Insider Hints: Investing in Art

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In almost any trade, dealers need working capital. This is particularly true when there is a buying season for a certain object and where sizable amounts of capital have to be put into inventory at that time.

The art industry is an example. In addition to the buying season and the large dollar amounts of inventory, there is a slack or no-selling season in the summer. This is also the buying season, so that when the dealers have to put out large amounts for inventory they have diminished amounts coming in. Very many dealers go to Europe every summer to buy and this expense adds to the need for seasonal funds.

At the present time the larger art dealers have tremendous trouble in getting good paintings for their stock, and for the most part they do not need funds. The medium size and smaller dealers do, however, and I have from time to time invested in their notes. Over the years I have placed considerable sums in loans to the art industry and I have collected every cent. In one case the ultimate buyer did not pay and had to be sued, but even here there was a profit in the transaction.

New York City may not be the soundest place in the country to make loans. There are many unscrupulous dealers and wholesalers, as well as manufacturers of all types located here, but there are also good dealers, and my experience runs to the field of art.

There is always a trade from the smaller dealers to the larger ones. When the smaller dealer acquires an outstanding art object, and he does this quite often, he may ship it to the larger dealer who may not pay right away but a month or two later, particularly if the shipment is made in the slack season. The larger dealer may give a note to the smaller dealer. I have purchased such notes at a discount. Those that I have bought have been without collateral and have yielded a rate of well over 20 percent per year. None has ever defaulted. The only note that posed a problem was one given by a large purchaser, and the difficulties make interesting reading.

To go back to the first criterion of a loan, a Dun and Bradstreet or Stone's Mercantile Agency report should be secured on the dealer, or whoever the borrower is, and perhaps a Retail Credit Report. These reports should be supplemented by inquiries at the borrower's bank, provided he has borrowed at the bank, and it must be determined why he is not now borrowing the money from the bank.

The reason may be a technical one, such as the fact that the bank does not lend over a given percentage of the net worth of the dealer, or it may be that he has in the past been a bad credit. A check with other dealers may add to your evaluation of the risk. If any other dealer has had bad experiences he is likely to let you know, being careful not to say so much about the prospective borrower as to lay himself open to suit.

In the case in which I ran into trouble on my loan I was warned in advance by another dealer or by a supplier who told me to be careful. This advice and these warnings should be enough to scare you off. If there is even a question about the man's integrity, drop the whole matter.

This is true in any investment, not limited to the art world. As always, be sure to carefully research any item you intend to buy to ascertain its authenticity and real value. Art objects do become more valuable over time, and many people buy them not only as a safe means of investment, but also because they add beauty and individuality to their homes and offices. If you have a large amount to invest, buying art and other "real" objects might be a good option for you.

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