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Banksy’s shredded evidence differentiating investment from speculation

The words ‘investment’ and ‘speculation’ are often used interchangeably but they do have subtly different meanings – as this visit to the world of contemporary art should illustrate

17/10/2018

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

Forget ‘Love is in the Bin’ – as Banksy has renamed a painting of his familiar ‘Girl with Balloon’ image that self-destructed moments after it sold for £1m at a Sotheby’s auction earlier this month. This episode has only served to strengthen our belief, here on The Value Perspective, that when it comes to the world of art, what you are most likely to find in the bin is value.

The moment the picture apparently passed through some sort of shredder secreted in the base of its frame, a feverish debate began among art experts as to how this changed what ‘Love in the Bin’ was worth. Not whether its shredding had impaired its value or reduced it to nothing, you understand, but if it was now worth more. Had the anonymous bidder turned a profit, quite literally, at the flick of a switch? 

We will leave to others the debate over a precise price-tag, and indeed whether this is all a Banksy prank, and instead focus on the ideas of value and worth – words we just about resisted the temptation to put into inverted commas when we used them in the last paragraph. These concepts are fundamental to what we do every day, here on The Value Perspective, so how to square them with a self-shredding painting? 

How is art valued?

The other day, while arguing ‘Love is in the Bin’ will come to be seen as one of the most significant artworks of the early 21st Century, BBC arts editor Will Gompertz wrote: “Contemporary art is not valued for its inherent aesthetic qualities (although that is how it is presented to us), it is valued pretty much solely on the basis of an artist’s reputation.

“All that matters is the brand, that it is a Banksy, or a Koons, or a Kusama. For a lot of collectors, art has become an asset class. Hence the talk after the event wasn’t about art but the asset. Will the shredded work be worth more, or less? Surreptitious calls were made suggesting potential buyers were already lining up to purchase it, should it come back on the market. Speculation mounted.”

Investments vs Speculations

An interesting choice of words, that last sentence. Granted, Gompertz was not doing so but ‘speculation’ is often used as an alternative term for ‘investment’. The words do, however, have subtly different meanings – and who better to turn to in order to clarify that difference than one of our favourite value investors, writing in one of our favourite value books.

In his 1991 value classic Margin of Safety, Seth Klarman wrote: “Both investments and speculations can be bought and sold. Both typically fluctuate in price and can thus appear to generate investment returns. But there is one crucial difference: investments throw off cashflow for the benefit of the owners; speculations do not. The return to the owners of speculations depends exclusively on the vagaries of the resale market.”

There are those in the artworld who would describe themselves as ‘deep-value investors’ – sorry, that was always going to be in inverted commas – because they scour the underground art scene for works that can be picked up at a fraction of the price they will command should their creators ever reach the level of fame of a Banksy, or a Koons, or a Kusama. 

What they are doing can undeniably involve knowledge, patience and hard work but, when all is said and done, it depends fundamentally on someone someday deciding something they have bought should command a higher price than they paid for it. They are relying, in other words, “on the vagaries of the resale market” – and true investors need more than that before they decide to part with their money.

 

Author

Juan Torres Rodriguez

Juan Torres Rodriguez

Research Analyst, Equity Value

I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.  

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