and low liquidity. The art market is gener-
ally illiquid. This means that owners of high-value works cannot ex-
pect to dispose of them in a few days or even weeks. Lead times for
significant disposals often have to be measured in months, and even

6. THE INFRASTRUCTURE OF THE MARKET FOR INVESTMENT-QUALITY ART 5
then, they take place only when market conditions permit. Further-
more, liquidity in the art market is not localized to any continuously
functioning exchange such as a national stock exchange; instead, it
floats among major trading outlets such as the annual European Fine
Art Fair (TEFAF) in Maastricht, the Art Basel fairs in Switzerland and
Miami, and fine art auctions conducted chiefly in New York and Lon-
don at set times during the year. While individual dealers and auction
houses may sometimes provide limited liquidity, such as advances on
future sales, there is no assurance that a work of art can be sold quickly
at “market price.” Moreover, although auction houses offer the opti-
mal price discovery process, this avenue comes with a hefty transac-
tion cost (see Chapter 2 for a detailed discussion of transaction costs).
Sale and price guarantees, in which a percentage of the expected sale
price is advanced to the seller prior to the auction’s taking place, are
generally offered only for exceptional works of art in an environment
of market growth.
Before they commit funds to art, investors should be mindful of the
potential handicap that can result from a lack of full knowledge of both
price data and meaningful comparisons. Generally speaking, market pro-
fessionals value art on an analogue basis, that is, by building groups of
comparable transactions to justify the market value of a particular work
of art. Investors should keep in mind that the actual return on an art in-
vestment is simply the capital gain (or loss) achieved on the work less its
ownership and transaction costs. Thus, achieving a suitable return on a
special alternative investment such as a work of art requires knowledge and
experience. Not only must the right investment choice be made at the right
time, but the entire investment cycle must be carefully planned to achieve
positive returns after taking into account cash-consuming ownership costs,
prohibitively expensive transaction fees, and sporadic liquidity. Suitable re-
turns such as those listed in Table 1-1 should compare favorably with the
returns on publicly traded securities or relatively liquid debt instruments to
compensate for the specific risks related to art assets.
The next logical step involves determining how investment-quality art
can be selected from the enormous pool of artists and genres present in to-
day’s market.

7. 6 S K AT E ’ S A R T I N V E S T M E N T H A N D B O O K
INVESTMENT-QUALITY ART
The investor will find that there is a large supply of high-quality art on the
market, with the quantity of available work increasing daily. Unlike the sit-
uation with oil and certain precious metals, there is no dearth on the hori-
zon, and so no alternative needs to be found. In fact, the opposite is the
case. Once rather limited, the sources of art are now manifold and in-
creasingly global. Given the sheer wealth of human creativity over the
centuries and the continuing desire for creative expression, the supply of
art is unlikely to dry up. As the auction house Sotheby’s states in its annual
report: “It is not possible to measure with any particular accuracy the en-
tire international art market or to reach any conclusions regarding overall
competition because dealers and auction firms frequently do not publicly
report annual totals for auction sales, revenues or profits, and the amounts
reported may not be verifiable.”4 While accurate measurements are indeed
difficult to make as a result of the vast number of artworks and the contin-
uous flow of new material, an attempt can be made to estimate the size
of the market’s free float, defined as works of art that are available for
purchase.5
Sources of Purchasable Art
The five main sources of purchasable art are as follows:
1. The world’s museums hold well over 100 million works of art. Of this
figure, some 100,000 works can be expected to come to the market
each year through a process of deaccessioning—those exceptional cir-
cumstances in which a museum sells selected works from its collec-
tion for fund-raising or curatorial purposes.6
2. There are at least 10 million unique artworks for which historical price
records are stored in the world’s major price databases (discussed later
in Chapter 2). These works make up the bulk of the free float.
3. At least 1 million unique works of art come to market and are added
to these databases every year. Approximately 400,000 of these newly
added artworks are sold through nearly 1,000 annual international

8. THE INFRASTRUCTURE OF THE MARKET FOR INVESTMENT-QUALITY ART 7
auctions conducted by Christie’s, Sotheby’s, and other major auction
houses.7
4. Approximately 1 million individuals and estates (personal investment
vehicles), more than 50 art funds (collective investment vehicles), and
at least 500 museums purchase art on a regular basis. Galleries, deal-
ers, and other intermediaries are excluded from this count,8 but to put
the trade activity into perspective, it is worth noting that there were
4,658 galleries present at 51 major international art fairs throughout
the 2007–2008 art market season.9
5. At least 350,000 artists are listed in various directories, catalogues, and
encyclopedias. Of these, 13,900 have a public auction history, that is,
auction price records are accessible to individual collectors and art
market investors.10 Thousands of new names are added annually.11 A
single artist can produce anywhere from a hundred to several thou-
sand works of art during his or her lifetime.
In total, based on these data, it can be assumed that there are between
70 million and 150 million works of art in circulation on the market. Of
these, roughly 10 to 15 percent are included in free float. Each year, the
number of artworks in circulation grows by about 500,000, measured by
items that are newly produced and sold. Most of these new additions enter
into free float. The actual market for several thousand artists exceeds 1 mil-
lion transactions per year, resulting in an art market turnover ratio of less
than 1 percent. In addition, the percentage of total transaction volume rep-
resented by contemporary art is constantly growing.12
These estimates should be read as a broad-brush attempt to sketch the
size of the art market rather than as a scientific definition of its exact
boundaries and true depth. They are also grounded in contemporary per-
ceptions of what constitutes a work of art. As Arthur Danto wrote in his
seminal philosophical text inspired by Warhol’s Brillo box: “Until the twen-
tieth century it was tacitly believed that works of art were always identifi-
able as such. The philosophical problem now is to explain why they are
works of art. With Warhol it becomes clear that there is no special way a
work of art must be—it can look like a Brillo box, or it can look like a soup
can.”13 In the context of this book, an artwork might be defined simply

9. 8 S K AT E ’ S A R T I N V E S T M E N T H A N D B O O K
as something that modern collectors and investors are prepared to pay
money for.
The millions of investment opportunities open to today’s buyers range
in market value from several thousand dollars to tens of millions of dol-
lars. Furthermore, each artwork must be treated as a unique object of in-
vestment because of its individual physical and aesthetic aspects, as well
as the specific art valuation drivers such as provenance and the personal
sentiments brought by individual buyers.
While most market professionals recognize the need for a unified ap-
proach to art valuation, there is currently no single standard system for
classifying the millions of available artworks. Christie’s and Sotheby’s each
have between 10 and 15 different departments into which they classify
art assets, and auctions are conducted within those categories, such as
Contemporary, Impressionist & Modern, Nineteenth-Century European,
Russian, and so on. On the other hand, both Kusin & Co., an independent
economic research firm that focuses on the art market, and the U.S.
Library of Congress use a broader system that provides separate classes for
Fine Art, Sculpture, Prints & Printmaking, and other categories. Finally,
perhaps the most interesting classifications are offered by Gurr Johns, a
global art appraisal specialist, and Artfact, an online art auction service
provider. Both firms use several hundred classes for art and accordingly of-
fer highly detailed and specific approaches to art asset classification. Even
with this level of detail, however, certain overlaps and “hard to classify”
challenges do occur.
Since 2004, Skate’s has collected data on the world’s 1,000 most ex-
pensive artworks based on auction prices from 1985 through to the pres-
ent, which we refer to as Skate’s Top 1000 (Chapter 2 covers this topic in
greater detail). Skate’s Top 1000 is composed entirely of investment-quality
art produced by 183 artists, collectively valued at $13.185 billion as of April
30, 2009. As of this date, the threshold sale price for inclusion in Skate’s
Top 1000 was $5.6 million, although an investor does not need to spend
$5.6 million to ensure a solid investment return.
Investment-quality art is not solely defined by price, and Skate’s Top
1000 does not embrace every known example of investment-quality art. So
what else defines investment-quality art?

10. THE INFRASTRUCTURE OF THE MARKET FOR INVESTMENT-QUALITY ART 9
As a starting point, and subject to refinements that we will consider
later, artworks that have the potential to attract another buyer who would
be willing to pay a price equal to or in excess of the original purchase price
would be considered investment-quality art. In Chapters 3 and 4, we will
see that a significant capital gain on art investments requires a 30 to 35 per-
cent annualized pretax effective rate of return (ERR) to compensate for poor
liquidity, ownership and transaction costs, and “opportunity cost.” This is
the cost of forgoing the alternative return that would have been received
had the capital expended in acquiring the work been directed toward an-
other investment opportunity. This definition assumes, naturally, that ir-
rational factors such as the joy of ownership and social recognition are
excluded as valuation drivers that compensate for an otherwise lower fi-
nancial ERR. In terms of returns, this 30 to 35 percent requirement puts
art investments squarely on a par with the stated target for private equity
investments.
In addition, investment-quality art should be defined as works produced
by an artist who is already known to the public or who can be “brought pub-
lic” as a result of intrinsic features of his or her charisma or persona, the
ability to connect with a broad group of prospective buyers. We call this the
“equity story,” since it is not unlike the pitch given in conventional markets
to sell a stock or equity. There are two arguments supporting such a defi-
nition. The first is a comparison of investment-quality art with collectibles,
and the second is a statistical analysis of the chances of finding a new buyer
for a work of art while enjoying a significant return on such a sale.
Comparisons with Collectibles
Researchers, journalists, publishers, and collectors often group works of
fine art with collectibles. The common denominator in this analysis is the
passion brought to the process of acquisition in contrast to a return-
focused investment. Passion implies a love of the subject at hand, an emo-
tional attachment to similar objects already in one’s possession, and a zeal
for “the hunt.” In this model of acquisition, the rational mind is always pre-
pared to accept financial loss or inadequate returns as a trade-off for the joy
experienced through collecting. It is no wonder, then, that most collectors

11. 10 S K AT E ’ S A R T I N V E S T M E N T H A N D B O O K
around the world, as irrational as they may be, are rational enough not to
bet their entire fortunes on their collections. Many limit their exposure by
focusing on lower-end collectibles, such as sports memorabilia, coins,
stamps, and so forth.
Collecting art is usually significantly more expensive. It takes more
time and knowledge, per unit prices are considerably higher, the subject
matter is generally more complex, and, as we have seen, transaction and
ownership costs are greater. When they are carried away by their passion
for collecting, investors in fine art tend to comfort themselves with the
belief that art, relative to sports memorabilia and other collectibles, has
a greater chance of increasing significantly in value. The opportunity for
greater returns is the reward, or at least the justification, for risking much
larger amounts of capital. The reason why art can experience massive
valuation step-ups, while antique cars, stamps, or coins generally do not,
has to do with the following unique characteristics pertaining to fine art
objects:
1. Art is not a standard product, and it exists in an environment of inad-
equate disclosure and dissemination of information. Limited access to
information and the irrationality of buyers can be exploited to extract
high prices at exit. In contrast, coins, stamps, and baseball cards come
in series, with more efficient pricing and more readily and equally ac-
cessible information.
2. Buyers are more likely to form a personal attachment to art, since in
most cases it is unique and handmade, whereas collectibles tend to be
standardized and mechanically produced. The very personal connec-
tion between art and its buyers flows from the psychological con-
nection of the single human being to the many, mediated through
the projection of the artist’s creativity manifested in the artwork. The
buyer’s attempt to map himself or herself onto a timeline, onto an art-
work’s ownership history, and perhaps even onto the current celebrity
status of the artist can also contribute to the personal connection pe-
culiar to fine art ownership.
The key takeaway from this discussion is that art is made by a person
with a story. This factor is an important source of capital gain for artworks,

12. THE INFRASTRUCTURE OF THE MARKET FOR INVESTMENT-QUALITY ART 11
thus forming one part of the definition of investment-quality art presented
earlier.
Increased Chances of Achieving Capital Gain
The chances of finding a buyer for an artwork that is in one’s possession
and getting this person to pay a hefty premium on top of the original pur-
chase price increase as
1. A work of art begins to appeal to a broader audience within the target
price category.
2. The artwork’s “story” gains credibility in the eyes of market profes-
sionals such as museum curators, professional intermediaries, art ad-
visors, and specialized media outlets. This professional endorsement
is critical to marketing the artwork to a wider audience.
Exiting successfully from an art investment is in many ways similar to
the process of prepping a private company for an initial public offering
(IPO) of its securities. These similarities are covered in detail in Chapter 5,
which also discusses successful art promotion tactics. The central idea in-
volves making art suitable for a broad spectrum of prospective investors
in the same way that preparation for an IPO makes a company attractive
to securities investors.
The willingness of dealers, galleries, auction houses, museums, the
media, and other industry professionals to support the story of an artwork
is essential for building and grooming potential buyers. It also increases
the seller’s chances of exiting the investment with an acceptable return.
Despite their value in other investment contexts, contrarian approaches
rarely make sense in the world of art investments. Going with the crowd is
absolutely necessary when dealing with investment-quality art. Investing
in “no-name” artists who have no resources in place dedicated to “taking
them public” is not a return-focused investment strategy. Fortunes in art
are made in the spotlight of publicity, not outside of it.
Any estimate of the size of the investment-quality art market must in-
clude artworks sold at major auctions and through the world’s largest gal-
leries. These catalogued sales, with proven transaction records and duly

13. 12 S K AT E ’ S A R T I N V E S T M E N T H A N D B O O K
conducted research into the works in question, are the equivalent of listed
equities—securities that trade on a public exchange and thus possess a
level of marketability far in excess of that of the securities of privately held
companies. The power of well-branded auction houses and dealers rests
firmly on their ability to label art as investment quality and to provide pub-
lic access to it. Purchasing art outside of auctions and major galleries makes
it harder to find buyers for the assets once the decision to exit is made.
While established auction houses and dealers may not be able to give sell-
ers a firm bid or price guarantee for an artwork, the chances of a successful
exit on agreeable terms are significantly higher.
THE ART MARKET VERSUS OTHER
A LT E R N AT I V E I N V E S T M E N T M A R K E T S
Defining the investment-quality art market as the market commanded by
well-established dealers and auction houses allows us to make a fairly ac-
curate measurement of the size of the market and its trading volumes.
The European Fine Art Foundation (TEFAF) is best known for its an-
nual art fair in Maastricht, one of the most respected and well-attended
events in the art market calendar. Since 2002, TEFAF has published an an-
nual survey of the international art market. The most recent study—“Glob-
alisation and the Art Market: Emerging Economies and the Art Trade in
2008,” an illuminating research guide written by Dr. Clare McAndrew and
published in 2009—estimated that the total size of the global art market
trade was €48.1 billion (approximately $66 billion) in 2007. Art trading vol-
umes are almost equally shared between auctions and dealers, with 52 per-
cent and 48 percent, respectively. The United States held 41 percent of the
global art trade and the European Union accounted for 41 percent, of
which the United Kingdom was the greatest contributor, with 30 percent
of global trade. China accounted for 8 percent of the global art market.14
To put these figures in perspective, the volume of trades throughout
the entire art market corresponds to roughly twice the annual trading vol-
ume of Microchip Technologies, a leading producer of microcontrollers,
which, at the time this was written, had an annual volume on the Nasdaq
exchange of approximately $30 billion. This is also approximately the same

14. THE INFRASTRUCTURE OF THE MARKET FOR INVESTMENT-QUALITY ART 13
volume as the entire Philippine Stock Table 1-2 Trading Volumes by Auction House in 2007*
Exchange.
1. Christie’s $6.3 billion
The financial reports published by
2. Sotheby’s $6.184 billion
Sotheby’s, one of two major auction
3. Phillips de Pury $600 million
houses listed publicly and the world’s
4. Bonhams $307.7 million
largest listed art business in general,
5. China Guardian $239.45 million
provide another helpful source for
6. Beijing Poly International $220.5 million
monitoring the size of the art market.
According to Sotheby’s annual report, *Auctions with over $100 million in annual turnover based on publicly stated volumes.
Source: www.skatepress.com.
Sotheby’s and Christie’s together com-
manded approximately $12.5 billion in auction sales in 2007 (see Table
1-2). Sotheby’s was responsible for about 48 percent of the total aggregate
auction sales of the two major auction houses.15 Overall, Sotheby’s repre-
sents close to 23 percent of the global art trade, with the rest of the market
share belonging to Christie’s, smaller auction houses, and private sales by
dealers, individuals, and art galleries.
Art is fairly illiquid, with less than 1 percent of art assets changing
hands each year. Thus, we can estimate that the size of the entire art mar-
ket fell somewhere in the range of $4 to $6 trillion as of the end of 2008.
About $400 billion of this amount is in free float, with the rest being closely
held by museums around the world.
Finally, in terms of value distribution, there are thousands of artworks
valued in excess of $1 million. In 2007, there were 1,254 works sold at pub-
lic auction for more than $1 million, and in 2006, there were 810 works
sold. Since 1985, there have been 416 works sold at public auction for more
than $10 million. To put these figures in perspective, more than 90 percent
of auction sales and perhaps an even larger percentage of gallery and dealer
transactions are below $15,000.16
When we compare the art market with other investment markets, it
bears a number of similarities to a large emerging-market economy in which
the ownership of most valuable assets is in state, or quasi-state, hands. In-
deed, many national museums look a lot like national champions and sov-
ereign wealth funds. With two notable exceptions, no single publicly
disclosed art transaction has exceeded $100 million, and most deals are on
the micro level. By way of comparison, this is similar to the Philippine
Stock Market activity report in terms of trading volumes and liquidity.

15. 14 S K AT E ’ S A R T I N V E S T M E N T H A N D B O O K
No truly reliable art market performance benchmark exists today for
an art investor or collector to reference. Since every artwork is unique and
the art market offers discrete rather than continuous liquidity, averaging
and indexing are of limited practical use. There is no way to invest in the
underlying assets of an art market index. (A more detailed discussion of
available art market indexes is included in Chapter 2.)
Despite the problematic nature of art-market indexing, scholars and
practitioners seem to have reached a consensus in recent years favoring
the use of data on repeat sales to measure performance. We have been early
supporters and advocates of this approach, publishing the first edition of
Skate’s Art Investment Handbook in 2006. Repeat sales data are based on
transactions for the same artwork appearing at auction more than once.
This allows multiple price records to be fixed and facilitates the calculation
of effective rates of return between such sales. Although these data do not
represent the entire market for investment-quality art, the focus on repeat
sales permits us to measure accurately the performance of a series of art
investments made in the auction market. According to auction records, no
more than 20 percent of art deals each year qualify as repeat sales. The re-
maining 80 percent of transactions either take place privately or involve
works of art with no prior public price record. Chapter 5 provides a detailed
analysis of investment returns based on repeat sales, and Appendix C con-
tains a complete record of repeat sales for artworks that are currently listed
in Skate’s Top 1000.
Unlike other mainstream investment markets, or even the real estate
market, the world of art investment is largely unregulated. In most juris-
dictions, the art trade is governed by laws and regulations that are not
specific to art, including import and export regulations and regulations
concerning cultural property, ownership, data protection, privacy, and
money laundering. Depending upon the place in which a transaction oc-
curs, there may also be the issue of VAT or sales tax. In some jurisdictions,
auction businesses are regulated, the New York City Auction Regulations
being one such example.17
A very important feature of the art market is its significant counter-
party risk. Counterparty risk can be defined as the risk that the other party
in an agreement or transaction will default on its obligations. The presence
of auction houses as intermediaries does not remove these risks, but it

16. THE INFRASTRUCTURE OF THE MARKET FOR INVESTMENT-QUALITY ART 15
Table 1-3 Allocation of Skate's Top 1000 Artworks by Auction House
Auction House Number of Works Total Value ($)
Christie’s 506 6,555,300,719
Sotheby’s 467 6,302,893,946
Phillips de Pury 18 197,044,055
Binoche & Godeau 2 61,895,900
Aguttes 2 25,536,730
Ader Picard Tajan 2 20,563,290
Piasa 2 15,823,354
Deutscher-Menzies 1 6,498,420
Source: www.skatepress.com.
significantly reduces them. Most auction houses and virtually all art dealers
however, are small businesses that publish no financial statements and
that fall outside any significant regulatory requirements concerning trade
standards. Moreover, the art industry is governed more by reputation and
trust than by laws and regulations. Coupled with unequal access to infor-
mation and poor price transparency, counterparty risk creates a fertile
breeding ground for price manipulation, fraud, other questionable market
practices, and outright criminal activity. These risks are explored further
in Chapter 2, and a discussion of risks involving the purchase of stolen art
is included in Chapter 8.
The art market’s poorly regulated trading environment, abundant with
counterparty risk, makes established auction houses and dealers valuable
as intermediaries (see Table 1-3). Established auction houses and dealers
endorse the market for investment-quality art by filtering the flow of art-
works and removing as many counterparty and asset-specific risks as pos-
sible. This is clearly a very important service.
THE COMPONENTS OF THE MARKET FOR
INVESTMENT-QUALITY ART
An easy way to visualize the art market is to imagine the two pillars of sup-
ply and demand supporting a large area filled by the art industry. The art
industry is composed of trade, services, and media companies.

17. 16 S K AT E ’ S A R T I N V E S T M E N T H A N D B O O K
Supply and Demand
The supply and demand sides together comprise five classes of investors:
1. Old money: individuals and their estates who historically have allocated
capital to art, thereby establishing collecting traditions
2. New money: individuals and their estates with no family collecting tra-
dition
3. Professional art dealers and galleries: market movers who purchase art-
works on their own account
4. Museums and affiliated pools of capital: individuals, such as “friends of
the museum” and patrons, who sponsor museum purchases and di-
vestitures
5. Professional asset managers: traditional asset managers who allocate
capital to art and managers of collective investment schemes focused
on art, such as art funds and segregated art capital pools
Needless to say, the supply and demand sides are further segmented
by geography (see Table 1-4) and by the amount of capital allocated to or in-
vested in art.
The involvement of these investor classes in the supply and demand
structure obviously varies over time, but they are key drivers of market ac-
tivity. Their involvement is reflected in shifts in value for particular styles,
genres, and periods as fashion and tastes change and fortunes wax and
wane. For example, at times of economic growth and bullish art market per-
formance, new money and professional art dealers become dominant
among buyers, with old money and museums being most active as sellers.
Conversely, during economic downturns, old money and museums tend to
migrate toward and become dominant among the buyers, while on such oc-
casions the sellers are represented mostly by more speculative new money
and professional art dealers, who operate with a shorter time horizon.
While museums contain predominantly investment-quality art, these
works are never likely to be traded. New money, along with professional art
dealers and galleries, provides the majority of the free float in the market
for investment-quality art. Old money is a consistent source of demand and

18. THE INFRASTRUCTURE OF THE MARKET FOR INVESTMENT-QUALITY ART 17
occasionally a source of supply, as de-
Table 1-4 Geographic Distribution of Auction Trading*
fined by Sotheby’s “4D” concept: Death,
Country Volume Value
Divorce, Debt, and Discretion, which
Austria 1.6% 0.6%
are equally applicable to the new money
Belgium 4.1% 0.4%
investor class (see Figure 1-1).
Denmark 1.2% 0.4%
Despite the emergence of well over
Finland 0.6% 0.1%
50 art funds over the last five years, pro-
France 18.1% 6.4%
fessional asset managers, including art
Germany 12.8% 2.9%
funds, remain the smallest and least
Ireland 1.1% 0.5%
important investor class. Somewhere
Italy 5.5% 2.8%
in the region of $250 million has been
Netherlands 2.4% 1.1%
committed to art funds thus far (see
Portugal 0.2% 0.0%
Chapter 7 for a detailed discussion of
Spain 3.5% 0.8%
art funds). Because of factors such as
Sweden 3.6% 1.0%
the joy of ownership, low price trans-
United Kingdom 14.5% 26.8%
parency, and social prestige, investors
EU 27 70.9% 44.4%
generally prefer to purchase art directly
Switzerland 3.5% 1.9%
from dealers or at auctions rather than
Other extra-EU 0.4% 0.3%
through collective investment vehicles.
United States 17.2% 45.7%
One of the few forms of institutional
China 1.9% 5.0%
art investing to have blossomed over
Rest of the world 6.1% 2.7%
the years is the pools of capital built
Total 100.0% 100.0%
around well-established museums, in-
cluding both contributions from donors * For those who are interested in aggregate market statistics, regardless of how
accurate the data are, Dr. Clare McAndrew’s book The Art Economy: An In-
for new acquisitions and single-owner- vestor’s Guide to the Art Market (Dublin: Liffey Press, 2007) is highly recom-
funded capital pools for the creation mended. This book has actually used a lot of the original Skate’s Art Investment
Handbook methodologies for art asset pricing and market definitions. Another
of private museums such as the Guggen- valuable source is Contemporary Art Market 2007/2008 Report, by Artprice,
FIAC, and Axa Art.
heim in Abu Dhabi and the Pinchuk
Source: Arts Economics (2007)/Artprice (2007).
Art Center in Ukraine. The various cap-
ital pools built around museums hold
over $3 billion in capital commitments and are growing at a faster pace
than stand-alone art funds.18
High-net-worth individuals (HNWIs) remain the backbone of supply
and demand for the art market worldwide, and it is largely the dynamics of
wealth distribution that determine the price and liquidity trends for in-
vestment-quality art.

19. 18 S K AT E ’ S A R T I N V E S T M E N T H A N D B O O K
Figure 1-1
Corporations
Relationships—Converting
Private
Auction Opportunities Individuals
clients
Estates
Sources of Dealers
business
Museums
Institutions
The 4Ds
Principal reasons for sale
Death Divorce Discretion Debt
Changes in taste or Strong
Redecorating
collection focus market
Source: Sotheby’s 2007 Annual Report
The annual “World Wealth Report” published by Capgemini and Mer-
rill Lynch is perhaps the most authoritative source of information on
trends in high-net-worth wealth. Its 2007 findings provide a clear explana-
tion of why major auction houses and dealers have gone to such lengths in
recent years to access the new emerging markets in China, India, and the
Middle East (see Figure 1-2).
More than 10 million individuals worldwide have financial assets in
excess of $1 million and are thus classified as HNWIs. On average, each
HNWI had slightly more than $4 million in assets in early 2008, prior to
the market crash. In total, they controlled $40.7 trillion in assets.19 Our es-
timated free float of investment-quality art is less than 1 percent of the total
financial assets held by HNWIs. The annual volume of the art trade is just
0.15 percent of the total financial assets controlled by HNWIs.
Private bankers and investment advisors tend to classify art pur-
chases as investments of passion (see Figure 1-3). More often than not, the

20. THE INFRASTRUCTURE OF THE MARKET FOR INVESTMENT-QUALITY ART 19
CAGR Annual Growth
Figure 1-2 HNWI Wealth
2005–2007 2006–2007 Distribution, 2005–2007
10.4% 9.4%
(trillions of dollars)
$33.5 $37.2 $40.7
45 trillion trillion trillion
1
40
0.9 1.7
35 1.4 6.2
0.8
1.3 5.1 % Change Total
HNWI Wealth, by
Global 30 4.2 Region, 2006–2007
HNWI 9.5
Wealth 25 8.4
(in $ 7.6
trillions)
20
10.6 Africa 14.9%
10.1
15 9.4 Middle East 17.5%
Latin America 20.4%
10
Asia-Pacific 12.5%
5 10.2 11.3 11.7 Europe 5.3%
North America 4.4%
0
2005 2006 2007
Source: Capgemini and Merrill Lynch, “World Wealth Report, 2008.”
100% 2% Figure 1-3 Investments
5.5% 7% 6% 4% 8% 8%
90% 5% 3% 6% 6% 5%
of Passion and Portfolio
6%
8% 10%
80%
9% 14% 7% 6% Structure (in % of dollar
10% 7% 7%
11% 13% volume, 2007)
70%
12% 9% 15% 9%
60% 13% 14%
12% 12%
14% 13%
50%
17% 13%
12% 12%
40% 14%
19%
11% 15%
30% 22% 21%
16% 11%
20% 13% 10%
10% 16% 17% 17% 18% 16%
14%
0%
Global North America Europe Asia-Pacific Latin America Middle East
Miscellaneous Wellness Jewelry, gems, and watches
Sports investments Luxury consumables Art collections
Other collectibles Luxury/experiential travel Luxury collectibles
Source: Capgemini and Merrill Lynch, “World Wealth Report, 2008.”

21. 20 S K AT E ’ S A R T I N V E S T M E N T H A N D B O O K
Table 1-5 Art Market Versus Capital Market Infrastructure
Segment Art Market Capital Markets
Data Four professional players plus specialized Market dominated by duopoly of Thomson Reuters
departments of large auction houses; combined and Bloomberg, with dozens of international and
data sales of less than $150 million per annum national companies that are well established
and profitable; combined revenues in tens of
billons of dollars
Media Very diverse market, although largely dominated by Market run by dozens of global and regional
the print media and a limited number of quality specialized media groups with all possible distribution
online media outlets. Combined advertising, channels employed, including television and radio.
subscription, and copy sales less than $0.1 billion Global sales of financial media companies in
per annum excess of $50 billion
Vetting aids Cottage industry of experts helping to determine Enormous industry ensuring the compliance of
authenticity and other art asset–specific risks and publicly traded securities and their issuers with
to ensure compliance with droit de suite* rules in market regulation; government agencies, law and
applicable jurisdictions audit firms, corporate departments, and multiple
professionals involved
Trading, auctions Auctions represent about half of the trading Almost all institutional securities trading is handled
volumes. About 60% of those volumes are online on either stock exchanges or electronic trading
dominated by Christie’s and Sotheby’s, with the platforms. Over-the-counter deals are mostly limited
balance going to more than 3,000 smaller and to securities that meet no listing requirements or have
mostly national/regional auctions limited liquidity
Trading, dealers About half of the trading volume occurs in Individual/retail trading is largely conducted online
unrecorded private deals in all price categories, and is “plugged” into institutional trading platforms
including widespread barter practice. with well-regulated price transparency and dealing
Intermediaries are largely a cottage industry with rules.The industry is well consolidated globally, and
a few large name dealers, all of whom have limited in developed markets intermediaries are always
international representation nationally regulated institutions
Ownership services No significant specialized art insurers (industry is Enormous industry, with trillions of dollars in
(finance) operated by art insurance departments of large collective investment, lending, and insurance
insurance companies).Tiny art banking with no premiums worldwide. Industry includes global,
more than $500 million in annual art lending national, and midsize regional companies
volume. Small but growing collective investment of all sorts
industry (with less than $1 billion in funds under
management), only five or six large players in this
segment worldwide
Ownership services Fragmented cottage industry of small businesses, Specialized audit, legal, and computer/IT services
(other) including restoration, advisory, software, security, represent a massive industry operated by global firms
transportation, materials, education, appraisal,
and others. Almost every segment has one or two
national leaders in major markets
*See Chapter 2 for a detailed discussion of royalties paid to artists’ families and the droit de suite (DDS) regulations.

22. THE INFRASTRUCTURE OF THE MARKET FOR INVESTMENT-QUALITY ART 21
“irrational joy of ownership” factor plays a far more important role in the
decision process than the quest for adequate investment returns. Globally,
art is the second most important investment of passion, after private jets
and other so-called luxury collectibles, which also includes rare automo-
biles and yachts.20
The Art Industry
The infrastructure of the art industry comprises three principal segments,
each with various subsegments. The principal segments are
1. Trading: auctions, dealers, and specialty stores, including e-commerce
retailers
2. Services: investment decision and ownership services, including advi-
sory, financial, security, and collection management services
3. Media: publications, art fairs, education, and databases
Within these principal segments, four primary types of investment
aids that support art buyers and sellers in the investment and divestment
processes can be identified: trade decision aids, or information; vetting
aids; trading channels; and ownership services.
When discussing the infrastructure of the art market and art invest-
ment, it is useful to discuss these four types of investment aids in terms of
how they compare to their peers in the capital markets (see Table 1-5). A
more detailed discussion of the art industry can be found in Chapter 7, in-
cluding a discussion of several of the most interesting business models.
CHAPTER SUMMARY
A successful art investment strategy requires the ability to
1. Focus on investment-quality art
2. Mitigate the downside risk of art investment, specifically, the risk of
purchasing artworks with compromised ownership titles or question-
able authenticity

23. 22 S K AT E ’ S A R T I N V E S T M E N T H A N D B O O K
3. Minimize ownership and transaction costs by engaging in transac-
tions outside expensive auction houses, and by minimizing per unit
ownership costs by spreading them across larger collections and us-
ing shorter holding periods
4. Sell to the next buyer at an acceptable profit, despite the relatively illiq-
uid environment and uneven information access
This model for art investments is very different indeed from applying
financial equivalents, such as the capital asset pricing model (CAPM) and
earnings models, used in equity investing, fixed income, and derivatives
math. It also differs from other rules-based approaches to successful in-
vestment strategies for mainstream assets. The key to creating a sizable
capital gain on an art investment lies in exploiting irrationality and using
hands-on tactics to build the appeal of one’s portfolio in the eyes of a
greater number of potential buyers. In the following pages, we suggest
a number of ways to use this approach and other strategies to conceive and
pursue successful art investments.

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