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Lindley Estes is a business writer for The Free Lance-Star and This blog is on Fredericksburg-area business. Send an e-mail to Lindley Estes.

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Investing in art can be lucrative

STOCK MARKET investors have suffered through extremely choppy seas over the past few months, but it’s been smooth sailing in the collectible art market, according to recent articles.

In its Oct. 8 edition, Barron’s reported that third-quarter auction sales at Sotheby’s, a high-end auction house, increased by 40 percent over the same period last year. The stock, whose “BID” trading symbol is most appropriate, has soared along with the sales. Barron’s reports that emerging wealth in countries that have prospered from a global commodities boom is partially driving the demand.

The Wall Street Journal ran an article Oct. 10 stating that “art sales have never been hotter at galleries and auction houses.”

Intrigued by this, I responded to an ad in The Wall Street Journal placed by the Questroyal Fine Art gallery in New York City that offered a free copy of a recent study written by gallery owner Louis M. Salerno titled “A Comprehensive Analysis of the Investment Potential of American Art.”

Salerno’s report is based solely on public auction sales. It does not include private sales that he says account for about half of the art trade.

The report lays out a number of compelling arguments why investors should make American art part of their portfolios. His report focuses on pre-1950 American paintings, which “includes works by artists from the Hudson River School, Tonalist, Impressionist, Ashcan School, and Modernist movements.”

Skeptics might say that the report merely serves the interests of a gallery owner attempting to gain publicity and sales. Salerno admits in the conclusion that “some bias is inevitable” in such a report. Yet the numbers speak for themselves.

Between 1956 and 2006, American art created before 1950 yielded a 13.1 percent compound annual return. Price volatility in art was higher than that of stocks and bonds in that time.

During that time, the Standard & Poor’s 500 returned 10.6 percent annually, 10-year U.S. Treasury notes offered 6.7 percent and gold’s yield was 5.5 percent.

The report shows that there’s little correlation between the returns of art and stocks. During wars and other international crises, art has increased in value while stocks have sometimes stumbled. Salerno argues that adding art to an investment portfolio enhances returns while lowering risk.

That doesn’t mean everyone should jump into the art market. It takes an experienced eye to evaluate which paintings are likely to appreciate over time. Art is a less liquid asset than stocks, and transaction costs are higher. As do companies, artists move in and out of favor.

Yet as Salerno’s report shows, knowledgeable collectors can do quite well in the art market. Furthermore, their assets look a lot better hanging on the wall than a stock certificate would.