You may not know this, but I create original artworks with the interior paint I use for each house I’ve bought since 2003. Not only is art fun, but maybe one day, these original pieces will sell for megabucks! So when Masterworks approached me to do a sponsored post about investing in fine art, I welcomed them with open arms.
Masterworks, founded in 2017, is an investment platform that helps non-accredited investors buy shares of fine art. The fine art market has been booming due a surge in wealth by the investor class. Further, with the growth of countries like China, there is more capital chasing fine art than ever before.
Fine Art vs. The S&P 500
Check out the price performance chart of the Artprice100© Index versus the S&P 500 since 2000. Included in the index are artists such as Robert Rauschenberg, Ed Ruscha, Cimabue, Kaws, Picasso, Modigliani, Claude Monet, Paul Cézanne, Andy Warhol and Jeff Koons.
It’s clear that fine art has performed very well in comparison to the S&P 500. However, investors on Masterworks are buying a share of a particular artist’s work, not a fine art index fund. Hence, your investment choice matters more for performance.
Over the years, Masterworks performance has been strong. With a bear market returning in stocks in 2022, interest in investing in fine art has increased due to its non-correlated characteristics. During times of uncertainty, you want to own real assets like real estate and fine art that has as little correlation with stocks as possible.
How Does Masterworks Work?
Masterworks purchases works of art from a list of artists determined by their proprietary algorithm. Masterworks target appreciation for each artwork is between 9% to 15%.
Once it purchases the art, Masterworks registers the art with the SEC and issues shares in $20 increments. Investors on the Masterworks platform can then own a portion of an artwork with no minimum investment. Masterworks limits the total investor share to no more than 10%.
The target holding period is between 3 to 7 years. When it comes time to sell the artwork, the new buyer with his or her new price must be approved by a majority shareholder vote.
Interview With Masterworks Founder, Scott Lynn
Sam: Tell me a little about your career and what motivated you to start Masterworks?
I’ve been starting technology companies for the past 20 years, but also collecting art around the same period of time. Art has been one of my best performing investments, but I realized the only way for someone to participate in the asset class is if they have millions of dollars to acquire it.
Surprisingly, we were the first company to come up with the idea of securitizing a painting, which has now led to a new asset class for investors.
Sam: What is Masterworks’ value proposition? Why is Masterworks better than competing platforms?
We currently don’t have any competition. Our focus is on investment-grade artwork that generally begins at $1 million per painting, ranging up to $10 million per painting.
We also have the leading research team in the art market. Like any asset class, you only want to invest with partners who have experience in the market — our team has more than 100 years of combined experience in the art market. We also have secondary markets where investors are trading shares in paintings.
Sam: What is the definition of blue-chip art? And how does art go from obscurity to blue-chip? It seems so subjective.
Our research team has coined the term “blue-chip” to help typical investors draw analogies with other asset classes. We specifically define “blue-chip” as art created by the top 100 artists (in terms of sales volume), which constitutes more than 60% of the art market. These are household brand names such as Picasso, Monet, Basquiat, and more.
Sam: What do you think about art sold on cruise ships? Is it investment-grade?
While we encourage people to buy art that they love for decorative purposes, we don’t consider this investment grade. In order for it to be an investment, you need to have sufficient data to conclude that the artwork you’re investing in is appreciating.
Roughly half of the $64 billion in sales volume that occurs each year is through public auction, so there is a large data set to analyze to understand appreciation rates for potential investors.
We publish returns on more than 80,000 paintings that have been bought and sold within the Price Database section of the Masterworks.io website.
Sam: Can you clarify the most valuable type of art in terms of levels of supply? Did most blue-chip artists do prints with numbers and signatures? How would you quantify the value of an original versus a print etc?
Almost all important artists have done some type of print work in their career, whether it’s an etching (Rembrant) or a lithograph (Picasso, for example, did both).
There isn’t a way to “discount” the value of a print based on a painting. However, clearly the most valuable art is from artists who are most in demand (and often most well-known) with the least supply.
We see this when analyzing $100 million+ paintings that sell every year — there are only a handful of artists who have achieved this milestone, such as Andy Warhol, Pablo Picasso, Jackson Pollock, and Willem de Kooning.
Sam: What type of price premium does an artist and his/her work usually get after dying?
The fact that an artist dies is not, in itself, significant. But what happens when an artist dies is that the supply (e.g., the total body of work the artist has created) begins to decline as collectors donate paintings they own to museums.
As paintings are donated, and there is less work for collectors to purchase, it becomes more “rare” and causes prices for what is left to increase. This is a unique attribute to art as an asset class — it is one of the few asset classes with continuously declining supply.
Sam: Here is a piece of art I created where there is only one in existence. There are no prints, etching, lithographs, nada. As a result, I believe this piece is worth at least $1 million today. What do you think?
I’ve owned Jackson Pollock’s work personally throughout the years, so I’m very familiar with his drip paintings. Although yours is a great example , the fact of the matter is that it’s not “culturally significant” because it wasn’t painted in the late 1940’s.
The reason Jackson changed painting in America is not because of his technique, but because he was one of the first painters in American history to paint in a non-figurative way.
For example, he painted abstractly, rather than painting people or still lives. Today this seems novel, but was revolutionary in 1940’s America.
Sam: How does Masterworks decide which art to invest in with the capital raised?
Our research team uses our proprietary database to decide which artists are accelerating most quickly. The research team then continuously updates our “artist list,” (which is around 45 artists today) for our acquisitions team.
Our acquisitions team is constantly in-market and tracking more than 1,500 paintings by these artists. We only buy the best examples and the best value — or less than 1% of everything we’re offered.
Sam: How is a Masterworks investment taxed? Is there a K-1 or W2?
All proceeds are taxed on a K-1 for U.S. investors, to provide optimal tax efficiency. For international investors, we use a Cayman subsidiary so that all proceeds are taxed in their local jurisdiction.
Sam: Do you have a Masterworks fund that invests in multiple pieces of art for more diversification and liquidity purposes?
We don’t offer a fund right now. Although it’s something we’re considering for the future, it isn’t a near-term priority.
Sam: What are some new initiatives Masterworks is looking to launch in the next three years?
In addition to fund-like products, we want to continue to build-out features on our Secondary Market to support investors trading shares with each other. In other words, if an investor does not want to hold onto his investment for 3-7 years, he can sell his shares on our Secondary Market.
Sam: How does a Masterworks investor know s/he is investing in a particular artwork? Where is the art piece stored? Is it insured for theft, damage, etc?
In terms of governance, we have the highest standard of any investment product. Each painting is a public offering, qualified by the Securities and Exchange Commission.
Investors can go to www.sec.gov, search for Masterworks, and read all of the details underlying each investment product. Due to SEC review, these products have much higher standards than private investment offerings.
All paintings are stored in the Masterworks Gallery (in Soho, NYC). If not, they are on loan to museums. Finally, they are fully insured in the event of theft or damage.
CNBC Interview With Masterworks
For a video explanation of Masterworks, here’s an interview I did on CNBC that shares more about Masterworks.
If you’re interested in investing in fine art, sign up for Masterworks and explore our offerings for free. Fine art is an alternative investment and another way to diversify your investment portfolio.
There is currently a ~25,000 person waitlist to invest in Masterworks, but you can skip the waitlist and sign up with this link. Our goal is to continue introducing more fine art supply every month.
See Masterworks’ disclaimer: Masterworks.io/disclaimer
I want to thank Scott and Masterworks for their insights into the fine arts market. Although I’m somewhat bummed my original artwork isn’t “culturally significant” and worth $1 million each, perhaps if I continue to create over the next couple of decades, they will be.
When it comes to any type of art or entrepreneurial endeavor, you never know the upside until you try!
Readers, any artists out there? How about any fine art investors? It’s always nice to invest in something that also provides joy and value. After a robust 2020, investors are looking to alternative asset classes to provide returns. When you can invest in an asset class that you can also enjoy, that’s a nice combination.
Upon reading comments from you fellow FSers, I must say I also get a funny feeling, and I feel I’d like to share my thoughts.
So, some of you were told that the 10k limit only holds for foreigners? In my case it was the opposite. It didn’t hold for me, *because* I’m a foreign investor. Maybe it was something I misunderstood, maybe I’m just not an accredited investor.
Likewise, the KYC procedure apparently doesn’t include me sending a copy of my ID, which is different to the KYCs I’ve gone through so far (mostly EU and US). Normally this also includes asking me where I get my money from, which was not asked about here. The screening call is not so much of a screening call, and nobody may yet prove that I am me. But still, I can’t answer to whether all this is in order or not.
Finally, I wonder about the transparency from the sales being done via personal contacts, not on an open market. How can the price be market price, unless its sold openly on a market? With a stated expected return of 9-15%, it doesn’t have to yield more than 15% to make investors happy. If the value increase exceeds that, maybe the amount surpassing that can go to masterworks via some side channel without being distributed to investors. Am just trying to think of ways this could fail.
Maybe it’s me being paranoid. Anyone here with solid experience from them?
Vishal Sharma says
hey Sam, you plan to invest anytime soon with Masterworks?
John L says
I had quite a negative experience with Masterworks. I signed up some months back just for kicks. Scheduled an ‘interview’ meeting online a couple of times, they never called me or notified/followed up with me at the scheduled slots either time. It didn’t bother me as I signed up mostly for the fun factor.
After seeing FS’s post and the priority link I figured why not and tried scheduling an appointment again. The good thing is that this time around they did call me at the scheduled slot! But everything went down hill from there… here’s how the call went.
We made a brief intro/hello and I casually mentioned I have some questions for him when he’s done with his overview. His overview of Masterworks was very brief, maybe 3 min, 5 tops. I remember I was thinking to myself that’s it(not much substance at all)?
He then asked me to go to the site to look at the 3 artworks on offer, that’s when he started peppering me with “Are you ready to commit today?”, “Are you ready to commit now?”
I explained to him nicely two times that I am not ready as I know little about art and nothing about the Masterworks and how the investment works and that I would commit when I am ready. But he would not stop. That’s when I asked to stop and that he didn’t even give me a chance to ask my questions. He relented and answered some questions on the legal structure, their fees, etc. When we got to the tax questions, he said one would get a K1 and if there’s a gain it would be reported as income but one can turn that into LTCG. I asked how would one do that and however the gain is reported on the K1 is what is reported to the IRS, one cannot arbitrarily change that as one pleases. He insisted he has seen it done before but could not explain how. I asked if I could get a redacted sample K1 so I can see how it would be reported. He said they cannot do that as it would violate someone’s privacy.
Uhmm…execuse me that’s why I asked for a redacted version no? We went back and forth and didn’t get anywhere.
Anyways, we ended the call with him promising to send a bunch reference docs for review and we’ll catch up in 2 days. No surprise I didn’t receive anything from him. Guess I am not their easy(prey) target clientele….
Oh darn, here’s goes my dream of owning a piece of some master’s artwork! Maybe it’s time to consider FS’s modern pieces instead :)
That doesn’t sound like a good experience. The guy you talked to doesn’t seem to have been well-informed or trained. There aren’t any example K1s because they just sold their first painting and so no-one has received a distribution yet. You need to read the offering circular. These are all on the site for the paintings either currently offered at IPO or in the secondary market. There are lots of caveats but the circular states: “it generally will be treated first as a non-taxable return of capital to the extent of our adjusted tax basis in Masterworks 021 Cayman shares and then as capital gain.” So, my understanding is that they would be treated as a partnership and then distribute capital gains to you. My plan is to not to invest too much until I see a couple of these transactions work out successfully. The Banksy sale is the first one where the principles are going to be tested.
John, just a quick comment here to say it’s eerie how similar an experience I had in my recent call. We must’ve both been speaking to the same individual…
I agree with moom’s assessment. But I can’t shake a certain lack of confidence in the company if they are pushing such an aggressive subscription agenda. It’s a deceptive conversion funnel; the call was pitched as a screening measure, but there was clearly no screening and the person I talked to was careless to the point of risking goading me into forking over a quantity of money in violation of the ceilings stipulated by the offering circulars. Only someone really fiscally imprudent or cavalier would throw money at this company after a rushed 10-minute phone call. What’s more, I also encountered the unwillingness to send any written documentation my way.
Are they in desperation mode? Already?
I checked out the Masterworks website and read through the 1-SAs for a few different offerings. It seems that the IPO prices include “True Up” payments made to Masterworks that are about 10% of the offering price; with a 1.5% annual fee also included, does that mean a work needs to appreciate 11.5% in its first year just to break even, before taxes?
Yes, I think. For most of the offerings the stated appraisal price is higher than the value of the offering. So they would argue that they are managing to buy paintings at less than their full value.
Thanks for the clarification. Sounds a little high though given that they’re also taking a 20% cut on the work sale price and that art work sold at auction typically includes a 20% buyer’s premium and a 20% cut for the auction house. So if you buy shares for a piece selling for 1$mm you’re actually buying the piece at $1.3mm and if it sells 5 years later for 2$mm, after the auction house’s 20%, Masterwork’s 20%, and another 7.5% in yearly fees, the realized price for holders is down to $1.45mm. Seems like a pretty big bite they’re taking.
Most of the offerings seem to be bought privately and so would avoid the buyer’s premium, which I agree is at a pretty outrageous level. So realistically, if they are buying a piece for $1 million, they then offer it for $1.1 million. If it sells privately again for $2 million as in your example, then the net gain to the investors is 58%.
Anyway, the first closed deal announced today saw investors gain 32% in one year on the Banksy after all fees and costs. I don’t think this will be typical, of course.
So the hammer comes down at 1 million.
The seller pays the auction house 20% and walks away with 800k.
The buyer owes the auction house 200k for a buyer’s premium
So now the buyer is paying 1.2 million
The buyer’s premium is subject to sales tax.
So at 7% sales tax adds another 84k
Then you have a “true-up” price paid to Masterworks of around 10%?
Assuming no sales tax on that, we are now on the hook for 1.384 million.
After 5 years, our cumulative annual fees total 7.5% of the 1 million?
Are these paid annually, or only after the final auction?
There goes another 75k
Then it sells at auction for 2 million, happy day
20% goes to the auction house, so 400k
20% goes to Masterwork, so another 400k
I must be doing this wrong.
1,000,000 Auction Price
200,000 Buyer’s Premium
84,000 Sales Tax
75,000 Annual Fees
400,000 Auction House Fee
400,000 Masterworks Fee
The total I get is 2,259,000. At an auction price of 2 million this means I lose $259,000?
Am I doing this wrong? Otherwise, I think I might want to buy shares of Masterworks, but by that I mean the company itself, not shares in the art works.
I guess if it auctioned for 3 million, however, I would make $741,000?
After 28% capital gains tax (collectibles) that would still be $533,520, so about a 6.75% rate of return, before inflation.
But 3 million for a 1 million purchase after holding it five years? To get a 6.75% rate of return, before inflation? I guess you need to ask how lucky you feel.
I’ve been averaging 12.7% on my mutual funds over the past ten year period, but where’s the excitement in that?
Your assumption that they are buying and selling at auction is wrong. All three currently offered paintings were bought privately. That’s how they intend to sell too, through their networks. The 1.5% per year is for costs… these are paid by issuing Masterworks shares which dilutes the investors. The 10% up front “true up” covers costs of research and acquisition etc. The 20% profit share would be after deducting all costs. Note that the S&P 500 has returned 6.62% per annum over the last 20 years including dividends… So I am investing in this for diversification benefits and plan to invest about 5% of net worth.
Well that’s a bit better. So the one million dollar painting, sold after 5 years at 2 million would be an ROI around 9.9%.
Or, given the 28% capital gains tax on collectibles, 7.5% after taxes.
I just don’t know that I could rely on the money being well spent, or the increase in value over a relatively short time yielding those kind of prices.
Worse, I’m a bit of a barbarian and, unless it was to resell them, I wouldn’t place any value on any of the offerings I saw. I mean, seriously, if I found them in my attic, and no one wanted to buy them at any price, I would throw them out. No offense to the artists but, in full honesty, I would not even hang them in my garage. There is art I enjoy and do buy, but I only buy it to decorate my homes and offices (and this ain’t it).
Not understanding the market is an excellent reason for me to stay well out of it unless there was very long track record of success (more than a decade, as I would want to see how things went during the 2008 bust), which would mean I wouldn’t actually be investing in the painting at all, just in the folks at Masterworks to consistently deliver what they promise. This is mostly how I choose mutual funds, actually. I would also want to look at the records of some competitors, which, if they are successful, should rapidly appear.
Also, the fact that this kind of investment is similar, in some respects, to homes in a resort community, is apt to make me gun-shy. When the economy turns really sour, demand goes way down, and so do the prices, especially if you don’t control when you sell.
Jeff VA says
I know nothing about fine arts, but I enjoy appreciating it from afar and I also enjoy making fun of it because some of them just goes over my head.
That Basquiat’s painting of two natives holding up a sign “food” and “salt” for example. Like, what? Someone bought that for $4 million dollars?
Financial Samurai says
I agree about the subjectivity of fine modern art. It’s pretty hilarious sometimes. Which is why I think it’s worth creating your own art and building a brand so that you can increase the value of the artwork overtime.
I can reserve for you up to a $99,000 allocation in my original artwork at a $1 million valuation this year if you would like. The artwork will appreciate in value the longer Financial samurai survives and grows.
Jeff VA says
I like the idea! I will put down 20% today and pay the remaining 80% by giving you a stake of the artwork I plan on creating in 2021. I’m not sure what I’ll create, but I promise it will have striking dark undertones that can only be created by using sophisticated strokes in Microsoft Paint.
It’ll probably end up as popular as the white on white composition that’s displayed in MoMA so if I were you, I’d take the deal.
So who pays the 28% capital gains tax on collectibles?
It galls me sufficiently I’m not selling any collectibles, ever, unless I turn out to be immortal or something. My heirs can sell them after they get “stepped up,” thereby avoiding it altogether.
You can’t sell your shares without the rest of the shareholders approving the price? That sounds like a huge headache and more like an HOA then a proper investment.
They didn’t do that for the Banksy sale….
Financial Samurai says
I don’t mind more knowledgeable, larger stakeholders make the decision for me as I’m not a fine art expert. The whole point is relying on people who know more to help make better decisions for investors of our size.
Backpack Finance says
Very cool. I would for sure pay $1M for your painting :) If we are already on the topic of alternative investments, would be cool to see a post about investing in wine. I have heard some good things about Vinovest.
Financial Samurai says
Cool! I might sell shares like on Masterworks.. b/c I think it could be worth $10 million in 20 years… especially if I continue FS going! I mean come on… there’s only one in existence! No prints, copies, nothing. :)
I’ve done a review of Vinovest as well.
I’m trying to use the link you provided to sign up, but it appears to take me to the page to request an invitation rather than skip the waitlist.
Financial Samurai says
Thanks for highlighting this. Try this link: Skip the waitlist
That works! Thank you very much.
I invested back in March in two paintings. Monet and Basquait. I really like the platform, just wish I had the minimum $5k more regularly.
Interesting. Scott Lynn told Sam that the minimum is $1k. They told you $5k, and they told me “we told the SEC that people would invest $10k minimum…”.
I am investing with Masterworks. The guy who interviewed me told me that I needed to invest a minimum of USD 10k in each picture. Maybe that was because I was foreign? So far I have invested in 4 paintings.
Also, they just today sold their first painting after one year of holding. There was no shareholder vote as far as I can tell. It gained 32%. A Banksy.
Financial Samurai says
Banksy! It seems like everybody wants to invest in one nowadays. The waitlist must be long.
Interesting on the investment minimum difference for an Australian versus an American. What a list foreigners have the opportunity to invest, which often times they don’t with American companies.
A $10,000 investment with a 32% return is better than $1000 investment with a 32% return!
Rebecca Ho says
I am from the states and they told me the minimum investment was 10K as well.
Fascinating! I like how they do the registration process with the SEC and that you can invest in a specific piece of art. That definitely is unique!
I’m curious about the 3-7 year investment time horizon. Why not longer?
Cool paintings Sam! I love that one at the bottom you call The Battle. That is so fun you use leftover house paint! What a fun way to reuse it!