Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:19]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:38]

Thank you, Mary, and welcome to episode 33 on Risk Parity Radio. Today on Risk Parity Radio, I thought we would do something just a little different. I've been reading a lot about alternative investments these days. It seems like people are getting very excited about things like Bitcoin and Birkin bags and venture capital and artwork and all manner of ideas for investing. And I thought I might talk about what we should do when we are confronted or proposed with one of these sorts of investments that is something that we are not very familiar with. And when these ideas pop up, and they usually come from somebody who is well-meaning and who is sure that they found a sure thing, there are a couple people I usually go consult with. One of those people is Mark Twain. And one of the things Mark Twain said is, It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so. And so what he's telling you there is there are no sure things. And the more sure somebody is about an investment, the more they are likely to make a mistake. Because when you speak from not knowing, you are more cautious. Now the other person I like to consult with Is Dirty Harry? And what does Dirty Harry have to say about newfangled investments with which you are unfamiliar? This is what he's got. Man's got to know his limitations. Let's let him repeat that. Man's got to know his limitations. So, thinking about that advice, I thought we would just take one of these things off the shelf that I'm not really familiar with and consider it from a position of somebody who doesn't know about something or doesn't know very much about something. And so the one I just decided to pick off the shelf is artwork. Because I've been hearing a lot about investing artwork these days. I've been hearing a lot about the platform Masterworks, they've had their CEO interviewed several times on many podcasts. I've heard a lot of ads for them. And so let's just take that one off the shelf from a position of not really knowing. And even though we don't know, we should still go through our 10 questions to master successful investing. That is our process here for deciding whether to invest in something or not. So we'll go through those questions in this circumstance and we'll see how the answers play out from a position of not knowing very much. So question one, what is it? Well, artwork is fairly well defined, although there are many different opinions as to whether something is truly art or not. We don't need to really get into that, but we do know that art is displayed in many places, in museums, in public fora, and in people's homes, and it could be paintings, sculptures, or any number of other objects that are created for their aesthetic value. Now, question number two：Is artwork and investment a speculation or a gamble? Well, it's not an investment. We can pretty much rule that one out because it doesn't generate any profit. It just sits there. So that leaves us with whether it's a speculation or a gamble. And the real difference between those two things is whether it has a positive expectation or not. We know from just general knowledge of the field that artwork does appreciate. Not all artwork appreciates, but enough of it appreciates. And there is a business in artwork that's been going on for hundreds, if not thousands of years. And there are people that specialize in that. So you would have to say that it's more likely a speculation than a gamble. overall that it has a positive expectation, at least from somebody who has knowledge in the field. Now, that's a little bit different though for us, for me, because I don't have knowledge in the field. So it's probably for me more of a gamble than a speculation. At least if I were to walk into a gallery and try to pick out a piece of art that would appreciate in value, I would have no real way of knowing that. So I would be relying on luck. And here's what Dirty Harry has to say about that. You could ask yourself a question.

Mostly Voices [6:05]

Do I feel lucky? Well, do you punk?

Mostly Uncle Frank [6:10]

So we come to the answer to that question, which is objectively artwork is a speculation. Subjectively in my case it's probably a gamble. Question number three, what is the upside? Well as a financial asset you are hoping to sell the artwork at some point in the future and make a profit, so to sell it for more than it's worth. now, and that would be its upside. I suppose you could consider starting a business, a display gallery where you buy and sell artwork, but I'm certainly not going to get involved in something like that. Or you could have a museum where you display the artwork and charge admission. I'm also not going to get involved in something like that. So the only upside for somebody like me would be buying it now and hoping to sell it for more later at some point in time. Question number four, what is the downside? Well, the obvious downside is it might not be worth more than it is when I pay for it in the future. In fact, it might not be worth anything. The other downside to having something like artwork, a collectible or an object, is it needs to be taken care of, it needs to be preserved. You can't just leave it out in the elements. There is a chance of it being destroyed, there is a chance of it being lost, there is a chance of it being stolen. So you probably want to pay for some insurance on it if you have expensive artwork. And so that's another downside. And then the other downsides would simply be the commissions or other fees associated with acquiring the art or selling the art on the other side. If you were to auction it off, obviously, you would have to pay an auctioneer or auction house a fee for doing that. And any agent that you work through would require a fee as well. to sell your artwork. All right, question five. Who is on the other side of the trade? Well, in artwork, it's typically a professional that you are ordinarily not going to be purchasing artwork from amateurs. I suppose you could purchase it from the artists themselves if you knew the artist. But usually you are working with somebody on the other side of the trade who probably knows more than you, at least knows more than me since we're talking about me in this circumstance. And I really don't know that much about our work. So you can see from that that you're going to be at a disadvantage in this kind of transaction, in this kind of investment. if you're me. All right, question number six, what is the investment vehicle? Well, typically the investment vehicle is the artwork itself. You just go and you buy it. But these days there are other alternative investment vehicles and one is this platform called Masterworks that we see online and I looked it up. I listened to the interviews and looked up the platform itself to see how it worked. And what Masterworks does is it allows you to essentially buy shares in a work of art. They purchase these works of art, they hold them for a period of time, they hope to sell them at a profit, and the investors are allowed to buy shares in different pieces of art that they have. in their collection or portfolio, if you will. So basically they are holding a master portfolio of artwork that they are allowing individual investors to invest in. Now obviously that makes it a little bit easier that you do have somebody with some professional ability going out to select this artwork. And I looked at what the fees were and how that worked and they basically operated like a hedge fund. Now a hedge fund would ordinarily charge its investors what they call 2 and 20, 2% a year plus 20% of the profits. What Masterworks does is charge 1.5 and 20. So if you invest with them, you pay a 1.5% annual fee on your investments, and then if they sell the artwork that you've invested in, they keep 20% of the profits from that. Now, is that a good deal or a bad deal? The answer is, I don't know. There may be a way of knowing, but you would probably have to be very knowledgeable about art, or certainly more knowledgeable than I am, to assess whether that is a good deal or not. This is a new enough platform that it doesn't have a large track record. So I have no way of knowing how skilled they are and what the market for art that they are choosing is going to look like in the future. So I have no way of knowing that. And what is Dirty Harry saying in my ear again? Well, here he is. You could ask yourself a question. Do I feel lucky?

Mostly Voices [11:57]

Man's got to know his limitations.

Mostly Uncle Frank [12:01]

All right, question seven. What does it take to be successful? Well, it seems to me it takes a lot of knowledge in this area, a lot of study in this area, and there may be things that I don't even know skills or abilities or knowledge that I'm not aware of in this area. It's those things that I don't know. but I know that I don't have that knowledge and I don't have those skills. So it takes something more than what I have. And Dirty Harry says it in my ear again. Man's got to know his limitations. All right, who is getting a cut? Well, in the situation with Masterworks, they are getting their 1.5% annual fee and 20% of the profits. If you are buying artwork on the open markets or at auctions and things, everybody involved in the sales process will be getting a cut because that's how it works for artwork and collectibles of this nature that there are agents fees and commissions and auction fees and everything associated with that. If you are holding artwork, there will be cuts to be handed out to insurance companies and wherever you are keeping your art or preserving your art if it's being stored somewhere. All right, going to question nine. How does it impact your portfolio? Well, this we can probably say that artwork is going to be uncorrelated with your other assets in your risk parity style portfolio. At least I'm not aware of any particular correlation other than if the dollar inflates a lot, then the artwork is probably going to be worth more as are many of the other assets in your portfolio. So there is some little correlation there, but in terms of individual pieces of artwork, they're going to be uncorrelated with the rest of your portfolio. So that is actually a positive thing from the perspective of constructing a risk parity style portfolio. It's good to have uncorrelated assets. Again, the problem here isn't the lack of correlation. The problem here is assessing the returns for something like this, for a person like me. All right, question 10. Should you invest? If the you is me, the answer is definitely no. Because for me to invest in this would simply be a gamble. As Dirty Harry says to me, you could ask yourself a question. Do I feel lucky? Well, do you punk? And so where do we come out? We come out pretty much where we started. And what I want to get across here is not that you shouldn't look at alternative investments or consider them or invest in them. What I want to get across here is that a lot of these sorts of investments require a level of knowledge that we just don't possess coming off the street. And that in order to invest in this in a way that would make sense, in a way that would be speculative and not a gamble, I would have to do a lot more work. I would have to study this investment for a long time. I would have to learn a lot about it, a lot of stuff that I don't know. And then the question becomes, am I willing to put in the time and the effort to learn everything that one would really need to know to succeed in this investment? And the answer for me right now is no. I am not willing to do that for this kind of investment. That doesn't mean you shouldn't, you shouldn't try. In fact, one of the most LUCRATIVE AREAS for many people is developing an expertise or an interest in a kind of investment or a sort of investment. And then pursuing that because once you have a knowledge advantage over other people in the marketplace, you can probably do pretty well so long as overall there is a positive expectation in the market. Otherwise, you and I will both be stuck with. Do I feel lucky?

Mostly Voices [16:54]

Do I feel lucky?

Mostly Uncle Frank [16:58]

And we wouldn't want to be there. So the next time you are told about some investment, think about being humble. Think about what you don't know about it. Because Dirty Harry's right.

Mostly Voices [17:10]

Man's got to know his limitations. Man's got to know his limitations.

Mostly Uncle Frank [17:14]

And if you don't know your limitations, you may make some bad decisions. Several decades of investment has taught me that. It hasn't been too painful, but it's been painful enough. But now I see our signal is beginning to fade. Thank you for tuning in today. If you'd like to reach me with comments or questions, you can send them by email to frank@riskparityradio.com that's frank@riskparityradio.com .com, or you can go to the website www.riskparadioradio.com and fill out the contact form there and I will get your message that way. We will pick up this weekend with our weekly portfolio reviews, but I will let you contemplate what Dirty Harry has to say until then.

Mostly Voices [18:12]

Man's got to know his limitations.

Mostly Uncle Frank [18:15]

Thank you for tuning in. This is Frank Vasquez with Risk Parity Radio, signing off.

Mostly Mary [18:23]

The Risk Parity Radio show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here, making sure to take into account your own personal circumstances.