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Photo for Sale

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I took a great photo the other day and am looking to sell it.

What would you pay?

It is a pretty picture. Lovely river, green grass. 


Like I said, pretty nice.

What Value do You Place on the Photo?

So what would you pay for that photo?

$1, $10, $100? Or perhaps you are thinking that you could wander down to your local river and take something of equal value for free?

Now how about I tell you that the photo was not taken by me, but instead by world famous photographer, Andreas Gursky. Does that change your opinion of its value?

How about the knowledge that this photographer has received millions for previous photos? Are you starting to look at the photo in a slightly different light?

Or what if I told you that only six limited editions of this exquisite picture were produced. And three are exhibited in major international art galleries? Does this change your valuation?

Now what if I tell you that the photo recently sold at auction through Christies for USD 4.3 million [5]? Yes, million. What impact does that knowledge have on your estimate?

The Value of Art

Beauty truly is in the eye of the beholder.

The value of art, like many other investments, lies solely in the mind of the investor.

Part of that value is based on one’s knowledge of the asset class. If you did not know this photographer’s identity and reputation, you might not even consider the above photo at a garage sale. Without fully understanding the market for photographic art and its production processes, you may never have given the photo a second thought.

Part of the value comes from the amount of information that you possess. The more information you obtain, the better your decision-making. In our example above, you may have heard of the photographer. But knowing prices received for his other photographs will help you value a new one. When assessing any investment or purchasing decisions, make sure you get as much information as you can.

Part of the value is also based on aesthetics and personal taste. Especially with collectible assets, there may be an emotional element involved in the valuation. This can be tricky for potential investors.

Value is What Someone is Willing to Pay

The value of any asset is what someone is willing to pay in an arm’s length transaction.

You can do as much quantitative and qualitative analysis as you want to arrive at the true intrinsic value of an asset. But unless you can find someone that shares your conclusions you will not be able to close the deal.

With stocks and bonds, there is a fair amount of publicly available data and many investors use similar pricing models. Based on current information a reasonable market value may be found between buyers and sellers.

But as you move to less efficient markets, there is more differentiation as to value. That is why you sometimes see large spreads between the bid and ask prices for investments in less efficient markets. With fewer traders, less available information on companies, fewer analysts tracking the assets, etc., there is less agreement on the “true” value for investors.

As you move into more exotic assets, such as collectibles, the differing of opinion on value can become even greater. There may be millions of shares outstanding for a public company. Apple Inc. has 929 million shares outstanding. You can easily see what many investors paid for the same share within the previous hours.

But consider the above photo.

“Of the edition of six, three are in public museums (Moma, Tate, Pinakothek der Moderne, Munich), one is with a private museum (Glenstone, Potomac) and only two are left in private collections, of which this is one. In other words this is almost as rare as a one-off painting,” says Outred.

How do you definitively value an item where you have no direct comparables? Yes, there are some measures (appraisals, insurance estimates, sales prices for indirect comparables such as other photos by the same or equivalent photographers, scarcity of the asset, etc.), but it is much, much trickier than evaluating the current value of Apple Inc.

This is why I believe that only those with strong expertise [6] in a specific alternative asset class (art, coins, stamps, porcelain dolls, etc.) or inefficient market should invest in those areas. The rest of you should avoid the market. Or, if you want to invest for diversification purposes, be prepared to pay for expert advice. Either directly through the use of expert consultants or indirectly through higher management fees in a specialty fund.

Psychology Plays a Part

With many exotic assets, other factors often play a role in valuation. Aesthetics, personal tastes, peer pressure, emotions, etc., all can factor into what someone considers an asset’s worth.

For example, I love fine art. But I have no real understanding what makes a great painting great.

I have visited the Mona Lisa on numerous occasions. As I walk through the Louvre, I see thousands of paintings. Some I like, some I think blah.

I like the Mona Lisa. But I must admit that if it was not world renowned, separated from the rest of the paintings, roped off in its own area, and covered in protective glass, I would not see it as any better than many of the other paintings I walk past on the way to see the Mona Lisa.

A large part of my attraction to the Mona Lisa is its reputation. How other people see the Mona Lisa shape my own view.

I suspect you are exactly the same way. When you saw the photo above, maybe you thought it was nice. Maybe not. Probably not worth much.

But then you learned the photo was taken by a famous photographer and not by me. That likely enhanced its value in your eyes.

Then you learned that previously auctioned Gursky photos have sold for millions. That undoubtably increased its value in your mind.

Finally, upon hearing how rare the photo, that may have also added to its worth.

But it is the same photo that you probably thought was worth little.

Yes, the added information helped you to adjust your viewpoint. But the psychological impact also affected your valuation. How others viewed the photographer and the value of other photos he sold.

But it really should not have direct bearing on how good this particular photo is. Maybe he had a bad day. Maybe the photo was actually taken by a relative and Gursky claimed credit. Maybe there are more than 6 prints in existence. Maybe there are 600. If you think this is not possible, google Salvador Dali for these sort of tactics [7].

Because psychology affects valuation significantly in exotic assets, it adds to the uncertainty.

I would note that psychology often impacts investors on conventional investments as well. The result of which is usually an investment bubble [8].

While gaining additional information usually assists in valuing assets, when you rely on psychological aspects, you may just get caught up with the masses. Be careful. Minimize the emotions and following the herd.

Key Takeaways

I have jumbled a few different points in this post.

One key takeaway should be that the more information you can obtain and the more expertise you have in the asset class, the better it is in valuing the investment.

Two, the more publicly available information and the more traders, the better the pricing. Conversely, the less information or less number of traders, the less efficient the market, and the more difficulty in determining fair value. This is part of the Efficient Market Hypothesis [9].

Three, exotic or alternative assets tend to lack substantial information and traders. Pricing can be difficult. Unless you have significant expertise in one or more of these assets, best to avoid them. Unless you want to pay for expert assistance.

Four, psychology plays a role in the value of assets, both conventional and exotic. Try to avoid emotional investing. Stick to the available information and avoid getting caught up in the moment.