- The central theses
- – With Masterworks you can buy shares in expensive, investor-quality works of art.
- – Investing in the fine arts can be a great way to diversify your portfolio into an asset that is not highly correlated to the stock market.
- – Masterworks is a new company and investing in art is risky. So don’t invest more than you’d like to lose.
You’ve likely seen clips of these fancy white-gloved fine art auctions. Sophisticated investors buy pieces for hundreds of thousands of dollars, or even a million or more. It’s a popular pastime for the world’s rich who have made a return of 5.3% annually and collectively hold around $ 1.74 trillion Dollars in the fine arts, according to a recent Citi report.
As an industry that is so great, you might think that investing in the fine arts is beyond your means, and if you are not Bill Gates, it probably is. But that’s where Masterworks comes in.
This unique platform enables people to buy shares in a work of art that almost anyone can afford. It’s a simple solution to a tough problem, but there’s a lot more to consider whether or not it will suit you well.
about the company
Masterworks is an art investment platform that allows people to buy shares in pre-screened artwork that will later be resold at a (hopefully) higher price.
It was founded in 2017 so won’t be around for long. This is an important factor to consider as Masterworks plans to keep any artwork purchased for three to ten years.
Although the company has bought and sold interests in over 40 different pieces since its inception, its track record of selling artwork has so far consisted of only one painting: a $ 1.5 million painting of Mona Lisa by famous artist Banksy. It achieved a 32% return for its shareholders.
That’s an impressive sum, but it’s important to note that this is the only sale the company has made. Hence, it is not a good data point to judge the success of the platform. It will take longer.
Review of the Masterworks platform
If you want to invest in Masterworks, you need to sign up for a waiting list. As you fill out the form, you may be warned that there are several thousand people in front of you. Despite this hurdle, we received an invitation within a few hours.
After completing the process, you will need to link your bank account, verify your email address, and have a phone interview before you can actually invest in Masterworks. This additional interview step could put off some investors who want a low-key investment experience.
How Masterworks Shares work
As you’d expect, the process of converting a physical painting into stocks that many people can buy is a little complicated. In short, it works like this:
- Masterworks uses its proprietary model to identify good investments that are currently for sale.
- It buys a work of art and creates an LLC (taxed as a partnership) for each piece.
- Masterworks is offering $ 20 shares (minimum $ 500) in the LLC until all shares are purchased.
- The company holds on to the work of art for three to ten years and then sells it for a profit.
- The LLC will be dissolved and the proceeds will be distributed to shareholders, net of any fees.
Since you are essentially paying to be an affiliate in the company that started for each painting, know that at the end of the year you will be given a Form K-1 to file with your taxes.
You don’t have to pay any fees directly as these are taken out of any sales proceeds, but it’s important to be aware of this. Masterworks is relatively expensive: it charges 1.5% per year plus a 20% fee from the sales profit. This can seriously affect your return on investment.
You may be wondering what happens to the artwork after it is purchased. As you can probably see, it doesn’t (unfortunately) go to all of the shareholders’ homes like a traveling trophy. Instead, Masterworks takes responsibility for its safety and care, and even has a gallery in New York where its pieces can be displayed.
After all, you have to be willing to hold your stocks for the long term. You have no say if the painting sells. You leave the masterworks up to you. However, if you need to get out early, the company operates a bulletin board-like secondary market that allows you to put your stocks up for sale in case another investor wants to buy them. However, it may not be as simple as selling stocks.
Masterworks is a unique company like no other we’ve seen. Here are some of the things that make it different:
- Invest in art. It’s easy to invest in stocks, bonds, gold, and more. But so far, art has remained an investment class for the wealthy.
- You don’t have to be an accredited investor. Many alternative investments like this require you to be an accredited investor, which the average joe cannot. With Masterworks, anyone can get started with as little as $ 500 in increments of $ 20.
- Access to a secondary market. You should be willing to hold your shares for up to 10 years. If you are unable to do this, you may be able to find a buyer for them through the Masterworks bulletin board.
For whom Masterworks is best suited
There are no two options: Masterworks is a risky investment. The company itself even says: “The investment is only suitable for people who can afford to lose their entire investment.”
There are many dangers of investing in art. Banksy himself – the artist of the only painting Masterworks has ever sold – famously shredded one of his paintings to make a statement against commercialization after it was sold at a London auction house at a lower price than the piece sold by Masterworks.
That said, Masterworks could make a lot of sense to you if you can tolerate these losses. It’s also especially good if you’re looking for a unique asset class that doesn’t align with the stock market.
If the stock market tanks and your portfolio are full of related investments, your entire portfolio could collapse with the ship. By investing in uncorrelated assets like art, you can keep some of the value of your portfolio in the event of a stock market slump.
After all, it might be an especially good investment if you’re an art freak, but you don’t have enough time or money to really invest in the basics of the art that you are investing yourself. After all, you can always visit “your” painting in a gallery.
Masterpieces versus other art investors
It is difficult to compare Masterworks to other art investment platforms as there really is nothing like it. However, if you’re looking for alternatives to investing in art, then you should consider Saatchi Art and Maecenas.
|How it works||Buy shares in works of art that will later be sold||Buy and sell artwork directly from artists||Buy and sell shares of Tokenized Art, similar to Bitcoin|
|Minimum investment||$ 500||Depends on the price set by the artist||$ 1,000|
|fees||1.5% per year plus 20% of the sales proceeds||Not revealed||As low as 1%|
|Hold time||3 to 10 years||None||Not revealed|
|Secondary market available?||Yes||No||Yes|
How to invest in works of art
Investing in art is a different beast than more common types of investments like the stock market, cryptocurrency, or even precious metals. First, it usually requires an extraordinarily large sum that only the richest people in the world can afford to pay while still remaining diversified.
To invest in the fine arts, you need to keep your finger on the pulse of the art market. It is not that easy to buy a painting that you like. To do this, you can go to your local department store for a sign that says “Live, Love, Laugh”.
To be good at it, you need to know the pros and cons of the different styles that artists use in each style. You also need to know how your artwork has changed over time, what prices paintings are fetching at auctions, how long they are kept, and much more.
It’s an entire industry, and unless you’re an extreme art nerd, it’s probably best left to professional art investors.
Until the start of Masterworks. It uses a proprietary model with over 3,000,000 data points from auction sales to determine which works of art are undervalued and expected to continue to rise. This model selects the investment grade work of art in which it is involved.
The bottom line
Masterworks is lowering the visual arts investment barrier so anyone can get started with $ 500. But that doesn’t mean it’s right for everyone. It’s still a riskier investment than a typical index fund, for example. However, if you want to deviate your portfolio from assets tracking the stock market, this might be a good option. Just make sure you carefully analyze how much to invest in Masterworks.