Trey Lockerbie (02:54):
Why do you think that is? Why do you think it’s taken till now to securitize an asset class like art?

Scott Lynn (03:00):
We have struggled with this question internally so many times. And I think the thing that’s particularly fascinating is art is one of the oldest asset classes. Sotheby’s, for example, up until recently going private, was the oldest list of company in the New York Stock Exchange at 275 years old. So, the asset classes has literally been around for centuries. And you would have thought that by now there would have been an investment product, but there hasn’t been.

Trey Lockerbie (03:25):
Well, last time you were on the show, Masterworks was just beginning to do some research into what actually drives the prices of certain works of art. So, I’m curious to catch up with you now and see what you’ve uncovered so far.

Scott Lynn (03:39):
We now today, I guess, two and a half years later, have the leading research team in the art market. And we publish a lot on everything from returns, correlation, loss rates, et cetera. One of the common questions that we get particularly from institutions, is what drives our prices? Why do our prices go up? Even though we know that they’ve gone up for decades now, in many cases, outperformed other asset classes, like the S&P, like real estate, like gold, not only from a return perspective, but also from a risk adjusted return perspective.

Scott Lynn (04:11):
When accounting for volatility, the obvious question is, why are our prices going up? And I think that we generally have two answers for that. One is the top 1% and demand by the top 1%. So, we generally believe that investing in art is similar to buying a call option on the ultra wealthy. The wealthy or the top 1% gets, the more our prices tend to go up on a global basis.

Scott Lynn (04:35):
And it’s important understand that the art market today is 25% US, 25% China, 25% Western Europe, and 25% rest of the world. So, you can literally buy a painting in New York, put it on a plane and fly to Hong Kong and sell it. So, we do view it on a global basis.

Scott Lynn (04:51):
The second thing, which is really interesting, is that art is one of the few asset classes that becomes more scarce over time. And what I mean by that is that, if you have an artist who is living, is well known, who paints a bunch of paintings, and then passes away, at some point those paintings are donated to museums or institutions. So, the supply actually decreases over time. And that’s actually to me, a really interesting concept, because think about other asset classes like real estate, there’s constantly more real estate being built. Gold, there’s constantly more gold being mined. This is one of the arguments that I think people have as to why Bitcoin is an investment, which that’s a whole separate topic, that I guess we can debate.

Scott Lynn (05:33):
But the interesting thing about art is that over time, when you have a great artist, there becomes very and very few paintings that are actually left after they pass away. And in many cases, those paintings sell for millions of dollars because of that.

Trey Lockerbie (05:46):
Well, let’s talk about your interest in art, because I know this is what drives you and gets you out of bed every morning, and why you started this company. Did you have some early wins with art in your own investment portfolio? What drove you to say, “Hey, everyone else needs to be doing this.”

Scott Lynn (06:01):
When I started collecting art, it was in the late nineties. And I did it because I was passionate about it. I had a mother who was, [inaudible 00:06:10]. We grow up with our books. But it quickly to me started to become interesting just from an investment perspective. And the main thing that drove that, I guess like many things, was really the advent of the internet. So, for the first time ever, you had websites which are publishing prices that painting sold for at public auction. And quickly within a number of years, you had large databases that tracked public transaction records of paintings.

Scott Lynn (06:36):
So today, there’s roughly $60 billion in art that sells every year, half of that is a public auction. So, you have this very big dataset that you can analyze to determine things like returns, correlation, loss rates, et cetera.

Scott Lynn (06:51):
So, in today’s world, a lot of people that look at the art market are looking at this data to try to understand how are particular paintings appreciating, how are artists market’s appreciating, really for the first time ever.

Trey Lockerbie (07:04):
So, you mentioned $60 billion in transactions a year. What’s the overall market cap look like for something like the art market?

Scott Lynn (07:12):
The best estimate is $1.7 trillion. You can think of that $60 billion a year as whatever, a couple percent turnover on the overall size of the asset class. The interesting thing about that $1.7 trillion number is that really excludes are held by museums or institutions, which obviously in terms of the global landscape is the most culturally significant art. But museums or institutions for a whole bunch of reasons, never sell their art.

Trey Lockerbie (07:40):
Interesting. So in your opinion, knowing that, it sounds like it’s about 20% of the size of gold, which you could say is a similar asset class in a way of store of value or scarcity, or any of the other benefits. In your opinion, how should investors look at art? What kind of portfolio percentage should it make up for?

Scott Lynn (07:59):
I guess it depends on the investor. So, when we were onboarding investors in the Masterworks, we run them through suitability and try to understand what is the size of their overall portfolio? What is their tolerance for liquid investments?

Scott Lynn (08:12):
Citi did the very first study on an asset allocation model to art in 2018, I believe. And they concluded somewhere between 1.8% and 8%, if you look at the art market overall. And we can certainly talk about performance by segment in the art market.

Scott Lynn (08:27):
But one of the things that’s really interesting about the asset class is, as art ages, very broadly speaking, returns go down. And this is something that a lot of people don’t totally understand. So, if you take an artist like Rembrandt, for example, I can almost guarantee you that if you buy a Rembrandt today for $20 million, you will sell it 10 or 20 years from now for roughly what you paid plus inflation. That’s one thing that I think a lot of new collectors also don’t understand. So, there’s definitely a relationship between recency in return, but those returns or those recency periods are measured in very wide increments.

Scott Lynn (09:04):
So for example, today Masterwork thinks that the most investible segment of the art market are created after World War II, which has been roughly 75 years. And just now, we’re seeing are created right after World War II, starting to decelerate in terms of returns. So, returns are correlated to fashion, but it happens in very, very wide increments.

Trey Lockerbie (09:26):
What in your opinion, is art mostly correlated with?

Scott Lynn (09:30):
We’ve done this research, and it was actually an interesting case study, I guess, for better, for worse, between what our research said, and then what happened with COVID. So, we publish a report on correlation between art and other asset classes, at the end, I believe it was in December of 2019. And we basically concluded that art is effectively uncorrelated. I think the highest correlation at that point in time was to, I believe bonds. And I’m not remembering specifically what the correlation was, but it was very low still. It was like 0.2. When we look at it compared to the S&P depending on the period, we measure somewhere between zero and 0.11. So, it’s effectively uncorrelated to almost every asset class.

Scott Lynn (10:14):
We often get the question, why is it uncorrelated? And I think there’s a couple of reasons. One is that if you believe that our prices are correlated at the top 1% and as the wealthy get wealthier, our prices go up, then you probably can also assume that on a global basis, that top 1% behaves differently than the rest of the market.

Scott Lynn (10:35):
And two is that art is an illiquid asset class. People invest to hold it for a very long period of time. So, some of the correlations that you would see with things like S&P that would be more extreme in moments of stress, you just don’t see because it’s inherently an illiquid asset class.

Trey Lockerbie (10:53):
Okay. So, give us the lay of the land for the art market, who are the key players? You mentioned Sotheby’s and some of these really old brokerage houses. But what are you as Masterworks attempting to disrupt exactly?

Scott Lynn (11:07):
I wouldn’t say that we’re disrupting the art market. That’s maybe a common misconception. The art market today, I think is really excited about Masterworks, because we’re effectively taking a pool of capital that hasn’t been buying paintings or investing in art, and bringing it to the art market through these investment vehicles. So, I think we’re probably the largest buyer in the art market today. So, that in itself makes it makes the art market like us.

Scott Lynn (11:33):
When I think about what we’re disrupting, I tend to think about the alternative investment universe. As I mentioned earlier, we really have one of the largest asset classes that’s never been securitized. And I think there’s parallels in today’s world to thinking of that in the context of whatever Bitcoin at a thousand dollars, right? Like with Bitcoin is very early, no institutions were allocating to it. It was all individuals. And it just behaved differently than it does today. That’s really the status of the art market. You have thousands of collectors, whether it’s 5,000 large collectors, 10,000 large collectors, I don’t know the exact number, but you have thousands, not millions, who are buying and trading these $10 million paintings. But I think as we see investors broadly defined, particularly for managed money come into the art market, that’s really disruptive from an asset class perspective.

Trey Lockerbie (12:28):
Talk to us a little bit about the flow of funds. So, essentially, Masterworks goes out and actually purchases a piece of art and then sells the securities. Is that correct?

Scott Lynn (12:39):
Yeah. So, these are qualified public offerings. So, we buy paintings with balance sheet capital. We file them with the SEC as identified objects effectively. And then people invest in particular specific paintings.

Trey Lockerbie (12:51):
Yes. So, I just want to call that out, because it’s not like a spec, where you’re going out there and raising capital to then go buy a certain thing.

Scott Lynn (12:58):
No. And I would love it if we could pull off that structure, but the reality is, it’s just the way the art market operates. We have to move quickly, do deals fast to find good investments. So, we do it with balance sheet capital.

Trey Lockerbie (13:11):
So, maybe explain to our audience of how much of an advantage that really is, because what does it take to get into the art market in general, for someone just starting out? And who are the agents in play? And what is the ecosystem look like?

Scott Lynn (13:24):
So, I would think about it in two different buckets. One is auction houses. So, auction houses like Christie’s and Sotheby’s. And then two are, primarily mega galleries, galleries like the Gagosian, Pace, Hauser and Wirth, et cetera. So, these are the main players in the art market. They’re the ones who handle most of the transaction volume.

Scott Lynn (13:42):
The art market is not friendly to new collectors, right? And I think maybe even a lot of your listeners have experienced this, when you walk into an art gallery and you’re just not buying a painting, and a lot of people getting bored, right? It’s not the most friendly industry.

Scott Lynn (13:57):
I think with Masterworks to a certain extent, we’re making it easy for people to engage with the art market on a painting by painting basis, with limited capital, ramp up, learn about it, and then eventually, hopefully get more involved.

Trey Lockerbie (14:12):
So, I’ve you talk about, well, let’s just talk about the $20 million Rembrandt. So, let’s just say, for example, you wanted to use that as a store of value, and Masterworks goes out and purchases this $20 million Rembrandt, what does the price per share look like for an investment of that size?

Scott Lynn (14:28):
Our price per share is the same on every IPO we do. So, it’s always $20 a share. And then minimums, our minimum per paintings is $10,000. So, anyone investing in any particular painting would invest at least the minimum, unless we waived that, we do on a case by case basis. But we tell people to think about portfolio construction across a number of paintings. So, similar to any other asset class, diversification really matters. And we have seen that in a lot of our own internal data.

Scott Lynn (14:58):
And I think, I talk about it with our CFO, but I think it’s analogous to frankly, even public equities, how it’s very hard to pick winning stocks over time. You’re probably better investing in an index or know how to think about that in today’s world, but probably better investing in an index.

Trey Lockerbie (15:15):
A Masterworks index of sorts.

Scott Lynn (15:18):
We’re in process of working on fun products right now. So, rather than simply having people pick and choose individual paintings to invest in, they can invest in a fund, which effectively buys securities and those underlying paintings. But an index product is far out or our secondary markets have some liquidity, but they don’t have the required liquidity that it would take for a for an ETF like product.

Trey Lockerbie (15:42):
So, something may be more like a REIT, but for art.

Scott Lynn (15:46):
Yep. Those are what I think about it.

Trey Lockerbie (15:48):
Talk to us about that secondary market, because that’s relatively new, I think for Masterworks.

Scott Lynn (15:53):
So, last time I was on, we didn’t have a secondary market. We launched that in the middle of last year. So, we now have people, we have thousands of trading accounts open, investors are trading shares and individual paintings, which is interesting.

Scott Lynn (16:06):
I mean, I tell people to think about our secondary market, very different than how you would think about an exchange traded security. So, an investor wants to sell their shares at a reasonable price. They go into the secondary market, they list their shares at a certain price, and that trade might clear in a week. So, it’s not like you’re buying and selling shares of Google, it’s trading in milliseconds, but there is liquidity for people that are looking to get in and out of the securities now.

Trey Lockerbie (16:34):
And what is the turnover look like for getting in and out of those securities? Do you have any data around the average hold period for people holding shares in this kind of pieces of work?

Scott Lynn (16:43):
We have 140,000 investors signed up on the platform today. And I would say the vast majority of those, I don’t have the exact number now, but I would guess, 80% really intend to hold those securities longterm. So, they’re just viewing it as liquid long-term holds similar to private equity or something like that. So, there’s a small minority of investors who are actively trading, but most people still view this as long-term investments.

Trey Lockerbie (17:09):
All right. So, after Masterworks goes out and buys one of these pieces and sells the shares, where does the art live? Is it just in your apartment or where does it go?

Scott Lynn (17:19):
Yeah. So, we have a pretty good structure in place where we avoid sales and use tax on these investments. So, today every everything is sitting in, what’s referred to as a free port in Delaware. So, we buy the paintings, they go into the storage in Delaware. We do lend them out to institutions for important artists, exhibitions or retrospectives as they may be called. But in general, most of them stand storage.

Trey Lockerbie (17:46):
I’ve heard you talk about the strategy around something that might drive price, is the relevance of the piece of work, so that maybe it was just recently in an exhibit. So, do you guys have any strategies about, “Let’s get this a new exhibit.” And then it’s right about the time of sale.

Scott Lynn (18:02):
So, the art market, I guess the way I would think about selling a painting is, I would describe it as very event driven. So, you want to sell a painting going into momentum, either because an artist just recently set a price record, there’s a museum retrospective or an exhibition, something like that. So, I wouldn’t necessarily say that an exhibition itself causes a painting to be worth more, but it does generate buzz around that artist’s market, which is usually the right time to sell.

Trey Lockerbie (18:31):
One thought I had just now was that, if I look at this like other kinds of collectibles, maybe fine wine, for example, they have a futures market associated with it. Is there anything like that in the art market? You’ve got these artists that are alive, that you know are going to produce more art, but there’s nothing like that. Do you see of anything like that down the road?

Scott Lynn (18:49):
I think it’s really interesting. I mean, again, the only investment product for art today is via Masterworks. The only secondary market for art is via Masterworks. So, I think there’s a long road ahead before we get to option markets. But I mean, I think it’s certainly interesting, and there’s definitely a lot of people in the art market that would want to make particular bets on individual artists. But yeah, it doesn’t exist now.

Trey Lockerbie (19:13):
In your opinion, where should we start as investors? You mentioned Rembrandts and some of these old masters fade into just becoming stores of value, and they’re not really high yield producing. So, I’ve heard you talk about blue chip works up in commerce. Where should we focus? And how do you allocate between all three of those?

Scott Lynn (19:33):
The answer is it really depends on the investor. So, it really depends what the investor’s objectives are. Masterworks tend to focus generally on two different segments there in our bucket. One is, what I would describe as mid to late career living artists. And we tend to classify artists into two different risks categories. One is an A risk category, and one is a B risk category. So, the living artists, we tend to put in this B risk category. And then our A risk category, we have brand name, well-known artists like Picasso, Warhol, Basquiat, et cetera. Probably, what you’re referring to as blue chip.

Scott Lynn (20:09):
Interestingly, we’ve done a lot of work on these two different buckets to try to understand how do risk adjusted returns differ. And risk adjusted returns are basically the same. So, there’s not necessarily a right decision or a wrong decision. The living artists bucket tends to be more volatile, but have much higher returns, generally returns above 15% when we look at historical appreciation.

Scott Lynn (20:31):
The A risk bucket tends to be less volatile and have lower returns, generally somewhere between 8% and 12%, depending on the artist market. But there’s not a right or wrong answer.

Scott Lynn (20:43):
One of the artists that I think is very interesting, which Masterworks is not that focused on any more, is actually Monet. And Monet, typically is the second or third largest selling artist in the art market, selling somewhere between two and $400 million in art a year. And the interesting thing about Monet’s market is that, historically he returns somewhere around 7% annually as appreciation, but the volatility is so low. His returns are so predictable that what your listeners would think of as a sharp ratio, is actually pretty outstanding, and I think somewhere around 1.2, which in the art market is a really good sharp ratio.

Scott Lynn (21:22):
So, it really depends on what the investor is trying to achieve. If someone said, “Hey, I’m just looking for store of value, very low risk. My target return is 6%.” I would point them to someone like Monet. If they’re targeting 15% plus returns, we would probably point them more towards major significant living artists, but there’s a bit higher volatility.

Trey Lockerbie (21:44):
I’ve heard you talk about Basquiat too, as a pretty high yielding artist. So, how soon would you direct someone to someone like him?

Scott Lynn (21:51):
Basquiat is an exception, right? He’s kind of the anomaly here. So, he’s what we define as a blue chip artists, but for over 15 years, maybe 20 years, his market is appreciated somewhere between 15% and 20% per year. So, he’s one of those artists where he’s very predictable as returns are very high, but he’s arguably the best performing artist in the art market overall.

Trey Lockerbie (22:16):
And how often does a Basquiat come to market? I mean, is it every other year? Is it every few years? Is it once a year?

Scott Lynn (22:24):
There’s not a lot of work. So, he died young of a drug overdose, and there’s not a lot of paintings. But I think we’ll see somewhere between five and 10. I don’t know if I would use the word major, but paintings in excess of $15 million trade every year, is probably the right way to think about it. I think his market overall is doing somewhere between three and $400 million a year now.

Trey Lockerbie (22:46):
And during that time, that piece of art is most likely sitting in some warehouse not being seen by someone, is that correct?

Scott Lynn (22:54):
Probably sitting in someone’s home, most likely, but possibly storage. Yeah.

Trey Lockerbie (22:58):
You’ve hinted at the risk ratio, is the Shiller PE way to look at this. So what, in your opinion, is an average volatility for something like a piece of art?

Scott Lynn (23:08):
Again, it really depends on the artist’s market. I mean, we see living artists today, for example, who their paintings are selling for $50,000, 10 years ago, 15 years ago, today they’re selling more for 1.5 million, right? So, just the volatility on that alone is very high, but the return is obviously very high as well. Someone like Monet it’s very low. I mean, I think we see falls less than 10% for him as an artist. So, it really depends on the individual artists and their market.

Scott Lynn (23:36):
I would think of artists similar to any other asset class, right? There are segments in the art market, which are super volatile, very unpredictable, very speculative. And there’s other segments, which are much more predictable and less speculative.

Trey Lockerbie (23:50):
So, when something like the equity market, which is where our listeners are probably most focused or the majority of them spend the most focus, right now you have something like the FAANG Stocks. So, there’s a handful of stocks that are driving the most amount of return, but there are also the largest in market cap. So, if we apply that to something like art market, which artists would be the FAANG Stocks, which would make up the most market cap?

Scott Lynn (24:14):
Picasso is usually the largest market. So, somewhere between Picasso, Monet and Basquiat, that tend to trade off. Those are the largest in terms of transaction volume. I’ll get this number specifically wrong, but I believe last year Picasso was somewhere in the 12% or 13% of the overall market as the largest artist in terms of transaction volume. So, you don’t really have the FAANG dynamic in the art market, but you do have a half dozen names, which are 20%, maybe 25% of the market overall.

Trey Lockerbie (24:45):
If art is appreciating in pretty close correlation to the 1%, where does the biggest risk come from? Should we be watching taxes? Should we be watching just the economy in general? How do we monitor or gauge the risk associated with art market?

Scott Lynn (25:02):
I think you’re exactly right. So, when we think about risks to the art market, we tend to think about what are the risks to the top 1%, what will cause them to stop buying art? And it’s interesting if you go back, I don’t know if you recall all the details of the Trump tax plan, but there were a lot of changes to 1031s, which allowed investors, particularly in real estate to roll their gain over into a new asset. 1031s were actually removed for art, whenever that was. Those changes were in place three or four years ago now, I guess.

Scott Lynn (25:31):
So, we thought at that point in time that could have had a material impact on the art market, because so many particularly big collectors really relied on 1031s to continue rolling gains forward. And interestingly, it had no impact. We didn’t see prices change at all, which we were frankly surprised by, maybe because 25% of the art market is the US, maybe because the top 1% has so much money now, that that tax change specifically didn’t really change how they thought about buying or selling paintings.

Scott Lynn (26:04):
So, I guess, we think about things like wealth taxes. We think about specific taxes that can target the art market. Anything of that nature could introduce a risk to our returns.

Trey Lockerbie (26:16):
What are the taxes on art in the US right now? Is it similar to capital gains or like a piece of property? What does it look like?

Scott Lynn (26:23):
It’s a good question. So, many people do not know this, but we have this special capital gain rate for collectibles, which today is 28%. And depending on how you define it, you can think of that as a wealth like tax, it’s really targeting people who are trading objects like this. That does already exist.

Scott Lynn (26:41):
Now, interestingly, if you’re buying a security and a painting through Masterworks, and you’re selling that security on our trading platform, you’re still paying capital gain, not the regular capital gains of 20 versus 28. But yeah, that act does exist effective on the art work today.

Trey Lockerbie (26:58):
You alluded to maybe this arbitrage opportunity where you’re buying pieces in the US going to China, where there’s a new billionaire every day and selling art. Is that a pretty common occurrence?

Scott Lynn (27:10):
We don’t actually see a lot of that, to be honest. I mean, we do see it when an artist is specific to a region. So, for example, Banksy grew up in the UK, has popularity as much greater in the UK than it is in the US. Oftentimes, we’ll see Banksy sell in London for that reason, even if the owner of the painting is in the US. But generally, we don’t see a lot of shifting of works between regions by collectors.

Trey Lockerbie (27:38):
I’m interested in, you brought up Monet and Picasso, they have a lot of pieces of work out there, and it brings to mind someone also like McKee. So, you’ve just seen Prince just go to Infinity, and you might see a print now at Urban Outfitters, or something. How do you look at artists as they just start to get diluted down to, even though they’re a master and they’re really well known, is there a dilution factor to this?

Scott Lynn (28:03):
It is interesting that for artists even like Rembrandt, we don’t really see prices decline. We see appreciation approach zero or returns approach zero, but we don’t actually see prices decline. Could that change in the future as the market continues to grow and get bigger? I’m not totally sure how to think about that.

Scott Lynn (28:21):
I think the thing that really helps maintain price in the art market, again, is the shrinking apply dynamic. Because now if I want to buy a Rembrandt, there’s only… I don’t know the answer, but I’m guessing less than 100 good Rembrandts and private collections that I could actually purchase. So, I think that that helps maintain the prize even though interest from collectors is declining over time as well.

Trey Lockerbie (28:46):
One of my favorite documentaries is Exit Through The Gift Shop. It’s just such an amazing feature on the art market, but also this really, maybe it’s well known, it wasn’t to me, but this fact that a lot of artists aren’t actually producing their own work. And even Picasso, where I was farming out a lot of work and slapping his name on it. How authenticated is that through third parties? And how do you look at the value of pieces like that?

Scott Lynn (29:15):
So, the reality is, it’s been an accepted practice in the art market for centuries. So, using Rembrandt as an example, there’s Rembrandt, obviously the person, and then there’s school of Rembrandt, which are people that worked for him, people that painted on his behalf. That’s one of the reasons that with a lot of old Rembrandts, there’s been authenticity issues, because so many hands from different people were on those paintings, is very difficult to tell which specific section of the painting did he paint versus what sections did other people paint. And we see that same practice today with a lot of artists.

Scott Lynn (29:48):
I think the reality is, when artists are famous in their lifetime, they generally sell paintings for a lot, which causes them to want to produce as much work as possible. And they can’t do it on their own. So, a lot of artists have dozens, I guess, in certain cases, hundreds of assistants that are helping them create these works under their name.

Trey Lockerbie (30:11):
And how should we look at the value of those kinds of works. Is it indistinguishable or is there some way to know that, “Hey, this is just from the family of work?”

Scott Lynn (30:20):
Yeah. I mean, we’ve never seen anything in the data to indicate that if an artist doesn’t work on a particular object, that object is less valuable, so long as it’s generally accepted by that artist. However, we have seen a bunch of data with living artists who produced tons of work and their market falls apart, because of just the total volume of work they’re producing.

Scott Lynn (30:43):
So, I think our concern is more about what is the volume of work that an artists is going to produce and how does that hurt their market? A great example of that is Damien Hirst, who many people might be familiar with. I mean, Damien produces more art than a small factory. And he’s one of the few artists in the top 100, who has had consistently negative returns. I think we’ve seen three artists out of the top 100 who have negative returns, and he is one of them.

Trey Lockerbie (31:15):
All right. So, we have scarcity, which is a good part of value here, part of the equation, events that are driving price. Is there anything else that we should consider as investors that are producing these returns?

Scott Lynn (31:26):
One of the things that we spend a lot of time thinking about, and we don’t have clear data on this today, is this, the question of what role does cultural significance play in terms of returns over time? And when we talk about cultural significance, we have to first define what that means.

Scott Lynn (31:44):
So, our internal definition of cultural significance is threefold. One, which other significant artist does that artist exhibit with? Two, which institutions or museums collect that artist? Three, how global is the demand for a particular artist?

Scott Lynn (32:01):
So, we built models where we tried to look at cultural significance, and then correlate that to future returns. And I would say, as much as we would love for there to be a clear correlation between cultural significance and future returns, there really isn’t. There’s some loose correlation, but there really isn’t a clear correlation. But what we do see is that if there is very low cultural significance or no cultural significance, and an artist market has run up and prices for paintings are selling for millions of dollars, it is potentially risky longterm, that it may be hard for that artist to maintain those price points, if there’s low cultural significance.

Trey Lockerbie (32:41):
Something that seems to have cultural significance as of late would be the new NFT industry, if you want to call it that. I’d love to hear your thoughts on, what is your take on this whole NFT movement? People can’t see you, but you’re holding your head in your hands. Doesn’t keep you up at night?

Scott Lynn (32:59):
Yeah. I mean, look, I’ve been doing lots of interviews on this. I don’t understand that. And let’s talk about it, I guess, maybe for 30,000 feet to the reason that we don’t understand enough to use. One of the things that we’ve talked about so far is that scarcity drives returns, and cultural significance matters.

Scott Lynn (33:18):
So, one of the things that we struggle with NFTs, is that the investment proposition goes something like, there’s a digital image that for whatever reason is important. Let’s just use the word important rather than cultural significance, is important. And because we take that digital image and we put it on the blockchain, and now has scarcity value, and that should cause it to go up in value in the future. And we don’t understand that. And the reason we don’t understand that is because when you transfer that digital image to the blockchain, you’re not transferring copyright, you’re not transferring any IP. You’re frankly, just putting a digital image on the blockchain that anyone else can copy. If you pay $60 million for the Beeple in NFT that recently sold, I have just as much right to display that on my wall as you do.

Scott Lynn (34:05):
We actually don’t understand what people are doing at all when it comes to NFTs. I think there would be some argument that NFTs have inherent value, if there was some sort of IP that transferred with these images, that people could own the copyright from and potentially profit from in the future. But today, we don’t understand what the asset is that people are effectively owning when they purchase in NFT.

Trey Lockerbie (34:29):
Well, I understand that part of it, but copyright is not even that common, I think in traditional art, is that correct? I mean, even if you’re buying the piece, you’re not necessarily owning the copyright. So, maybe walk the listener through that a little bit.

Scott Lynn (34:41):
It’s a bit surprising to most people, but if we go out and we buy a $20 million Basquiat, which did three days ago, we don’t own the copyright to that painting. The artist foundation owns the copyright, or if the artist is living, the artist owns the copyright. So, buying the object does not entitle someone to necessarily own the copyright.

Trey Lockerbie (35:01):
And why does that matter? I mean, if you buy the piece of art, you can hang it on your wall, but you can’t do what? Lend it to a museum? What is the limiting factor there?

Scott Lynn (35:12):
The obvious use case would be royalties. So, you take an artist like Picasso, I don’t know how much the Picasso family is still earns in royalties, but I think it’s nine figures a year. So, there’s a lot of earning potential in royalties for certain artists.

Trey Lockerbie (35:27):
And that’s the longer term ambition I think with NFTs is to have a royalty, or maybe that’s what’s happening currently, right? Is there might be some element of turnover and the artists collecting royalties in that way.

Scott Lynn (35:38):
Yeah. We are unaware of a single NFT that has inherited the copyright from the artists.

Trey Lockerbie (35:44):
Well, we touched on a number of things. I’m learning a lot. It sounds like it’s okay for an artist to go from artist to producer. Something that comes to mind for me coming from the music industry is something like a Rick Rubin, who’s a famous record producer. And he’s known for just having the final product come across his desk and be like, “Yep, good or bad.” Kind of being a seal of approval. And how that actually adds value, which is really interesting. And another thing is the royalty factor, that someone is still sitting back and collecting royalties on these traditional pieces of art, but not actually on NFTs, which is, I think it would be the opposite?

Scott Lynn (36:19):
To us that seems like the interesting opportunity or the interesting angle for NFTs, is that people can somehow inherit a royalty stream when they’re buying in NFT. That feels like an investment to me, but otherwise I’m getting a digital image that has no IP associated with that. I don’t understand that.

Trey Lockerbie (36:36):
That would make it a cashflow producing asset. Right? Whereas now, art is typically, I would say looked at as somewhat of a greater fool theory asset class, right? Where art is so subjective. That’s probably an argument you get all the time, right? Like a canvas painted a certain type of blue, means something to me and less to you. I mean, how does that play into all of this? Is it purely psychological, when you use data in any way to extrapolate from that? What’s your take?

Scott Lynn (37:02):
We get that question all the time. I think I just spin the question around and I say, you can make any argument you want, but you literally have an asset class, which has been appreciating in many ways for centuries. You’re familiar with the da Vinci that sold a couple of years ago for $450 million. Some of these paintings have been around for literally centuries. And if you track individual artist’s markets, even like Monet, that market has been around for a hundred and whatever, 40 or 50 years now. It’s hard to make an argument that an artist like Monet is going to lose value. And we’ve just, we’ve never seen it happen, right?

Scott Lynn (37:36):
We’ve never seen artists that are very culturally significant like Monet, like Picasso, like Warhol, et cetera, go from something to nothing because case changes. Now, we have seen recurrence change for those artists markets, but we’ve never seen people really entirely fall out of favor. We do ask ourselves why that is, what causes that? And I think a lot of it is many of these artists are ingrained in our culture, right? They’re supported by museums. They’re hanging in museums. They’re in art history books that kids learn in school. They’re part of the narrative of contemporary society. So, for whatever reason, I think that’s helped establish and help these markets survive throughout decades or centuries.

Trey Lockerbie (38:21):
Whether we like it or not, NFTs are happening right now. Talk to us a little bit about the importance of the number of bidders on that recent 60 or $70 million Beeple in NFT that sold.

Scott Lynn (38:34):
I mean, I think like everyone else in the world, we were shocked when that ended up Beeple sold for $60 million. So, my first reaction to that was, “This can’t be a real sale, right? This must be two guys, two whatever, collaborating behind the scenes to mark this digital image at $60 million.” And it was very surprising to us.

Scott Lynn (38:51):
So, what we learned from talking to the auction house that day, it was that there were more than 30 bidders who were registered with the auction house, who were totally unknown to the auction house. And in our world, someone who’s spending $60 million on a painting is almost always known to an auction house, right? They’re a large collector, multi-Billionaire, very successful. The auction house knows who they are. So, the auction house basically had 30 people show up from the crypto community to bid on this NFT that they didn’t know who they were. That was fascinating to us.

Scott Lynn (39:24):
I think the thing that was maybe even more fascinating was after that sale, we’ve seen a few of those crypto people come in and start buying real paintings. You may have read about $20 million. I believe it was a Dora Maar Picasso that sold at Christie’s to one of the people that was registered for the NFT Beeple painting. So, from an art market perspective, we love that, right? We would like to see more and more crypto people come in and start buying real art.

Trey Lockerbie (39:52):
Closing the loop on the NFT thing, I’ve heard that an NFT is more keen to, say like the authentication, certification on the Mona Lisa, than the actual Mona Lisa, since it is a highly replicable piece of art, you’re buying this authenticator slip that maybe you turn around and sell. Is there anything like that in the traditional art market? We mentioned that copyright is typically owned by the artists or their heirs, but is the authentication of artwork valuable at all?

Scott Lynn (40:23):
In today’s world, it really isn’t that valuable. So, I’m on the board of an organization called IFAR, which is probably the leading art authenticity, nonprofit. Most authenticity issues today are really dealing with old masters or people who are painting, definitely pre-World War II, mostly. Pretty major artists, there’s a book published for that artist called a Catalog Raisonne, which are the published, recognized paintings that are authentic by that particular artist.

Scott Lynn (40:51):
If you have a painting that’s being offered to you, that’s not in a Raisonne, particularly if it’s a significant multi-million dollar painting, in today’s world, you just don’t buy it. And that’s one of the arguments that I have a lot with people that don’t understand authenticity well, which is, you can argue about whether or not a painting is by Jackson Pollock, but the fact that you’re arguing almost, you’re already losing, right? Because if that painting is not in history, if it hasn’t been exhibited by museums, if it hasn’t been talked about in art books, even if it is a real Jackson Pollock, it probably still isn’t that valuable from an art history perspective.

Scott Lynn (41:28):
I think this idea of found or recently discovered painting, it’s great to talk about from a media perspective, but in the world that we live in, we just pretty much discount that stuff almost 100%.

Trey Lockerbie (41:39):
Got it. So, there’s not the possibility of saying something like a real piece of art, having something on the blockchain that helps keep its value or certify it.

Scott Lynn (41:48):
I don’t think so. Yeah.

Trey Lockerbie (41:50):
I was recently watching this documentary on Netflix, I think, and these guys stole something like $200 million from this Boston museum. And obviously, that’s not a common risk when it comes to the art world. But my question was around that though, is why would someone do that? It seems like you’ve just marked those pieces of art as inherently dangerous to own, who would go by that and where would they buy it?

Scott Lynn (42:16):
I think we spend our Saturday afternoons the same, because I just watched that as well. The short answer is, I have no idea, right? I mean, that seemed like such a bizarre story of… I mean, they also, by the way, I think they mentioned this in the documentary, but they talked about how they cut those paintings out of the canvas when they took them from the museum. I mean, I can tell you if you cut an old master painting like that out of the canvas, you can’t even roll it. If you roll it, the paint will crack, you’ll ruin the painting. So, whoever did that didn’t know what they were doing, and they clearly weren’t reselling it to someone who cared about art. I don’t know. It was a good documentary though.

Trey Lockerbie (42:54):
Well, you mentioned the core ties here of like the US, China, Europe, the rest of the world. What is the trend though? Obviously, we mentioned China is very up-and-coming in their wealth class and art consumption. How do you see that trend continuing?

Scott Lynn (43:10):
Well, it’s actually, China has been on a downward trend. So, we talked about how art is an uncorrelated asset class. One of the things that we saw in the art market in 2016, our price has actually decreased when public equities increased. Our best guess is that it was really due to two things, one either to Brexit, or two due to capital controls in China, and really preventing people in China from moving money out of the country.

Scott Lynn (43:38):
I think at the peak, China was 35%, 40% of the art market. Today, it’s down to roughly a quarter. We have seen that shrink. And that’s not by the way, dissimilar to other countries in the past. Like at one point Russia was 25%, 30% of the art market. Today, I think it’s less than 5%. So, you do see these countries with mega billionaires coming to the art market, moving in a big way, increased concentration. And then that usually changes over time.

Trey Lockerbie (44:06):
Let’s talk about you a little bit more. So, what has been the biggest success you’ve had in art and maybe what was the worst outcome you’ve had in the art market?

Scott Lynn (44:16):
Personally, I would say that like any collector, any investor, depending on how you define it, you make lots of mistakes early on. I think one of the mistakes I made early on was, I focused on brand name artists, but I didn’t focus on objects that were necessarily a examples. So, for example, Picasso, a lot of people don’t realize that Picasso during his lifetime created, I think it’s 65,000 objects. So, a lot of people think, “Oh, if you own a Picasso, that’s amazing.” But the reality is, there’s 65,000 Picassos, right? You can buy in addition to ceramic tile by Picasso for $2,000. So, it’s not necessarily that rare, that unique.

Scott Lynn (44:57):
So, I think as a collector in the beginning, I bought a lot of addition work. I bought a lot of drawings. I didn’t necessarily buy high quality examples. And I obviously had no idea at the time. But one of the things that we’ve studied a lot at Masterworks is how does price point impact volatility, and how does volatility go down or up relative to price. And generally, what you see is what you would expect, is the more you spend for a painting, the more volatility goes down, and the more predictable returns are, which is why we fundamentally believe that the only real investible segment of the art market or paintings is somewhere between $500,000 and a million dollars on up. We think it’s very hard to make predictable returns if you’re investing in any artwork less than that. So, that’s probably the worst example or the worst decisions that I made personally collecting in the beginning.

Scott Lynn (45:54):
I’ve had a lot of great examples of paintings that I bought for. I’m thinking of a painting I have downstairs in my living room, where I bought for a million dollars, sold it for $11 million. I had a painting that I bought by an artist named de Kooning, which was a great one. I think I can’t remember exactly, I think it’s seven and a half million dollars for the work. And I think I sold it a year and change later for $16 million, which from a return perspective in the art market is pretty unheard of.

Scott Lynn (46:23):
It’s definitely an asset class where you can generate great risk adjusted returns. Like to me, it was always when I thought about investing in art, it was never that I can make 50X or a 100X returns, it’s that I could return… I think when I last calculated this, and personally I returned 21% of my portfolio over a 10 plus year period, but I could do that without taking a lot of risks. That’s what was always so interesting to me. It’s very rare to see someone buy a Monet for $10 million and sell it for $5 million. It almost never happens. The store of value characteristics on art are really, really good.

Scott Lynn (47:02):
So, if you can generate returns without taking any, from my perspective, material risks, I think that’s super interesting. And that was the genesis really behind Masterworks in the beginning.

Trey Lockerbie (47:16):
It is interesting because you would think, you mentioned Masterworks has about 140,000 subscribers or that’s kind of the market, which is not a large pool. So, you would think that there would be some liquidity issues there, or there’d be more volatility. And you have 140,000 people more or less selling things back and forth to each other, and that would create more volatility. But are you saying that that’s pretty limited on the platform? Is that correct?

Scott Lynn (47:41):
Just think about liquidity overall in the art markets, you have $60 billion a year in transaction volume, right? Masterworks has 140,000 investors. This year, we’ll raise three to $400 million. So, our segment of the art market is still relatively small.

Scott Lynn (47:56):
I would think of liquidity from an art market perspective is frankly probably slightly better than real estate, right? If you own a $20 million home in the Hamptons, it’s going to take you a couple of years, maybe one year at best to sell that home. If you own a $20 million Basquiat, you probably have three or four collectors at any point in time, that’ll buy that painting. So it’s still, it is an illiquid asset class, not dissimilar to real estate, but I think it’s better than real estate in many ways. And then obviously, doesn’t have carrying costs and the complexity that goes with buying or selling a piece of real estate.

Trey Lockerbie (48:29):
So, what the 140,000 investors you have on the platform currently, do you have to be an accredited investor to be on the platform? Walk us through a little bit about what it takes to get set up on the platform?

Scott Lynn (48:40):
Yeah, these are all qualified public offerings, so very similar to how Uber goes public. You can go to the SEC’s website, search for Masterworks and literally read every single painting that we’ve taken public. And today, we’re taking one painting public every 10 days, roughly, valued somewhere between $1 million and $20 million. So, there’s a bunch of examples out there. But because they’re qualified public offerings, we can sell securities to retail as well as accredited investors. So, you don’t have to be accredited.

Trey Lockerbie (49:11):
Very cool. Well, before I let you go, Scott, talk to the audience about where they can find Masterworks? Where they can follow along with what you are doing? By the way, are you personally in on a lot of these deals? Can someone follow along with what you’re doing and where your expertise is?

Scott Lynn (49:26):
Yeah. We’re in every single deal. So, our management fees are one and a half percent per year, and then 20% of profit when the painting sells. So, we earn those in equity because paintings don’t produce cash flows. So, that one and a half percent is earned by issuing ourselves shares and that individual vehicles. So, our interests are entirely aligned with investors from that perspective.

Scott Lynn (49:49):
High level, if anyone wants to get involved with Masterworks and look at some of these investment opportunities, they can go to the website, www.masterworks.io, request a meeting with our membership team and basically get on the phone with one of our representatives and walk through how they’re investing today, what their investment objectives are, how they think about diversifying into art, what their objectives are with art specifically. And we’ll work with people to construct a portfolio that makes sense for them.

Trey Lockerbie (50:19):
Now, just throughout there, reminds me of like a hedge fund fee structure of sorts. So, I’m just curious, how does that compare to the traditional art market with the Sotheby’s and the like, what are their fees structures like?

Scott Lynn (50:29):
It’s significantly last week, I actually had a call today with our team, to just walk them through how to think about traditional art fees versus how Masterworks charges fees. And the reality is the art market has tons of transaction fees. Auction houses charge 20% today. I think our average commission that we’ll pay with an auction house is somewhere around 2% or 3%, just because of our buying power. Advisors charge 10%. We don’t use advisors because we’ve a research team and an acquisitions team in house.

Scott Lynn (51:00):
Most collectors pay sales and use tax. We avoid those transaction fees with our structuring. Our paintings are moved through the State of Delaware. The transaction fees historically in the art market have been very high, but we’ve created a pretty unique structure that gets around most of those.

Trey Lockerbie (51:17):
Very cool. And so, if I go to masterworks.io, and is there a way to just subscribe and get notified when these new IPOs are coming out?

Scott Lynn (51:25):
Yeah. As soon as you create an account, you’ll receive emails every single time we launch an offering. But yeah, that’s the way to get started. I think most people that we talked to, 99% of people don’t know how to think about art as an asset class. They don’t understand returns. They don’t understand risks. They frankly don’t understand hold period, liquidity. So, we’re educating hundreds of investors a day on how to think about a new asset class.

Trey Lockerbie (51:51):
Well, you certainly educated me today, because I knew very little about the space, that I really enjoyed talking to you about it. My wife loves art, so I need to catch up quickly. And this was super helpful, and it’ll make me look smart later. So, I appreciate that. I really enjoyed our conversation, Scott. Thanks for coming on.

Scott Lynn (52:07):
Yeah. Thanks for having me.

Trey Lockerbie (52:09):
All right, everybody, that’s all we had for you this week. If you’re loving the show, be sure to follow us on your favorite podcast streaming app. Also follow me on Twitter @TreyLockerbie. Be sure to say, hello, give us some feedback. We’d love to hear from you.

Trey Lockerbie (52:23):
And finally, if you haven’t already done so, go to theinvestorspodcast.com, and check out the TIP finance tool. I live by this tool, and can’t recommend it highly enough. So with that, we’ll see you again next week.

Outro (52:37):
Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network, and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com.

Outro (52:54):
This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.