Episode #269: Scott Lynn, Masterworks, “I Think Art As An Asset Class Has To Be The Largest Asset Class That Has Never Been Securitized”

Episode #269: Scott Lynn, Masterworks, “I Think Art As An Asset Class Has To Be The Largest Asset Class That Has Never Been Securitized”

 

 

 

 

 

 

 

Guest: Scott Lynn is the Founder & CEO of Masterworks, the first company to allow investors to buy shares representing ownership of great masterpieces by artists like Warhol, Monet, and more.

Date Recorded: 10/14/2020     |     Run-Time: 1:04:36


Summary: In today’s episode, we’re getting into the ins-and-outs of the art market. It’s been around a long time, but investing in it hasn’t been widely accessible. Scott launched a business that has set out to change that. He takes us through some history and the evolution of the market. We discuss constructing a data set to formally analyze returns of the asset class, and what he and his team learned from the process.

Scott talks about the interesting opportunity the art market offers from an investment standpoint, and specifically, what segments and artists the Masterworks team keeps their eye on.


Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159

Interested in sponsoring an episode? Email Justin at jb@cambriainvestments.com

Links from the Episode:

  • 0:40 – Intro – Masterworks.io – Promo Code: Meb to skip the 15,000 person wait list
  • 1:48 – Welcome to our guest, Scott Lynn
  • 3:42 – Scott’s background and foray into art
  • 5:17 – An overview of the size and scope of the art market
  • 8:14 – How the art market has evolved
  • 9:38 – What are the sectors/genres of the art market
  • 12:10 – Scott’s own participation in the artwork over the last 20 years
  • 13:27 – The origins of Masterworks
  • 18:41 – Art during financial downturns
  • 20:09 – The Global Art Market – Citi
  • 20:52 – Meb’s family story with art
  • 22:08 – Their data on valuation in the art market
  • 22:45 – Launching Masterworks
  • 24:18 – Walking through an offering
  • 26:57 – Investing in an art strategy vs. a specific piece of art
  • 28:00 – Target demographic
  • 30:32 – How Masterworks decides on what art to invest in and when to sell it
  • 32:10 – Some of the artists on their platform
  • 33:54 – Actual procedure for procuring the artwork
  • 36:54 – Previous fine art funds
  • 38:03 – When to sell the artwork
  • 40:19 – Tax implications of these assets
  • 41:58 – Museums selling art
  • 44:27 – People visiting their gallery
  • 45:06 – Collectibles market
  • 45:12 – The Meb Faber Show – Episode #48: Van Simmons, David Hall Rare Coins, “The Rare Coin Market Can Go Up Dramatically, Quickly”
  • 46:19 – Global exposure
  • 46:58 – How the geopolitical market landscape is driving the art market
  • 50:24 – The secondary market action among the Masterworks community
  • 50:56 – Concerns about art theft and forgeries in 2020
  • 53:10 – An overview of the actual company and fundraising for it
  • 55:05 – The future for Masterworks
  • 56:42 – Greatest artist for investing
  • 58:52 – Most memorable art investment
  • 1:00:46 – Most undervalued assets in the space
  • 1:01:32 – Collectibles of the next generation of wealthy
  • 1:03:51 – Learn more: Masterworks.io

 

Transcript of Episode 269:

Welcome Message: Welcome to the “Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb: What’s up, friends? We got a masterpiece of a show for you today. Our guest is the founder and CEO of Masterworks, a startup that’s opening the doors to top tier blue-chip art investing to everyone. He’s a special offer for listeners of the show. You can skip the 15,000 person waitlist by going to masterworks.io and use the promo code MEB. That’s masterworks.io promo code MEB.

In today’s episode, we’re getting into the ins and outs of the art market. It’s been around a long time, but investing in it hasn’t been widely accessible. Our guest launched a business that is set out to change that. He takes us through some history and the evolution of the market. We discuss constructing a dataset to formally analyze returns of the asset class and what his team has learned from the process. There’s a lot of great academic lit on the subject, including from our old podcast guest, Professor Elroy Dimson. We talk about how an art allocation fits in the portfolio and specifically what segments and artists of the Masterworks team keep their eye on. As we wind down, I tell a fun story of a mystery piece of artwork that’s been in our family for decades. Please enjoy this episode with Masterworks’ Scott Lynn. Scott, welcome to the show.

Scott: Thanks for having me.

Meb: Where in the world are you today?

Scott: As you can maybe see for those who are watching, in New York City.

Meb: That’s funny. I’ve talked to a lot of friends in New York lately. And despite the fact it seemed like ground zero for the zombie apocalypse this year, god, 2020 has been so long already. It seems like I see all my photos and talking to my friends now, and it seems almost like this idyllic paradise. How’s things on the ground there?

Scott: Things are pretty good. Definitely, New York was hit hard early on, but I think it’s more or less stabilized by now at least relatively compared to other places.

Meb: Well, before we started this show, hit record, you poured some cold water on my dreams for 2021, which is to quarantine a little bit in Colorado and do some skiing. You made me a little nervous about the setup. You are part-time in Colorado too. Is that right?

Scott: Yeah, so live between New York and Aspen. We were talking about how Aspen has now sent out an email to everyone who buys season passes basically saying that they’re going to socially distance everyone on the mountain, which I’m not sure how that works exactly, but that’s the latest.

Meb: One of my favorite ski trips in my life was in Aspen but this was like right out of college, and one of my girlfriends lived there with, like, nine of her other girlfriends in like a two-bedroom, and five people went to visit. And it’s such an awesome mountain. So, on my to-do list, my bucket list, we’re going to try to knock this out this winter. We’ll see how the world’s going. Let’s do the drive from LA up through Taos, which I’ve never skied and then Silverton outside of Telluride. Those are my two to-dos this year. We’ll see what happens. Are you a skier or a boarder or neither?

Scott: Skier. I’ve been seeing my whole life. But surprisingly, I’ve never even tried boarding.

Meb: Where’d you grow up skiing? What was your home mountain?

Scott: I grew up in Kansas City. So, the closest mountain to us was actually Vail.

Meb: Not too far down the road for me with Winter Park. I got a lot of sutures from a lot of different mountains all over the country. All right, well, we’re not talking about skiing today. Let’s talk about art. This is something we haven’t covered much on the podcast. We did a little bit with one of my favorite podcasts and favorite authors was Professor Dimson, based out of the UK. And he wrote my favorite investing book called “Triumph of the Optimists.” And they actually wrote a fantastic paper on investing in art as an asset class that took it way back to 1900. But tell me a little bit about your background. You grew up as an artist. What’s your interest in art? And then we’ll kind of walk forward and get to the art market in general.

Scott: So my background really is not necessarily in art. So I’ve been starting technology companies for the past 20 years, from online gaming to online advertising, and then recently fintech. But I’ve been collecting art roughly that same period of time. So I bought my first grade or is good painting, I was 19. And the art market back then was very different than it is today. And, you know, I guess I’ve just appreciated the characteristics of the asset class over the past 20 years but had this idea to start Masterworks, basically, because if you look at the performance of the asset class, which generally outperforms public equities and is uncorrelated, it’s very interesting, but there’s no way to allocate to it unless you have millions of dollars to buy a painting, which the vast majority of people don’t. So Masterworks was the first company to securitize a painting in a very similar process to how companies are taking public by filing an offering with the SEC and then selling shares in individual works of art.

Meb: We’re going to go super deep into all this. But let’s talk about the art market a little bit, in general. You hit on some of the general perceptions. And the first I can always think of is it’s just a rich person’s game. And the challenge of it being a pretty insider focused market, it makes used cars, to me, seem like the most transparent thing in the world. It’s almost like a James Bond novel of Russian brokers and selling this one. It came out of somewhere. Give me the scope. How big is the art market? What’s it look like? How’s it evolved? All of that good stuff.

Scott: I guess there’s a lot to unpack there. So the way we think about the size of the asset class, and this is what we find so interesting, is Deloitte and Sotheby’s estimate the size of the asset class to be roughly $1.7 trillion dollars. If you look at the annual transaction volume in 2019, pre-COVID, it was $68 billion. So you can sort of think of that as a couple of percent turnover every year.

And then think about how do you really judge the qualities of an asset class? Like, when I think of a strategic asset class, I think of the very simple definition of does it beat inflation? Is it uncorrelated? The really interesting thing about the art market is that half of it trades through public auction. So you have this massive data set, which you can analyze for literally hundreds of years to determine, is the asset class appreciating and is it uncorrelated?

If you just go back in history, and I tell people this a lot, and it’s fascinating because nobody fully grasps it. Sotheby’s, which is one of the two most popular auction houses, was recently taken private from the New York Stock Exchange. Sotheby’s is a 275-year-old company. And that’s just almost hard to get your head around in today’s world. So this is a business that’s been operating for centuries, really doing the same thing that it does today, which is kind of brokering art through this auction method. We think this is one of the oldest asset classes. It’s one of the largest asset classes. You think of $1.7 trillion, compared to venture and private equity, which is roughly $3.5 trillion. But there’s been no way to allocate to it up until now, other than buying a multimillion-dollar painting. And that’s what we find so interesting.

Meb: We talk a lot on this show about what we call the global market portfolio. If you were just to go out and buy the world of assets, it’s roughly half stocks, half bonds, half U.S., and half foreign. But there’s a big chunk of that that’s not well represented for public markets. And it goes single family real estate is hard to access is a big, huge one. And under that sort of real assets, we talk a lot about farmland, which is from someone who’s from Kansas City; we come from a farm family. In western Kansas, we still have some farmland, knock on wood, we got some wheat in the ground this year. And Nebraska. So farmland is a big one that’s really hard to access. And a lot of similar properties, difficulty of allocating it as art.

And then as you mentioned, art, if you call it 200 trillion global portfolio, this collectables piece, art being a big part of it, ends up a few percentage points allocation, depending on how you define the whole collectables universe. But it’s hard what you mentioned. Walk me through how this sort of market has evolved the past 20 years. So since you’ve been involved, since the ’90s kind of rolled around, is it something that, with the Internet, and transparency, and everything involved, has it become a lot more accessible at all?

Scott: You hit the nail on the head. So the big game-changer for the art market was, I guess the advent of the Internet, which is maybe not surprising. So what happens is there was a company called Artnet, which was started, and which basically started publishing prices through a searchable database of all historical auction records. So prior to… I can’t remember the exact date, but call it 1998 when Artnet was founded, the only way you knew what a painting was worth was to kind of trust the dealer you’re buying it from to go to an appraiser and get an appraisal. You couldn’t really do your own research quickly and conclude the value of something. So that level of transparency just totally changed the art market.

And I think even the early 2000s, we saw people start to focus more and more on investing in art based on the accessibility of that data. It’s still early days. Like, most people now realize that it can be a strategic asset class. They don’t know how to allocate to it. They don’t really want to get deeply involved with learning about it in terms of going to galleries or, you know, whatever it may be. So, there’s still tons of opportunity for all of them.

Meb: Breakdown the market, in general, much like stocks, there’s a lot of what we call in the stock market sectors or industries but in the art world, it’s going to be different categories, post-war, contemporary, Western art, Chinese art. All that sort of stuff is 90% of the transactions. Are they happening with the old Masters? Is it something where it’s evolved over the years? Give us kind of lay of the land.

Scott: Maybe taking a step back. So, when we started Masterworks, one of the things we realized very quickly was that in order to convince real investors that this is a strategic allocation, we would have to have a lot of data. And for a bunch of different reasons, I mentioned Artnet, specifically, but good data on returns has never really been assembled in the art market. So there’s a lot of data on how to value something from a fair market value perspective. There’s not so much data and really understanding how specific segments of the market are appreciating.

We went out, and very similar to how Case-Shiller was constructed for real estate, we went out and we found every single time that a painting had been purchased at public auction, and then subsequently sold at public auction, and what the return was in that individual transaction. And then across 80,000 or 90,000, returns, we use that to construct indexes on the art market overall, or certain specific segments of the market. And by the way, those indexes are also what we used in partnership with Citibank to do the first correlation study on the asset class.

So, that research project taught us a lot of things very early on. And it gets to your initial question, which is, what segments of the market appreciate most quickly and how do you think about a painting from the 17th century? How do you think about a Rembrandt versus a more contemporary artist like a Frank Stella? And the very first thing that those indexes showed us is the appreciation the art market follows fashion or follows recency but in very wide increments. So what you’ll see is that in today’s world, art created after World War II is most investable. And just now we’re seeing post-World War II art start to decelerate, in terms of appreciation, and newer art created in the ’70s, ’80s, ’90s is still accelerating but eventually will decelerate, which means that if you buy a Rembrandt today, you’re most likely in the future to get your money back maybe plus inflation. Like, it’s still a good store of value but it’s unlikely to produce returns. We really see these sort of call it 80-year periods that art comes into fashion and then slowly goes out of fashion. And those are the most investable periods.

Meb: I would love to hear a little bit about your own personal experience of collecting over the past 20 years, and then lead into the ideas that helped formulate the concept in the origin story of Masterworks. Was it something that you participate in auctions? Were you going to galleries? Were you just chatting up friends? Were you using brokers? How did your experience work for the past 20 years? And by the way, what do you have in the background? Listeners can’t see it. But there’s nice little sculpture.

Scott: To answer the first question, all the above. The art market in some ways, it’s very simple. And in some ways, very complex. I mean, there are tons and tons of intermediaries. You can think of art advisors as somewhat synonymous to, like, real estate brokers and real estate. There’s auction houses, galleries, and then all these brokers in the middle. You definitely have to learn how to navigate that ecosystem. And the reality is personally, I made lots of mistakes. I have a top 100 collection now, really focused on abstract expressionism. So people like Rothko, Pollock, Klein, de Kooning. The sculpture in the background is someone named John Chamberlain, who was the first American artist to kind of use found materials to build sculpture. It’s one of these markets that I think just has a huge learning curve for most people. And unless they’re passionate about it, historically, they haven’t gotten involved in it, even if they think it can be a good investment.

Meb: So we’re walking forward to what was sort of the inspiration for the idea that has come to be Masterworks? Was it something where you were just, like, “Look, this is a pain in the ass,” or you’re having a coffee or glass of wine with a friend that said, “Man, I’d love to just split a painting with you?” What was the kind of the original idea of the concept?

Scott: So I think there’s two things that I find really intriguing. One is that you have this asset class, which historically has outperformed public equities, and as we discussed, is uncorrelated, which I think we’ve proven that at this point, but there hasn’t been a way to allocate to it outside of buying a $1 million plus painting. And then if you want diversification in the asset class, you’re spending $10 million, $20 million to diversify. And that’s really why, historically, it has been limited to the ultra-wealthy. You qualitatively see that.

You know, like, last weekend we had an evening sale in New York, where hundreds of millions of dollars in art sold in one night. If you’re standing there in the room, right, it is one online, there’s 200 people that are bidding for these paintings that are all worth nine figures or more. That is the nature of the art market today. So it was really how do you take this asset class and make it accessible to everyone? Which I think we’ve now done.

The second thing is just that if you think about different asset classes, and you think about the competitiveness of those asset classes, and where there’s opportunity to find alpha, I think art as an asset class has to be the largest asset class that has never been securitized. So you have $1.7 trillion sitting out there, which we know is interesting from an investment perspective. But there’s never been a company that securitized it. And that to me is shocking, particularly considering that it’s the oldest asset class. I don’t know why that is. I mean, we talk about it internally at Masterworks all the time, like, why are we the first ones doing this? It doesn’t really make sense. But it is what it is. So, you know, I think about art at $1.7 trillion with just us as the only one securitizing it. Then I think about like venture and private equity at 3.5 trillion dollars with 6,000 firms that help people allocate to it. And I just think this is a really interesting opportunity.

Meb: I’m going to give you feedback personally, as to why I think you’ve found something special. There have been a few platforms, and I think you will be one of the winners, by the way, who have hit upon this idea of securitization in an asset. Another, they don’t do art, but they do cars and comic books, Rally Road is an example where originally, I was like, “This is the dumbest idea. Why would anyone want to invest in a classic car that they can’t drive? Why would anyone want to invest in comic books that they can’t hold possession of?”

And then I thought about it. I used to have a classic car or maybe I would call it vintage, 1960s Land Cruiser. And what a pain in the ass that was. Oh my God, I loved driving it but it was expensive. It would break down. It took up room. It doesn’t sit a three-year-old in it, on and on. And there’s a side one about comic books. I was a big comic book reader as a kid. Best thing my parents ever did for me was just let me buy all the comic books and read all I wanted to. Well, mom, bless her heart, has been storing a couple thousand comic books for 30 years now. And mom just brought two of the boxes in my house now. And I’m like, “Oh, God, what am I going to do with all these boxes of comics? I don’t want these. You’re going to have to store them somewhere.” They’re currently sitting in my garage. And I think that applies to art too.

Was it Wynn that put his elbow through his painting through the Picasso? One of the earliest private companies I invested in was MURAL. And MURAL does kind of like a digital painting on the walls sort of thing. They got bought by Netgear. But it applies to so much in life where the romance of an idea versus the actual ownership practicality. And so then once you separate the two, you’ve found what actually works. And many of these, like StockX, I bought a pair of shoes, that’s a little different because I’m actually going to wear them. But anyway, that’s my takeaway, long-winded answer to say why I think you found something that works.

Scott: I always get this question, like, “How do you think about art versus cars versus all these other things? And the short answer is, I don’t know. I really only understand the art market and art as an asset class. But one story that always comes to my mind is when we started Masterworks, this is very, very early days, and it was the genesis of us creating a research team, which I think is the best research team and understanding returns in the art market today. But I had this meeting with the head of strategic asset allocation at Goldman. And he’s responsible for building model portfolios that control a couple trillion dollars in assets. And the very first question out of his mouth in the meeting…He’s a really nice guy, and I’ve learned a lot from him, is “Prove to me this is a strategic asset class. Prove to me that it beats inflation and prove to me that it’s uncorrelated.”

And I think that’s such a critical question in anything that we think about investing in. Is there enough data to demonstrate that something is beating inflation and that it’s uncorrelated? And if so, it has a role in a portfolio. You know, I struggle with that with a lot of collectibles. Like, I’m not sure how to think about that. But I do know with art, in the last 10 years… And look, I mean, this is a market that’s selling whatever, $68 billion a year in art, in the last 10 years, we’ve just now got enough data to prove that it really isn’t correlated and that it really does outperform other asset classes.

Meb: I think you’re going to see, at least from my conversations with a lot of investors, the U.S. is a high yield market compared to the rest of the world where bond yield’s trending towards zero, and in much of the world already negative. Places that just at least have some sort of wealth protection. Gravy is returns, but at least can keep up with inflation and art, and you can talk to this, but it seems to me would have, I would think a similar characteristic as gold does when there’s negative real interest rates, when inflation is higher than bond yields like now. If inflation is 2%, bond yields in the U.S. are below 1. We actually have negative real interest rates, what a lot of people call financial repression. Is that something that shows up in the data? I would think it would, that the art does particularly well during those periods.

Scott: There’s two things. One is I would say that art during financial crises very high level is uncorrelated. So when you look at the .com bubble bursting in 2000, our prices were up. When you look at 08′, 09′, it had the highest correlation factor ever, which I think was 0.4. Interestingly, the art market declined in 2016, even though public equities didn’t, probably because of Brexit or capital controls in China. And then with COVID, our prices have continued to go up. I don’t know how to think about public equities right now. But generally, that’s kind of pressure testing art during financial crises.

In terms of art as a store of value or art compared to gold, we did just publish a report with Citi on art versus gold. And there are two things that I think about. One is characteristics of art, in general, when compared to gold, is art has a lower loss rate measured on a three-year trailing average than gold. And when you do lose money, and this is why we think it’s such a good store of value, the magnitude of losses is far less. The challenge with art versus gold is that art’s inherently illiquid. And we’ll talk at some point about how we’ve now launched trading markets for securities in these paintings and people are trading these securities, but in general, it’s an illiquid asset class. So, we think the characteristics are better than gold but an investor has to be willing to tolerate the illiquidity.

Meb: I’ll tell you a funny story. And I haven’t told this publicly on the podcast, but my grandmother from North Carolina used to always say that we descend from a long line of horse thieves. As every family I’m sure does, not just in their extended family, somewhere, there’s a murderer, a thief, or just terrible people. But probably most of us can identify a few crazy people in our actual family. Everyone’s got a crazy Uncle Eddie. But there’s a fun story where my grandmother’s side of the family was living in Rock Hill, South Carolina, the Thomases. And so, there was a period during the wars where they had let a Jewish family stay with them. And as a thank you, they had given him a painting. I did some digging on the Internet about a year ago. And I think it’s a Swiss painter from a couple hundred years ago. But touching on this concept of stored value, where you’re leaving your house, your governments do what governments do, and maybe there’s some modern equivalents with whether it’s crypto currencies, gold, you put on your person a painting had a very real value to them. And they gave it to our family as a thank you for housing them for a while. So I think it does fit under this characteristics of things that can keep up with inflation. And if it returns more, gravy as well.

Scott: As a total aside, I’ve been talking about this research data that we’ve collected on returns in the art market. So our perspective on research data in general is that we just publish it for free. So if you go to the masterworks.io website and click on the price database section, your listeners can actually just go through that data themselves, which I think is kind of cool to see for people who don’t know much about the art market. But what we see generally is people just don’t… you buy a $10 million Monet, that painting never really sells for $3 million in the future. If someone overpays for it, maybe it sells for $9.5 million, or maybe it sells for $9 million, but the probability of loss and the loss rates in this market are not that great.

Meb: Let’s hop over to Masterworks. We’re going to get deep on how this actually works in practice. I’m now a proud partial owner of a painting on Masterworks. My wife was joking with me a week or two ago because I’m notorious for mispronouncing all sorts of words. And she’s like, “Meb, we need to walk through like 20 painters’ names. She’s like, “Say it with me, Basquiat.” However, you say it. I can’t say it. And I’ll be like, “I’m going to forget.” She’s like, “You’re going to have to practice this because you’re going to embarrass yourself.” All right, so Masterworks, you have this idea germinating, and when did you guys start, two, three years ago?

Scott: So we started the business two, three years ago. And the investment product really is very similar to how a company goes public, right? So we buy a painting, we put it into an LLC, we file it with the SEC as a qualified public offering, and then we start selling shares both to retail investors as well as accredited investors. So very similar to how a company goes public. But the SEC had never seen anything like that. So we started the company, filed the first offering, I don’t know, three, four or five months later, took us a year-and-a-half to get the first vehicle through the SEC, just from a commenting perspective, because it was a pretty unique idea at that point in time.

Meb: I can sympathize with you. We love you, SEC. They’re loyal listeners of our podcasts. They’re there for a reason. And I think they get it right, almost always eventually. But as you mentioned, some of these things can take a lot of time and a lot of legal bills. I don’t even want to ask you how much that cost to get that first one through. But it’s a unique process that I hadn’t seen before. Walk us through of how this would work. And you can even use your first painting or any other painting. You guys have got Banksys on there; you’ve got Warhols, but maybe take us through how one specific offering would work.

Scott: We buy a painting with our own capital. We put it into an investment vehicle. We file it with the SEC to go public. We sell shares to investors via the website. When the offering closes we move that offering to our secondary market where investors can trade shares between each other printer and liquidity. And then eventually the painting sells. And we tell people to think about these investments generally as three to seven-year illiquid investments. Again, you can use the trading platform in the interim but investors should expect to hold that investment for some period of time.

Meb: Well, it’s the same approach as private equity. You know, we talk about this a lot on the pod. This is another area where my opinion has changed over the years. We used to talk about illiquidity being a problem. But to me, it’s much more of a feature than a bug, where you watch what’s going on with investors, time horizons, and Robin Hood, and day trading again, like, no one learned their lesson from the ’90s. And this forcing you to kind of hold things for longer periods and let the investment compound is by far one of the most important things in all of investing. And so, this concept of holding period, I think, is important. Okay. So let’s say you guys buy a Banksy, it’s 2 million bucks. Do you guys buy it upfront? Do you get the pre-commitments? How does it work?

Scott: Yeah, we buy it up front with our own capital. That’s really required for the art market. You know, it’s one of these asset classes where to kind of bring good values to the platform, we just need to be able to move fast with most sellers. So we buy it with our own capital, and then we effectively sell it off. Our fee structure is very similar to how you think of fee structure in private equity, which is 1.5% per year plus 20%. Carry your 20% of future profit.

Meb: It’s interesting because you guys… It’s a dual to me. You have skin in the game in the sense that you’re buying it in the first place. You have the alignment of interest where it’s upside. What happens if you say, okay, we’re going to list a Rothko, it’s a giant red square, no one wants any.” They’re like, “Oh, my God, well, who’s going to invest in this?” And you guys have a $2 million painting? Do you guys just put it on the balance sheet? Do you keep it? Let’s say only a million sells, what do you kind of do with it then? Does that happen before and what would happen if it did happen?

Scott: We’re fortunate in today’s world where a lot of these million-dollar paintings are selling out in 24 hours, 48 hours. Larger paintings are taking weeks, but everything’s moving pretty fast. Theoretically, if that did happen, we would just return investor money and then sell the painting privately.

Meb: I was thinking about this last night, as I’m known for having lots of terrible fintech ideas. So, throw this in the garbage, by the way. But I said, you know what’d be interesting? As I was looking through the paintings, it’s like fantasy sports, where you’re picking the paintings you like, put together a portfolio, which I imagine is how a lot of people do it. But I imagine there’s also a lot of people that are like, “Look, I want to commit 50 grand to this asset class per year for the next 10 years. I don’t want to deal with it. It’s going to be almost like a rolling fund, they have an angel list. Can I just invest in a fund?” And the way I was thinking about it, is I was wondering that if you raise like a 10, 20, 50, 100 million dollar fund, that would sort of soak up on… You say, “Maybe we’re going to take X amount of offering or take the entire thing if the audience doesn’t want it.”

Scott: It’s a great comment. It’s the most common piece of feedback that we get from investors, and it’s something we want to launch. But I think right now, we just have so much demand, we’re kind of trying to keep up with it and keep doing what’s working well. But at some point, other products outside of these single painting vehicles make sense.

Meb: Who’s your target demo? Is it individuals? Is it family offices? Is it institutions? Is it U.S.? Is it global?

Scott: Today, it’s all individuals, right? They’re the ones who are really buying out these paintings very quickly. I’d say the majority of capital comes from accredited investors, the minority comes from retail. It’s really everyone. You did mention one thing I agree with is kind of this online, self-directed Robin Hood investor dynamic today, I share the same concern. That is a bubble waiting to burst.

One of the things that we do is, you know, from signing up is we actually have phone conversations with every investor. And we do that to try to just make sure that people are thinking about the asset class correctly. Because this is an asset class that’s new for almost everyone that we’re working with. And most people have no way to think about allocation, returns, hold period, risk, like we are risk rating our paintings now in different risk buckets to help investors better understand risk, but it’s new for most people.

Meb: The reason that I was kind of mentioning about the fund concept is we got a lot of advisors on this podcast. The conversations we have on a daily basis, they’re like, “Meb, I don’t know what to do with my bond portion,” which in many cases is significant. And they say, “I want to invest in farmland or I want to invest in art.” It’s just a pain. For example, we have over 50,000 investors, but the average advisor has usually about 80 or 100 per advisor. And if you had an advisory team that manages 10 billion, you may have hundreds if not thousands of clients. The challenge is you can’t for the client say, “Hey, look, you got to sign up on Masterworks. You got to do this,” maybe an idea where they could just allocate across 100 maybe into a fund. Neither here nor there. It’s an idea for 2021 perhaps. So, you buy a painting, you buy a portion, what happens next?

Scott: So you buy a painting, you buy portion, and then either you wait to sell your shares in the secondary market or you wait for us to sell the painting. We are feeding a lot of information to investors or I guess they’re finding it on the website themselves around what are called comparables, right? So similar paintings that are selling in the art market and how much money they’re selling for. There are certain offerings that we’ve done, where there have been comps immediately after those offerings that have been significantly more, which helped inform how to think about value on that prior offering. So that’s kind of the model we’re trying to build, right? Like, we’re trying to think about comps as research-like data over time that investors can use to indirectly understand the value of their securities, give them the tools that help them better understand the asset class and their investments.

Meb: So you guys have this database that informs a lot of your buy, sell. Walk us through how that works? Are you guys identifying…? You mentioned there’s six billion of transactions happening on a yearly basis. How do you filter and sort that to paintings that you might be interested in? How do you also think about when and why to sell them?

Scott: Our investment process or I guess, our acquisitions process is we have this research team that uses this data to understand returns by segment in the art market. What are most closely correlated to returns, maybe not surprisingly, are artists themselves. So, outside of example, outside of year, outside of anything else, the number one thing that determines returns is an artist. So our research team continuously updates a list of artists that they think are most investable. And today, that list is roughly 45. And that’s a very small number when you think of the thousands of artists that have painted paintings in history. So we’re really only focused on buying about 45 artists right now.

And then our research team hands off that list to our acquisitions team that goes out and finds examples by those 45 artists. And today, I think we’re tracking something like 1,200 different paintings by those 45 artists. So we’re buying less than 1% of what we look at. And when we buy a painting, how representative is that painting compared to the typical work that the artist is known for? And then two, value. Not surprisingly, the price we pay ultimately, significantly impacts returns. So we’re very value-focused with many of the offerings.

Meb: Talk to us a little bit about some of the artists that are on your platform. I mentioned a few famous names. But could you walk through some of the acquisitions or ones that you guys have featured or been interested in over the past year or two?

Scott: I mentioned that we have two different risk buckets. One is A risk bucket. And these are kind of blue-chip household name artists. So artists like Monet we’ve done. Artists like Basquiat we’ve done. Artists like Warhol we’ve done. And then there’s this B risk bucket, which most of your listeners are probably less familiar with. These are mid to late career living artists. And really, these are still what we consider, I guess, in the art world to be very stable artists. They’re artists that are selling more than $30, $40, $50 million a year. But they’re not a Monet, who’s selling $400 million a year. So they’re kind of more like small-cap companies. So those are artists like George Condo, or KAWS, or Cecily Brown. Even Banksy is a well-known name, but to us, he’s still a B risk rating.

From a data perspective, one of the things we look a lot at is not only what are the historical returns for these artists, but also what is the standard deviation of return? And therefore, the risk-adjusted return or what your listeners would think of as a Sharpe ratio. And it’s interesting when you look at the Sharpe ratios between the A bucket and the B bucket, they’re generally the same. So the A bucket you have higher single-digit kind of lower double-digit returns with a lower standard deviation return or Sharpe ratios of around 1 to 1.1. In the B bucket, you have kind of mid-teen returns with a higher standard deviation of return or higher volatility with a similar Sharpe ratio. I always tell investors, there’s not really a right or wrong choice between those two different buckets. It’s just kind of what your targeted return and risk tolerance says.

Meb: So you identify a painting, say, “All right, we’re interested in this new Banksy that’s come in to auction.” Is it something you guys actually literally go participate online, in-person? Do you set a target price saying, “Look, we’re going to pay this much.” And how often do you guys win those transactions? Is 5% of the time? Is it 90% of the time?

Scott: Particularly with COVID, we’ve been buying a lot more privately than we have at auction. So I think the last Banksy, and I’ll probably get this precisely wrong, but I think the last Banksy we did, we paid $2.3 million for it privately. I think it had an appraisal of $3 million.

Meb: And how does the private transaction work? Is it you guys are just calling a gallery? Is it privately listed in some sort of network? I mean, give us some behind the scenes. Like, how does this actually transact?

Scott: When you think about the art market, out of the 68 billion, half of that is at public auction. So that’s Christie’s, Sotheby’s, Philips, whole handful of international auction houses. And then the other half is privately. And there are kind of mega galleries, galleries like Gagosian, David Zwirner, Hauser & Wirth, and then there’s kind of mid-sized or small galleries. But everything really that we’re buying in kind of this million dollar plus segment is generally going through galleries. We have probably a dozen of the top art world families who we’re actively in conversation with. And we will buy work directly from them from time to time. But usually, we’re dealing with some intermediary in some way, shape, or form.

Meb: The only auction I’ve ever been to is for a Camaro, beautiful maroon Camaro I was trying to buy. And my problem, as listeners know, is I’m such a cheap bastard because I went to the auction in Palm Springs, and was way too scared to bid. I had a number in my head, I don’t even think it got to the number, I was just too caught up in the emotions of it and couldn’t pull the trigger. This is interesting. You guys have seen an increased amount of flow as far as paintings. How many of you guys invested in at this point? How many offerings have there been?

Scott: We’re launching a painting between $1 and $10 million every 7 to 14 days now. So the cadence is pretty fast. We get a lot of questions around how much has COVID contributed to that growth rate? And the short answer is I don’t know. I mean, the business was definitely growing last year, quickly into 2020. I can’t believe we’re already almost at the end of 2020. But it’s kind of hard to bifurcate the “COVID benefit to us,” versus the standard business growth. But I think investors, in general, are just looking at alternatives more now because they’re concerned either about public equities or they just don’t know how to think about things in general. They don’t know where to put money. We’re just seeing more interest across the board in what we’re doing.

Meb: You know, what’s interesting is, so maybe a dozen or two dozen paintings total, at this point, somewhere in that ballpark?

Scott: Twenty-seven or something, yeah.

Meb: There have been a handful of these private fine art funds over the years. And I think sum total, they probably manage less, I think at this point, I could be wrong, and you can correct me, you may know better, I think it’s less than a billion.

Scott: It’s even less than that. I mean, we have a full analysis in all these funds. And they’ve never been successful, which is really interesting. And most of these funds have been sold to art world people. So it’s like, if you’re a collector like me, and you don’t collect emerging artists, someone will start a fund. They’ll go to other collectors and say, “Hey, I’ll give you exposure to emerging artists.” But I think the unique thing about what we’re doing is 100% of investors on the Masterworks website are not art world people, right? They’re just people… They’re investors, they’re people looking for returns in an uncorrelated way. The history of art funds has never really made any traction.

Meb: Here’s the interesting part I was starting to allude to is that as you guys start to add more and more paintings, you are quickly becoming one of the dominant platforms in the entire industry, which size in and of itself has some benefits of increased deal flow, potentially better terms as far as acquisitions and sales, and you could extrapolate in the not too distant future, to where you guys could potentially become one of the biggest art funds in the world. How do you think about selling? We talk a lot about the challenges of investments on this podcast. We say, so many people spend 99% of their time on the buy, and then they buy something, and then they just don’t know what to do with it. They just kind of play it by ear. How do you guys think about this process for sales? Is it time-based? Is it a return target? Is it relative to where you think it should be trading with the other comps? Is it just opportunity-based? If some Steve Cohen calls you and is like, “Dude, I need that painting, 50 million. Here you go.” How’s it work?

Scott: The art market tends to be very event-driven. So, optimal selling is based on events. And those events usually break down into two different categories. One is an artist setting a record for a comparable painting, selling at what you would think is above fair market value, and then being in a position to sort of quickly sell a painting to people who are involved with that original transaction. So, an example is, this painting by this artist named Hans Hofmann. It’s a really good painting. It was probably a minus painting, in my opinion, but a great painting. An A-plus painting sold, I can’t remember what it sold for, like $9 or $10 million. We knew that was going to happen. So we had my painting in a back room for the under bidders who didn’t actually win that other painting to look at immediately.

That’s really the ideal way to sell something in the art market is when there’s a ton of buzz around a particular artist or a particular object, you just position yourself to sort of be next in line to capitalize on that. For most of these artists, that happens every couple of years.

The second thing is retrospectives will kind of institutionally driven awareness. So if a museum’s holding a retrospective on a particular artist, people generally become more interested in that artist. There’s an artist right now named Alex Katz, who we really like. I mean, personally, I think he’s an incredible living artist. He’s the Warhol of our generation. And the Guggenheim has announced a retrospective I think of his in I want to say ’24. So that is one thing that’s sort of influencing our investment thesis on that artist is we know there’s a retrospective coming up in three years.

Those are the two types of events that we think about. And then obviously, you know, you’re just always opportunistic. And the reality is, these are publicly traded vehicles. So just like a public company, we just have a fiduciary obligation to sort of sell a painting at anything that we think would be a reasonable value.

Meb: What’s the tax implication? So I put 10 grand into a painting. I assume it doesn’t really generate any sort of income or spit off anything like that. So seven years from now, you sell it, am I getting K1s? I’m I getting only when it actually completes a sale? How does it work?

Scott: That’s K1. So these are LLCs, you’ll receive a K1. You know, it is interesting, on the buy-side, one of the great things about the Masterworks structure is we’ve set up these vehicles to where they are not required to pay sales tax or use tax, which is a significant amount of money for most of these paintings. So that is kind of an indirect benefit of using this investment structure versus what someone would pay if they were actually buying a painting directly. We have a gallery in Soho. They’re all in the Soho gallery. If we can’t fit them in the gallery, we put them in art storage.

We’ve just recently started lending out permanent loan to institutions. So, ideally, rather than keeping them in storage, we would have them displayed at different institutions. So we have two Banksy right now that can’t remember if they’re in a Banksy show or not, but they’re a museum in Europe, the MOCA in Amsterdam, if I recall correctly. And we’re starting to do a lot more of those deals. So in a perfect world, we would have hundreds of paintings that are on display in institutions around the world that the public can actually see.

Meb: But there’s no real monetization there.

Scott: There’s not. We get asked that all the time. The reality is institutions won’t pay to borrow work. And institutions are very difficult to work with, they’re non-profit organizations. So, you can envision a world maybe eventually, where certain types of people, maybe like luxury real estate developers are paying to rent paintings. But I honestly think it’s a limited use case.

Meb: Masterworks subscription, for X amount of money, you get to rent a painting. It’s like Rent the Runway, but much more expensive. You get to rent these paintings, hang them in your house. I assume there’s enough insurance that you would have to take out on that sort of thing.

Scott: Yeah, they’re totally insured. There is one thing that’s interesting, though, with institutions, which has only happened in a COVID world. Most of your listeners don’t know these details on how museums work. But museums are basically governed in part by this organization called the AMA, which is like a museum association organization. And museums historically have been prevented from selling art to fund operating expenses. And the idea behind that is that as a society, we don’t want museums selling culturally significant objects to fund operating expenses. We want those objects staying public for the public to experience.

So the AMA has actually suspended that rule recently because of COVID to help museums keep the lights on. So we are seeing museums now deaccession works. And one of the cool angles that I think we’re excited about is there’s this idea that a museum could come to us, sell a painting to us, and we could have investors effectively buy the painting. And then the painting can continue hanging on the museum’s wall until the painting eventually sells, deaccession without actually having to give up display of the painting.

Meb: A few things I’ve read about the art world, there was some “Wall Street Journal” article a couple of years ago, where it said something like 80% of paintings that are transacted between individuals just sit in storage. And there’s some weird like tax domicile issues. And the other being, you mentioned so many of these museums, they’re only displaying like a fraction of their actual holdings, which is a shame because it seems like it would be nice to have them all on display somewhere.

Scott: So I was talking through this idea with the director of the Whitney and the Guggenheim, pre-COVID. And I asked that question. Like, “Why aren’t you selling work when you own so many examples by the same artist?” And it really comes down to this AMA rule, combined with just a concern that if an institution is seen as selling work that people donate to them, and then maybe people will stop donating the future. But the realities of most of these great museums, they have 10 great paintings by a particular artist. The best painting of those 10 and the second-best painting, which never gets shown because the other one is slightly better, there’s just a ton of stuff that sits in storage. It’s unfortunate.

Meb: Has anyone ever turned into an investor after just wandering through Soho and popping into the gallery? People were like, “What is this? Hold on, wait, I can buy a part of this Banksy?”

Scott: It’s funny, we do have people come into the gallery that become investors. Mostly the people that come into the gallery are pre-existing investors. We’ve got over 100,000 people signed up on the platform now. So we see more people who are just coming in that have already engaged with us in some way, shape, or form. There’s a moment in time where we thought our retail model could be interesting for Masterworks. Like, we open these galleries in lots of different locations and then we have foot traffic come in, but I think we’ve quickly realized that online is just a much better flywheel than traditional retail.

Meb: The interesting thing about art, if you look at collectables in general, coins, one of my favorite episodes was a collector of Van Simmons, where he convinced me to put 10k into some collectable coins afterwards. I mean, it was a lot of fun. But putting those in context relative to the prices of art, I mean, I think the most expensive coin and the most expensive comic book, I think they’re both sub 10 million. And you regularly see art go off north of 100 million. What’s the most expensive transaction? Do you know offhand?

Scott: There’s this Salvator Mundi painting by Da Vinci that sold for roughly $450 million. That’s the record. I think last year, there were six paintings that sold over $100 million. And again, I think the thing that’s so amazing about that is we see buildings sell for $400 million all the time, and nobody thinks twice about it. The reason that’s different is that those sell to investor groups, right? Those are securitized transactions selling to multiple investors. I think what’s so interesting about the art market is we see these huge prices paid for these paintings, but it’s really just individuals that are transacting. I do think in our lifetime, maybe in the next 10 years, we’ll see a billion-dollar painting. The trends seem to support that.

Meb: You guys are not just U.S. only, right? Are you international?

Scott: We’re international. So we take investors outside of the U.S. We’ve actually spent a bunch of time on international-friendly structures. So within these investment vehicles, there’s a Cayman entity that sits within the vehicles. So we need proceeds for non-U.S. persons who are 100% pass-through, then they’re just taxed in their local jurisdiction. It’s mostly U.S. now. I would say 85%, maybe 90% of our investors are U.S. today. That’s just a byproduct of us really marketing in the U.S. and not marketing outside of the U.S. yet.

Meb: You’ll definitely get some international inbounds after this show just be forewarned. Talk to me a little bit about, you guys have only been in business for a few years, but you’ve been around for 10 or 20 personally involved in the art space. How does the sort of global geopolitical scene, and I’m not talking about as much economics and interest rates, but rather things like COVID, my initial reaction would be that people withdraw. Things like the emergence of China, where people that are newly wealthy, this massive new wealth class that wants to put their money in something tangible, and you’ve seen money sloshed around and different think back to the ’80s, the Japanese investors buying up everything in the world because of the stock market there. How much narrative can you tease away from that going on all over the world?

Scott: Let’s talk about what drives our prices and then what are the risks that we see with the art market overall. So we think there’s two things primarily that drive our prices. One is that when you’re investing in our at least at the type of art that we’re purchasing, it’s kind of like a call option on the ultra-wealthy. You’re betting that the ultra-wealthy will continue to buy and buy more art over time. And generally, what we’ve seen is that top 1% grows on an international basis because remember, the U.S. is really only 25% of the art market. As that top 1% grows, art prices go up.

The second thing that drives our prices is scarcity. I think that art is the only asset class I can think of which is continuously declining in supply. Meaning if you’re an artist and you paint a bunch of paintings in your lifetime, and then you die, collectors on those paintings, eventually they die, or they get divorced, or something happens, and they donate them to a museum, the supply is continuously shrinking. And the example I like to use is Jackson Pollock, who had two of his paintings in the past. And I know that market well. So there’s 23 Pollock drip paintings in private collections. Out of those 23 drip paintings that are left, they’re all probably B minus, C examples with the exception of one or two paintings. For those B minus or C examples, they’re still commanding between $15 and $35 million. And the only reason they’re $15, $35 million is because there’s nothing else left. So if you want a Jackson Pollock, that’s what’s left. And that scarcity really drives price. So I think that’s very unique.

And then the last thing that we talk about, which doesn’t really drive prices, but I think is just interesting for the asset class is that you can buy a painting in the U.S., and you can take it to Hong Kong and sell it. So it’s almost like this currency-neutral asset that can be moved between borders, which we just think is an interesting characteristic. So that’s what drives our prices. Now, when you think about what are the risks to the art market, we tend to think about what are the risks of the top 1%. And particularly the world that we’re living in today, things like wealth taxes, for example, could hurt the art market. In New York City, we have a billionaire tax that’s proposed by the mayor. Things like that, I think could hurt the art market. So, I’m not sure how to think about those without getting political. Some of those things concern me, generally, and I think that could have a negative impact on our prices.

Meb: The cheap bastard in me is always thinking of ways to arbitrage human behavioral foibles where they’re the forced sellers. So, next big bear market, we’re going through where people are forced liquidity I’m definitely going to be on the bid for all the pieces that are trading in the secondary. How active has that been? Has that been something that you think is, at this point, more of a feature? Is it people that are actually transacting in those buy and sell?

Scott: People are definitely actively transacting. I mean, we’ve only had the secondary market live for six months. Our goal is to get 50% of an AV trading every single year, which would provide sufficient liquidity to anyone who wants to get out at a reasonable price. And I think we’re a third of the way there at this point. We’re not where we want to be but it’s so early and it’s growing so fast that I think it’ll be there before we know it.

Meb: How much is roll or is this just a concern that we hear in the news? I mean, there’s two good examples. One was Stéphane Breitwieser, who had stolen more than a billion in art from 200 museums. And another was the Russian Rybolovlev, and his broker, Bouvier, two amazing stories where there’s just so much concern about legitimacy, about conflicts. How do you guys approach authenticity as something that is a concern or not fakes, etc., in 2020?

Scott: I’m actually on the board of this organization called the International Foundation for Art Research, which is the leading art authenticity. As a non-profit, we spend lots of time on this. But very generally, I would say that conflicts in the art market are all over the place. And one of the things our CFO loves to talk about is these SEC qualified offerings are the first transparent art product that’s ever been introduced in the art market. We’re required to disclose anything like conflicts, required to disclose risks. We’re required to disclose who we purchase paintings from so that, you know, these vehicles are 100%, transparent.

You generally don’t see fraud in this segment of the market. The paintings that we’re buying and bringing into the platform, many of them are in books, and they’ve been museums, they’ve been exhibited. There’s a long trail of history on kind of why they’re culturally significant. Other paintings that are newer, like in some of our B risk bucket paintings, those are coming directly from the galleries that represent those artists. In many cases, we know the artists that we’re presenting. There is a very low risk of losing capital because of authenticity in this segment of the market.

Now, that being said, there’s a bunch of fraud in the art market at the low end of the market, particularly with prints. And usually, the print market is kind of what people hear about and read about. There are lots of artists like Dali, which most people probably heard of. You know, I think he’s one of the most faked artists because people have just reprinted these prints that gets sold. That segment of the market is much more difficult to authenticate and understand. But, you know, those are also prints that sell for a couple thousand dollars. They’re not materially expensive items.

Meb: What’s the Masterworks team look like? Is it just you running it out of your apartment?

Scott: I think we’re 45 people today, got a big membership team that just onboard investors. You know, I’ve got 15 people or so in membership now. Obviously, the tech team that builds out the platform, and that the research and acquisitions team that decides what paintings to buy and negotiates those purchases.

Meb: Is this bootstrapped? Did you guys take venture funding? You got a partnership with family office? How’d you get this started?

Scott: It’s really bootstrapped. I mean, it’s just me funding it substantially today. That’s kind of have been my model for the past several companies I’ve done is kind of start the business, get it up and running, and then continue to invest in it. There’s not currently a plan to take outside capital right now.

Meb: But let me know if you do. I’m interested.

Scott: And we thought about at some point doing a public vehicle, just like we do for the paintings that allows people to invest in the company, partly to raise capital, but partly more so because we can take all these investors that we have in the platform, and then have them become shareholders and theoretically advocates for everything we’re doing, which I think is really, really interesting.

Meb: We did that same thing a few years ago. We said, “Look, we’re not really in the mode of needing or having to raise money. But we would like to get people who want to be involved in the ETF industry and be ambassadors for our mission, and just tag along with what we’re doing.” And so, we’d considered doing it on some of the platforms, but eventually decided to do it on our own. Because going through the platforms, there wasn’t a whole lot of benefit when you have an audience like you do already and ended up raising I think it was about 3 million bucks, which I don’t know that another asset manager has done this, certainly not one that I’m familiar with that size. But it’s been really helpful. I think as those people who are going to be cheerleaders and want to see you succeed and want to help but also that already love the idea. So, anyway, we can talk it about later if you decide to go that route.

Let’s look to the future. You guys are a couple of years into this. 2020 is almost a wrap. What’s the horizon look like, 2021 thereafter, is it mostly just building out your portfolio? You guys got some other weird ideas in the bag?

Scott: I’ll say two things. One is building out features in the secondary market. So we’re very committed to making that work. And I think the thing that we find so interesting about the secondary markets is that, again, historically, you’ve had this illiquid asset class, it’s been limited to the ultra-wealthy. We’ve succeeded in securitizing it; we have lots of demand to sort of invest in these offerings. Now, we want to be able to provide liquidity as soon as possible at fair prices to people through the secondary market. So there’s a big emphasis on making that work. And then, as you mentioned earlier in the episode, fun products or fun-like products to help people allocate to the asset class that don’t really want to be involved with picking and choosing paintings is probably the next priority. So, you know, doing that and then just kind of scaling what’s working today.

Meb: Gun to your head, you got to pick one for the next five years, not risk-adjusted, pure absolute return, what artist you going to go with?

Scott: So if we look at not risk-adjusted artists, just the greatest absolute returns that are accelerating the most quickly, I would say the artists that we like the most in that category are Cecily Brown, Günter Förg, KAWS are probably the top three.

Meb: And what category are those guys?

Scott: All three, well, Günter Förg just recently passed away but the other are two living artists, you know.

Meb: This is a fun question. You may not know the answer, but I’m going to ask anyway. If you think about all-time artists like market cap, where number of paintings times value of those paintings, who’s the GOAT, who’s the greatest? Who’s the biggest? Is there any that you can think of off the top of your head that would be in the top five?

Scott: Picasso is the number one most selling artist, right? So in terms of annual turnover, Picasso sells more than any other artist. Monet is usually second. But the amazing thing about that is that Picasso, during his lifetime, created roughly 60,000 objects. So he was incredibly prolific, right? Like, the guy just turned out painting after painting, drawing after drawing. Like, he was just a machine. So you think about that in context of market cap, he is not selling that many things every single year but there’s a ton of work out there. So, even though his turnover is higher than Monet’s, I think if you could calculate as “market cap,” the average value of work times total number of works, I think it would be far greater than someone like Monet.

Meb: Who else would be up there? Are these all just kind of like the ones you would expect, the classics?

Scott: A little bit. But again, if you use the comparisons, so Picasso, we just went through. So take someone like Basquiat, right? So Basquiat is always in the top 10 but Basquiat died very young. He’s very few paintings, it’s hundreds. It’s not thousands or tens of thousands. He sells $100 million a year. So his turnover is good but his market cap would have to be far less than someone like Picasso.

Meb: Does living artists passing away traditionally, as morbid as it sounds, increase the value? Does it not have much of an effect?

Scott: It’s not that the artist passing away increases value. It’s that when an artist passes away, they stop making paintings. And then those paintings that they did make start getting slowly donated to museums, so supply starts shrinking, right? So supply is growing during an artist lifetime, then they pass away, then it starts shrinking. So that’s really the dynamic that causes prices to rise more so than the event of death itself.

Meb: What’s been your most memorable art and investment in your career?

Scott: I bought, I wrote this in a blog post about this de Kooning painting, I think for $7 million and sold it 18 months later for $16 I think. Some of those deals that are just great deals that are hard to replicate.

Meb: How challenging is that and how much do you see that in the investing world where you look at something, you’re like, “Oh my God, that person just paid 10 times more than that painting is worth just because they got into a bidding war or there’s scarcity or rich people just sword fighting whatever it is.” Do you see that quite often?

Scott: I think people like talking about them more than it actually exists, to be honest. Most “collectors” who are spending tens of millions or hundreds of millions of dollars in art are successful in some other way, right? They’ve built some major business. They’re smart. They’re intellectual. They’re not usually people who just throw away money, contrary to what the art world wants people to believe. Behind in the market, we see people behave pretty rationally. And people that are buying paintings between $10 and $50 million are generally smart, highly competent people that have some lens around investment with what they’re doing.

Meb: Any other crazy stories that you’ve experienced come to mind that you can share?

Scott: There’s so many. Nothing, in particular. The great thing about the art world is that to just contextualize it for people that don’t understand is you have this massive industry, which trades $60 billion a year on 1.7 trillion assets. But it still is operating like it has been for hundreds of years. I come from a world where in technology, we’re constantly surrounded by the smartest, brightest people there are. And you go to the art world, and it’s just not. There’s no such thing as a Kwan in the art world. It doesn’t exist. There’s never been one like it. It’s just a totally different world.

Meb: What do you think is an area that you think is typically most undervalued currently, relative to fair value?

Scott: It’s definitely particular artists. We choose these artists that we think are either momentum artists or for whatever reason, we think are currently undervalued. But one of the dynamics that’s happened in the art world and I guess it’s happened outside of the art world, as well is this strong focus on “identity artists,” which generally means African-American and female artists. And if you look at a lot of the gains over the past few years in the art market, they’ve definitely shifted towards some of those artists. But we think there’s buying opportunities now for artists that are culturally significant, like Warhol, for example, that just aren’t trendy today because of those dynamics. So that’s probably the biggest trend that we see in the art market today.

Meb: Something I was thinking about is when I was chatting about collectables with a good friend of mine, he said, “Meb, when you look around the corner, and you’re thinking about value, think about what the generation that’s coming into money coveted when they were younger.” And so, you see some of this in the collectable world today, where a lot of these like classic cars from the ’60s or maybe it’s some baseball cards and comic books, whatnot, have seen this explosion in interest, I wonder how much as the developing world emerging markets, thinking Africa, thinking China, where you have this entirely new generation of collectors that will be putting money to work over the next 30 years, is that an area you think has some promise? Is it already well-known?

Scott: China, in particular, has become very significant to the art market, right? The amount of volume that we see going through Hong Kong now, compared to 10 years ago, is night and day. I mean, I don’t remember what the numbers were exactly. But I think China, you know, broadly defined was something like 2% or 3% of the art market 10 years ago. Today, it’s 25%. That’s just exploded. And I think we see that trend continuing to grow. And that kind of goes back to the whole top 1% comment, right? Like, wherever money is being created, wherever billionaires are being created, that’s generally where the art market goes.

Meb: But we did a tweet for this episode, unrelated, but I think it’s informative, where I asked followers to say, what do you think the emerging market percentage of world GDP is 0 to 20, 20 to 40, 40 to 60, above 60? And everyone always gets these polls wrong, which is why I ask because it’s trying to make a point was that emerging markets are essentially 60% of world’s GDP now, And it’s just exploded over the last number of years. U.S. is around 25. And in the stock world, the analogy I was trying to make is that emerging markets as a percentage of world market cap is only 13. In the U.S., people allocate only around 3. So it’s a huge discrepancy between what people allocate to and then what’s transpiring in the real world. And so my thought was just kind of similar as all this wealth gets generated, at some point, they’ll have the same interest in the spaces as people do here and in Europe.

Scott, this has been a blast. I look forward to you guys syndicating world’s first billion-dollar piece of art. Where do people go if they want to find out more about what you guys are up to, they want to tag along with me and invest in some Hardings and some Banksys? Where’s the right spot?

Scott: It’s very simple, https://www.masterworks.io/, not .com, but .io and then just request access, schedule a call with our membership team, and we’ll get you up and going straight away.

Meb: Scott, it has been a blast. Thanks so much for joining us today.

Scott: Thanks for having me.

Meb: Podcast listeners. We’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback@themebfabershow.com, we love to read the reviews. Please review us on iTunes and subscribe the show. Anywhere good podcasts are found. My current favorite is Breaker. Thanks for listening friends, and good investing.