How Unfair Transactions Affect You

Feb 06, 2014    |    My Money MD     |   Shirley M. Mueller, MD

A few months back I wrote about Jim, a service provider who observed that his stockbroker appeared to be separating him from his money.
 
He noticed that cash seemed to be disappearing from his account. This was because of loads (up-front charges) and continuing 12b-1 fees (advertisement expenses charged to Jim that only benefit his brokerage firm) plus high management costs. All are legal.
 
This had been happening to Jim for several years, he finally was ready to delve into the reasons, though he had been meaning to do it for some time. Deep undercurrents were apparently at work in Jim’s head that only recently bubbled to the surface. There are some neuroscientific reasons why Jim finally took action.
 
Current neuropsychological studies demonstrate that unfair offers lead to rejection. For example, in the ultimatum game, if one player is given $10 and knows he can share it with a second player any way he wants, but can keep money only if the second player accepts his offer, certain outcomes are predictable. If the first player offers the second less than 25% of his money, the second player will reject his offer 50% of the time. Then, neither player gets anything. They both lose. On the other hand, if player one offers the second player 30% or more of his cash, most of the time the second player will accept and they both win (gain more than they had to start with).
 
This sense of fair play is even reflected in the animal kingdom. When two monkeys are in cages side by side and each is given a cucumber slice in return for a pebble they have offered to the researcher, then all is well. But, if one monkey is given a grape in place of the cucumber for the same pebble, the other monkey becomes agitated and no longer wants to play. He evidently perceives a grape as a better reward and sees the game as no longer fair.
 
This rebuff of one player toward the other (in the case of humans, one to another, and in the case of the monkeys, animal to human) is thought to be a form of punishment for an unfair action. According to the work of Fehr and Fischbacher, this rejection can promote more reasonable and accommodating behavior in the future. Therefore, these actions can be explained through evolutionary forces.

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The Cyclical Rotation Effect: A Factor in the Art Market and the Stock Market

Oct 15, 2015    |    My Money MD    |   Shirley Mueller, MD

The first lot in the Marques dos Santos Leilões sale of Chinese export porcelain on Sept. 25 sold for nearly $20,000 including commissions.

My phone representative said, “He never takes down his hand.” This was my counter-bidder for Chinese export porcelain at the Marques dos Santos Leilões sale of Chinese export art Sept. 25 in Oporto, Portugal. Chinese export porcelain is porcelain made in China and exported to the West.

What was surprising was not that I was outbid, but the nationality of my opponent. He was not Chinese (this ethnic group been rabid in the auction market of late for all things Chinese). Rather, he was from India.

This competitor for the auctioned Chinese export porcelain lifted his arm and did not drop it when he wanted to make a purchase. Bidders in the room found this intimidating no doubt, but it was also intimidating to me as a phone bidder. I knew that if I desired a lot and this man did too, he wouldn’t stop until he won it. Of course, that could mean he paid too high a price, but perhaps no matter to a wealthy person whose anticipation of owning Chinese export made his pleasure center burn brightly.

Secondary bidders in the sale were evidently Brazilian and English with Chinese buyers scarcely to be found according to my phone representative. So, it is with art. When a country’s economy nosedives as it has in China, generally fewer art enthusiasts buy art.

http://www.hcplive.com/physicians-money-digest/columns/my-money-md/10-2015/the-cyclical-rotation-effect-a-factor-in-the-art-market-and-the-stock-market#sthash.NFN0t4Xh.dpuf

Art and Lots of Money: What to know

This past week NYC hosted the Antiques Fair at the 67th street armory and the Ceramics Fair at the National Academy of Design.  There were also simultaneous high end sales at Christies and Sotheby’s to coincide. The events brought out not only art collectors, but also art advisors buying for their clients, some of which were high net worth individuals (HNWI). Art advisors buy art for HNWIs to smooth out the overall return of their investment portfolios within the ups and downs of specific categories in the art/luxury markets.

However, whether adding art as another asset class is beneficial to return is still a matter of speculation. The British Rail Fund (BRF) used art in its portfolio for 25 years and made an annualized return of 11.3%, which is perfectly respectable, but was not as high as the rest of the BRF’s portfolio.

Today, the BRF does not invest in art as an asset class. Its concerns could have included the cost of storage and insurance for the art or luxury item. In addition, this category has no dividends or income like stocks and bonds. Moreover, they cannot be disposed of rapidly. They are only worth what someone will pay for them and the market can be very thinly traded. Therefore, valuing art/luxury items can be speculation more than a solid determination.

A recent research paper by RFA Campbell, however, challenges this concept. It suggests that art is worth considering as an asset class in a HNWI’s investment portfolio. She looked at art as yet another alternative asset class and treated it like real estate, commodity futures, private equity and hedge funds. Each of these can be used to broaden diversification within an investment portfolio. She focused on bear markets because it is there that the benefit of diversification is most needed. The author used data from both the Art Market Research and Mei Moses All Art Index that compare repeat sales prices of particular items at auction.

Read more at: http://www.hcplive.com/physicians-money-digest/columns/my-money-md/02-2010/science_of_art_investment#sthash.cSR18K4g.dpuf

A New Concept: Art for the Average Investor

  My Money MD    |   Shirley M. Mueller, MD

A few weeks ago, I gave a lecture in Paris entitled “Art: For Love or Money?” It was in association with Deloitte S.A. Luxembourg’s third annual “Art and Finance” conference regarding the art market and finance. The two intersect because studies by Rachel Campbell, assistant professor of finance at Maastricht University in the Netherlands and others show that holding 5% of a portfolio in an art fund results in a positive for return over time, at least for high-net-worth individuals (people with net worth of $30 million or more).

At the conference, Thierry Hoeltgen, the lead partner of Deloitte Luxembourg, made a surprise announcement (at least it was a surprise to me). Deloitte wants to bring the art-fund concept to the average investor. The scheme is evidently preliminary, as no details were given. Nevertheless, what we know about art funds for the wealthy is likely applicable. Art adds diversification to an investment portfolio in that it has low correlation with stocks – when stocks go up or down, art does not necessarily follow. 

Art as an alternative investment has been promoted by Jianping Mei, a professor of finance at the Cheung Kong Graduate School of Business in Beijing, China, and by Michael Moses, previously an associate professor of management and operations at NYU Stern School of Business. The two launched a company called Beautiful Asset Advisors LLC, which created the Mei Moses Art Indexes based on the researchers’ data. The index tracks returns on some 15,000 objects that have been repeatedly sold in major auctions over the past 75 years, according to the Wall Street Journal. 

This graph indicates that currently the All Art Index is back to 2005 levels, while the S&P Total Return is hovering near levels it hit in the early part of this decade.

The 2008-09 downturn in the art market occurred after logging strong returns since the late 1990s, though not always in tandem with the S&P 500. This is, of course, why Campbell and others find low art and stock market correlation.

Read more at: http://www.hcplive.com/physicians-money-digest/columns/my-money-md/11-2010/A-New-Concept-Art-for-the-Average-Investor#sthash.4lH35kml.dpuf

Antiques, Auction Houses and Your Portfolio

Sep 26, 2013    |    My Money MD     |   Shirley M. Mueller, MD

“It takes just as much effort to sell an object for $10,000 as for $100,000” — Anonymous

An example of an art piece that meets the new criteria for the increased buyer’s premium. Before the enhanced pricing, the buyer’s premium was 20% — now it is 25%. From Christies.com: A FABERGE-STYLE SILVER GILT AND ENAMEL KOVSH, AND A PILL BOX,20TH CENTURY, sold for $52,500 at Sale 2721 Interiors 23-24 July 2013 New York, Rockefeller Plaza

Antiques and art are recommended for a limited part of an investment portfolio, at least for high-net-worth individuals. Recently, Christie’s and Sotheby’s whittled away at any benefit this might have for buyers of more modest artwork by increasing the threshold for their buyer’s premium in their lower two tiers (Effective 11 March 2013 for Christie’s).

                              Before                                          Now

Tier 1 (25%)          <$50,000                                   <$75,000

Tier 2 (20%)        $50,000-$1,000,000                  $75,000-1,500,000

Tier 3 (12%)          >$1,500,000                                >$1,500,000

Percentage of U.S. buyer’s premium depending on item value for Christie’s. Note the figures for the lower two tiers increased. Sotheby’s increased similarity. 
 
Whether this was to squeeze an additional premium from clients or to discourage lower and medium-end sellers and buyers from consigning to them is the $64,000 question. Javier Lumbreras from Artemundi Global Fund tackled this puzzle with data in his article entitled, “What is the True Reason Behind Christie’s and Sotheby’s Increase in Buyer’s Premiums?” It was published in ArtBanc Intelligence, in June 2013 (issue 4).
 
Lumbreras performed a statistical analysis on more than 9,000 lots sold at Christie's and Sotheby’s during 2012. To do this, he grouped the lots sold using the before period and then the after increase in pricing structure at both Christie’s and Sotheby’s. He used the lots in each tier and their share in value to calculate the percent of premiums the auction houses gained from the sales.

Read more at: http://www.hcplive.com/physicians-money-digest/columns/my-money-md/09-2013/Antiques-Auction-Houses-Your-Portfolio#sthash.UGOGWBdd.dpuf