What investors can learn from the great art collectors

Free time during lockdown, low interest rates and a search for somewhere to put spare money have helped spearhead a movement of day trader’s keen to make money in the markets for themselves.

It is widely accepted across the investment fraternity that most retail traders lose money. In fact, more than 70% of DIY investors lose money (source: capital.com).

Much of the problem here comes from:

While an investors approach can develop and improve with time and experience, the psychology of investing can affect the novice and seasoned investor alike.

To illustrate my point on the issue of ‘approach to markets’, we will consider the story of one man as told by Morgan Housel in his excellent book, The Psychology of Money.

Heinz Bergguren

Heinz fled Nazi Germany in the 1930’s and settled in America. He began an ordinary life, and with an interest in art, by 1939 had job at San Francisco Museum of Modern Art.

He got married that year and bought his first artwork, a picture for $100 while honeymooning in Chicago. This was the start of a great collection; as by the 1990’s Heinz was considered one of the most successful art dealers of all time.

In 2000 he sold part of his collection to the German government for 100 million. He sold these artworks at such a discount it was considered a gift. The collection included Picassos and Matisse’s’ valued in the private market at closer to 1 billion.

I don’t know much about art – but do understand it’s a subjective area. So how could anyone predict what art would become so sought-after decades later? Is it Skill? Is it Luck?

A third way

There’s a third 3rd explanation – and one very relevant to investors.

The great art dealers operate like index funds. They bought everything they could and bought in portfolios, not individual pieces they happened to like.

Then they just sat and waited for a few winners to emerge – that’s all that really happens

Something like 99% of the works these art dealers buy, turn out to be of little value. But that doesn’t really matter if the other 1% turn out to be something like a Picasso.

Long tails …………………………

It is important to realise that many things in business and investing are just like this. It is a concept known as ‘long tails’ – whereby a small number of events account for the majority of outcomes.

Many important things, those worth doing in life, are just like this. It can sometimes feel like we take three steps forward and then one step back.

Consider how we evolve and advance in work, health, relationships, business – the progress it is not linear, there will always be setbacks.

As further evidence of this concept, J.P. Morgan published research on the distribution of returns from the Russel 3000 Index, a big broad range of the largest public companies in the US, over nearly 3 decades from 1980. The results are informative:

• 40% (4/every 10) of companies in the index lost at least 70% of their value and never recovered – a catastrophic loss! Effectively all of the index returns came from 7% of the companies.
• The most important part of this story: the Russell 3000 Index has increased by more than 73-fold in that period. That is a spectacular return – a success.

Final lesson for investors

Success with investing, as with much in life, is earned through what can feel like many failures.

This is why, when making investments, diversification and holding for the long-term are such important factors.

In a future blog we will examine the Psychology of investing, and how investors can best handle this aspect.

Barra Gorman
Chartered Financial Planner