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THE DAILY CUT


SIDESTEP INFLATION WITH SHARES OF BLUE-CHIP ART

Chris Lowe, Scott Lynn  | Sep 22, 2022  | The Daily Cut | 4 min readPrint

--------------------------------------------------------------------------------

Chris’ note: Inflation is the biggest threat to your wealth right now. It’s sent
stocks and bonds tanking. It’s also sent the Fed into rate hiking mode. That’s
pushing up the risk of recession.

To fight back, colleague Teeka Tiwari recommends scarce assets such as
collectibles and art. The government can “print” as many dollars as it wants.
But it can’t print a 1960s Ferrari 250 GTs or a Pablo Picasso painting. This,
plus their enduring desirability, makes them great stores of value.

Yesterday, I showed how you can now buy shares in artworks by Picasso and other
iconic artists through a platform called Masterworks. It’s the brainchild of
tech entrepreneur and art collector Scott Lynn.

I spoke with Scott about how owning shares in artworks can help you build a
higher-return, lower-risk portfolio… and how you don’t have to be a wealthy
buyer to take advantage. It’s all in the Q&A below…

--------------------------------------------------------------------------------


Q&A With Scott Lynn, CEO, Masterworks



Chris Lowe: Buying shares in iconic artworks is a game-changing idea. What’s the
origin story of Masterworks?

Scott: For about 20 years, I’d been starting technology companies across
different segments – from gaming to FinTech. And I was collecting art throughout
that time.

Masterworks takes my passion for art collecting and combines it with my finance
and technology skills. It takes this asset class – art – that has been available
only to wealthy buyers. And it opens it to everyday investors through
securitization.

Chris: Walk our readers through how that works.

Scott: It’s the same thing private companies go through to go public. We take a
work of art… file it with the SEC [the U.S. Securities and Exchange Commission,
the main stock market regulator]… and sell shares in that work of art.

Chris: I was calling it fractionalization, because it allows you buy a fraction
of a Picasso. You call it securitization. But it sounds like it’s the same
thing. You take a painting, turn it into a company, and sell shares in it.

Scott: Exactly.

Chris: What advantages does art as an asset class bring for investors? Our
readers may own stocks, bonds, cryptocurrencies, and private shares in regular
companies. Why add contemporary art?

Scott: It’s down to diversification. Investors with a traditional 60/40
portfolio split between stocks and bonds are susceptible to volatility like
we’re seeing right now. That portfolio is down about 17% this year. It isn’t
diversified enough across other asset classes.

Take a step back and ask yourself what you’re trying to do as an investor.
You’re trying to generate the highest returns at the lowest volatility.

The way you do that is to diversify across a bunch of different asset classes
that don’t move in lockstep. When one goes down, another will go up or stay
flat. This smooths out the overall volatility in your portfolio.

Art is a great way to do that. The correlation between art and the S&P 500 is
between 0 and 0.2. A correlation of zero means the two assets move independently
of each other. So that’s a very low correlation.

Plus, the Masterworks portfolio has appreciated at roughly 15% to 15.5% a year
since it got going in 2018. So you also have these great returns.

Chris: What about inflation? How does that affect art prices?

Scott: There are two things to understand about art prices…

First, they’re linked to the growth in the global top 1%. The folks buying and
trading these $10-, $20-, $30-million paintings tend to be the wealthiest people
in the world. And generally, they behave differently during inflationary cycles
than regular investors.

Second, the art market is global. The U.S., China, and Western Europe account
for roughly 75% of the global art market. You can buy a painting in New York,
put it on a plane, and sell it in Hong Kong. They aren’t as susceptible to
country-specific issues as other asset classes.

So I would say art prices are mostly neutral to inflation. Inflation doesn’t
really change how art prices appreciate. It’s not like a bond that’s going to go
down in value as inflation rises.

Chris: Do I buy shares in that painting through my broker like how I buy shares
in Microsoft or Ford?

Scott: At Masterworks, we do something called “issuer direct.” We sell shares
directly through our website. You don’t need a brokerage account to invest in
them. Just go to the Masterworks website, create an account, and speak with one
of our financial advisors to get started.

Our minimum for each painting is $15,000. But if that’s not suitable, we lower
that for investors. That’s something I’d encourage your readers to discuss with
our financial advisors. They’ll give you advice on how to get started in a way
that makes sense for your needs.

Chris: What does your client base look like? Are we talking mom-and-pop
investors, family offices, or big institutional players?

Scott: All the above. We don’t work as often with investors who want to invest
$500 on the hopes of it turning into $50,000. It’s more about building a
higher-return, lower-risk portfolio that allows you to build steadier wealth
over time.

Chris: Thanks, Scott.

Scott: My pleasure.


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