Ghost Story

The ghosts of Proust are those brittle couture-clad creatures that haunt the salons of fine hotels where they sip ballet pink Champagne. Perpetually enrobed in an air of melancholy, they climb the spiral staircase to the sacred solitude of their tiny perfect rooms. Drawing the papal purple velvet curtains they turn away from the the noise and the ill-mannered hordes and take to their beds. What else is there to do? As their heavy eyelids close on yet another day, the ghost damask wallpaper shimmers like a spectre.

Oh, the horror of imperfection. If only everyone behaved well and all the flowers were arranged just so life would be so much sweeter. Those who expect perfection and cannot tolerate anything less, suffer.

Take French fashion designer Yves Saint-Laurent. As his lover and business partner Pierre Bergé once said, “Yves was born with a nervous breakdown.”  Saint-Laurent would often retreat to their chateau in Normandy to sketch new collections and to recover from the excesses of Parisian night life. One afternoon Saint-Laurent returned to the chateau and noticed that the housekeeper had placed a bouquet of flowers in the dining room. It pained him to see the uninspired arrangement. He took a pair of nail scissors and painstakingly snipped the tops off each stem, a hundred tiny decapitations. Then he took to his room for the rest of the day.

Just as it’s unrealistic to expect perfection from our housekeepers—and even our fashion designers, after all Saint-Laurent was a great designer but not always a good one—it’s equally juvenile to expect that markets will behave the way we wish them to. As the industry mantra goes: past performance does not predict future returns. Yet many investors mentally latch onto past success and expect history to repeat itself.

After the crash in 2008 it took several years for the markets to regain momentum after which they went on a tear. Investors regularly boasted of 15-percent and up returns. DIY investors felt like geniuses and portfolio managers behaved like kings of the universe. But the wheel turns…These days it’s unlikely our quarterly reports show anything like those stellar returns. Where did all those investing geniuses go, I wonder?

According to John Bogle, the famous value investor and founder of Vanguard, we’ll be facing a tough decade ahead. His math is simple but hard to refute.

He divides total return into investment return and speculative return. Investment return is approximately 2-percent. That is the average dividend yield on U.S. equities. Corporate earnings growth adds another 6-percent for an 8-percent return. Pretty good so far.

Speculative return is how the market values a company’s earnings growth (price/earnings). Right now the P/E ratio is 20 but the historical average is 15. A lower P/E means lower stock prices, unless earnings skyrocket. So, based on Bogle’s back-of-the-napkin calculations, that 8-percent investment return plus a negative speculative return of, say, 3-percent, leaves us with an average return of 5-percent before inflation and before portfolio management fees. Throw in a couple of ghosts-in-the-machine like hedge funds, high-frequency traders and massive short-trades and things can get pretty hairy, pretty fast. (Hello Valeant!)

To mix my holiday metaphors, to avoid a fright upon finding a lump of coal in your retirement stocking, consider factoring a lower real return, somewhere between 1-to-4-percent, into your nest-egg calculations. Many companies today are priced for perfection but they could hit a snag.Don’t let your fantasy of perfect get in the way of a perfectly nice arrangement. Save a bit more, (or spend a bit less), as insurance against a decade of fair-to-middling market returns.

But, darlings, whatever you do, never skimp on pink Champagne.

Art Shop

 

Courtesy of qthomasbower

Celebrities and social climbers collect Warhol but what did Warhol collect?

“Keep the coffee tins—aluminum might go up!”

“Keep the batteries—copper might go up!”

According to Bob Colacello who worked with Warhol as the editor of Interview magazine and as his unofficial sales agent, “Warhol was not a collector; he was a hoarder.”

Back then a Warhol portrait started at $25,000. The key was to lure socialites to commission them. Trouble was, Warhol was not a social success. Cue Colacello who was a right charmer. “Pretty society women wanted their portraits done but it was their stockbroker/private equity husbands who were going to pay, so Andy would tell me to play up my Republican side,” says Colacello.

It was society “walker” Jerome Zipkin who amped Warhol’s fortunes. He gave subscriptions to Interview to all of his ladies—party circuit regulars like Betsey Bloomingdale, Nan Kempner, and Carolyn Roehm. The magazine had switched from covering film criticism to doing Q&As with famous people. Society types tripped over each other to land on the magazine’s cover. Colacello pocketed a small commission for each portrait he sold. Once, when a client paid for her’s with a large, uncut Colombian emerald, instead of cash, Warhol offered Colacello his own portrait. “He told me he knocked $3,000 of the price,” says Colacello.

Despite Warhol’s tightfistedness, Colacello managed to amass a small collection of his work. “I wish I hadn’t sold because it kept going up in value. Still, it did buy a place in East Hampton.”

Today, buying a Warhol is like buying shares in Microsoft. Solid, not sexy. But that’s where the similarities end. Art investing is a high-stakes game. Many people think they can clean up but survivorship bias distorts market returns. For every Frank Auerbach painting bought for $1.1 million in 2005 and sold for $2.3 million in 2006, there are hundreds of artists whose careers die a silent death. We only ever hear about the winners.

Unlike the major stock markets, the art market is insular and lacks transparency. Amazon and eBay may sell fancy pictures but the real deals are made privately. Price manipulation is the name of the game because dealers are expected to nurture artists’ careers. To do so, collectors are discouraged from selling works in the open market, and if they do so, gallery owners will bid up prices to keep the mystique alive. Because buying art is aspirational, not selling at auction could be career-ending for an artist.

Liquidity is another issue. Even more than in real estate, sometimes there’s absolutely no demand for a work of art. Like other ‘alternative’ investments such as hedge funds, returns from art are all over the map. However, due to high transaction and commission costs, realistic net returns over a 5-year holding period hover between 1%-5%. Not great shakes.

So why invest in art? Well, it’s pretty. What you lose in financial return you potentially gain in everyday pleasure. It’s doubtful that gazing at your investment statement provides the same spiritual uplift. Being an art collector also raises your social capital. There are art openings, cocktail parties, meet-the-artist powwows and so forth. It’s a special club—particularly at the upper echelons—that provides a global passport to hobnobbing.

But if the art market is a little too rich for you, then follow Warhol and invest in physical commodities. Aluminum, copper, iron…demand is bound to pick up one day.