Why Blue-Chip Art Should Be in Everyone's Portfolio with Scott Lynn: An EOFire Classic from 2021

0:01Boom! Shake the room, Fire Nation. JLD here and welcome to Entrepreneurs on Fire. brought to you by the HubSpot Podcast Network, the audio destination for business professionals with great shows like Creator Science. Today, we're pulling a timeless EO Fire episode from the archives, so the giveaway may not be active. And we'll be breaking down why blue chip art should be in everyone's portfolio. To drop these value bombs, I brought Scott Lynn into EO Fire Studios. Scott is a serial tech entrepreneur who has been collecting art for over 20 years. He brings his passion for tech and art together with masterworks.io.

0:37In today's foundation, we'll talk about alternative assets, how they're a great way to diversify. We'll talk about achieving financial independence, and we'll talk about being patient and so much more. And a big thank you for sponsoring today's episode goes to Scott and our sponsors. Artificial intelligence has made a splash in the headlines, and for good reason. The digital landscape is changing quickly, and AI is a huge part of that. If you're feeling behind the curve, don't worry. HubSpot has got your back. HubSpot's AI power tools, including their content assistant and chat spot are a perfect place to start learning the power of AI.

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1:53Scott, say what's up to Fire Nation and share something interesting about yourself that most people don't know. I'm sitting in my office in New York, and most people don't know this. And in fact, everyone who works for me doesn't know this. But my childhood dream was actually to be an actor, and I'm looking at my headshot right now. So that feels like ages ago. But yeah, that's what comes to mind. Hey, we all have dreams. We all have dreams and aspirations. And sometimes life just turns out a little bit differently. But the reality is I'm not the starting shortstop for the Boston Red Sox. and you are not a actor, apparently.

2:34So we have some cool things to talk about, though, and that specifically is going to be why blue-chip art should be in everyone's portfolio. And I have to say, I really wanted to have a conversation with you because I am clueless. I mean, I'm in my 40s. I've been running a seven-figure business now for eight years in a row, and I still don't have any idea about blue-chip art. I mean, I worked for John Hancock for a number of years back in my corporate days, and I got to know all about variable annuities, stocks, mutual funds, bonds, you name it. But I never really got to know about blue chip art.

3:10And I'm really looking forward to this conversation. But before we get into some real, real specifics, I want to talk about your art collecting background. Like, how did you get into this? And what are some things that you've learned over the years? You know, my background generally has been as a technology entrepreneur. So I've been starting tech companies for the past 20 years in casual gaming, online advertising, and now fintech. And at the same time, I've been collecting art. So I bought my first, you know, what I would consider important painting at the age of 19. Wow. And that was the late 90s.

3:45So that was a very different time for the art market than where it is today. Today, I guess it's much more of a, you know, of a commercial business where I think 20 years ago there were lots of people collecting sort of for the um you know the joy of collecting or the cultural significance of collecting um and today a lot of people obviously are in it are in it for for investment like reasons and you you read a lot about these these hundred million dollar paintings that are that are selling today i mean i'm a firm believer that in our lifetime we will see a billion dollar painting sell um but it's a very it's a very opaque market that most people don't understand.

4:27So, you know, what have I learned collecting? I think is a hard, is a hard question. I mean, like anything you learn through, through making mistakes and, and kind of iterating and learning, learning along the way. I think some, some of the mistakes that early collectors make, are they focused on big name artists like, you know, Picasso, but they buy a really bad example. So most people don't know this, but Picasso made 60 ,000 works of art during his lifetime. And 95 % of it's just not investable. It's not that great. So there's all these small things that I've learned along the way. But as we'll talk about later, I've tried to put all those together in the context of Masterworks to really help people access this asset class in an easy, user-friendly way and generate real returns from it.

5:15One thing that I really would love to dive into, because I know Fire Nation salvatates for this kind of stuff. We definitely want to hear about what you consider one of your best investments. But before we hear that, let's hear about a bad one, just a really, really terrible investment that of course you learn from. And let's get the specifics on that. I wrote a blog post on this somewhere on the Masterworks website, but it's along the lines of what I just said. So when I first started collecting, I was focused personally on big you know big brand name artists and and sort of buying lots of objects by those artists so i i bought um something like i can't even recall now something like 100 200 picasso ceramics from a neighbor that used to live next to him uh in the south of france and that you know the objects like that i mean these are sort of 10 20 30 40 50 thousand dollar objects individually not you know I bought a whole bunch of them at once.

6:15And they just don't, for a whole bunch of reasons, they just don't appreciate, right? They're not the most rare objects. They're an edition series. There's lots of them out there. So, you know, the scarcity value is low. So that's probably, you know, things like that are probably the worst paintings I've ever purchased personally. In terms of best paintings, I mean, I bought paintings for, you know, five or ten million dollars, sold them two years later for twice the amount. Wow. you know, it just depends on the artist and the time. And the art market moves by events, right? So sometimes you just don't know these events are happening.

6:54For example, if you buy a$10 million painting by whatever, an artist named de Kooning, let's say, and there just so happens to be a new price record set of his a year later, you know, that can change the entire market and that can be the right time to sell. So sometimes it's hard to predict those events. You know, sometimes it's like, I guess like in any investment, it can be a little bit of luck, but you know, I've had some, I've had some great wins and I've had some losses as well. Yeah. And I mean, that goes in a lot of different investment classes. I mean, there's a lot of things that have happened even this year with things that people might be a little more familiar with, with COVID happening, where you have companies like Zoom having all these new record highs and you have companies like DocuSign now crushing it that weren't particularly doing so beforehand because now everybody's in this new world.

7:42And guess what? New worlds happen all the time. And so you can't always predict them. But that's why I love being able to diversify and spread myself out over a number of different investment alternatives, which is kind of where I want to go next, Scott. What exactly are investment alternatives? And how do you see them fitting in to current market conditions? The way that I would think about it, or I guess I do think about it personally, is alternative assets like ART are a good way to diversify a portfolio and to also increase overall returns of a portfolio. Just like any investment, I think any investor should think about risk-adjusted returns, right?

8:25So what is the risk you're taking relative to what sort of return can you receive? And art historically has been one of those asset classes that just hasn't been accessible. I tell people this all the time and they find it amazing. But Sotheby's, which is one of the two major auction houses that was traded on the New York Stock Exchange, just recently went private. It was the oldest listed company on the New York Stock Exchange at 275 years old. This is an asset class that's literally been traded by the ultra-wealthy for centuries. but the only way to allocate to it is if you have millions of dollars to buy a painting in today's dollars.

9:02So it just, you know, it continues to be an asset class that outperforms and is uncorrelated to other asset classes, we believe has a role in a portfolio, but there hasn't really been a way to invest in it outside of buying these very expensive paintings. I'm going to be the first person to admit, as I did earlier, that I just don't really understand blue chip art to the level that I want to, which is why I'm really looking forward to this conversation. So can you break down for me and for Fire Nation, the fundamentals in a piece of art? Let's start from very, very high up 30 ,000 feet. So when we think about the art market, we generally think there's a couple of things that cause art prices to increase over time.

9:43One is just, we think of it as almost a call option on the ultra wealthy, right? So the wealthier the top 1 % of the world gets, not just the US, because the US is only roughly 25 % of the overall art market. But the top 1 % of the world, the wealthier they get, we think that's generally correlated to art prices going up. The second dynamic, which is a really, really fascinating dynamic, is that art is the only asset class that I'm aware of that is consistently decreasing in supply. So the example I like to use is an artist named Jackson Pollock, who some of your listeners are probably familiar with, who's a splatter painter during mid-century America.

10:22And I know his market very well because I've owned some of his work in the past. And today, I think there's something like 22 or 23 drip paintings by Jackson Pollock that are in private collections. He painted, I don't know, hundreds of them during his lifetime. So those 22 or 23 that are in private collections, they're still selling for$30 or$40 million, not because they're great paintings, but because there's nothing else left. Because when an artist dies, collectors that wind up with those paintings wind up donating them to institutions or museums over time. And then the total supply of the work shrinks.

10:57And if you want a Jackson Pollock drip painting, you have to pay in today's dollars,$30 million. So that's a really unique dynamic about the asset class that just causes prices to go up over time. You know, what's left to buy just decreases every single decade. Now, I know a lot of people, they're concerned with the volatility of their investments when it comes to their personal investing style. So can you kind of break down the volatility of blue chip art compared with, say, stocks and bonds and that such? Our research team has done a lot of analysis on what we refer to as loss rates and then magnitude of loss.

11:34And when you compare art to other asset classes like oil, public equities, and real estate, the loss rates are actually lower on art and the magnitude of loss when there is a loss is actually lower than those other asset classes. What are loss rates on a rolling basis? The other thing that we look at is what are volatility and returns in individual artist markets? And some of your listeners may be familiar with this phrase called sharp ratio. And a sharp ratio effectively is looking at the absolute return divided by the volatility in return to try to understand exactly the risk-adjusted return of any particular asset class.

12:15And many of the artists that we deal with have sharp ratios above one, which is very, very good for any asset class. So, you know, we think the volatility relative to the returns is totally reasonable and very interesting. I mean, some of the absolute returns for the artists that we track are as high as, you know, 30 % historical returns. So that, you know, that's very hard to find in any asset class. Let's talk about FIRE for a second now, So not the entrepreneur on fire topic, but financial independence retire early. How does art fit into that context? If I'm thinking about achieving financial independence, I want a well-diversified portfolio with asset classes that have competitive, if not superior returns to other asset classes.

13:02And the great thing about the Masterworks platform is you can actually go to the website, review each individual painting, look at the historical returns. And then as part of our governance structure, we actually risk rate the paintings just like you would see a risk rating on a bond, for example. So I would think about diversifying a portion of my overall portfolio into an asset class like R that can provide superior risk-adjusted returns. Now, that being said, I mean, since this is an illiquid asset class, we do have a trading platform now where people are trading shares. We can talk about that later.

13:37But since it is an illiquid asset class, I would think about limiting that allocation and realizing that I may have to wait several years in order to recognize it. So as long as you're able to wait several years to recognize your return, I think it's a great way to diversify a portfolio for financial independence. So Fire Nation, we are going to be diving into masterworks.io when we get back from thanking our sponsors. This is the company that Scott Lynn has put together. And there's going to be a lot of interesting things I'm going to ask him about this. So make sure you stick around. We'll be right back.

14:13Success Story, hosted by Scott D. Clary, is brought to you by the HubSpot Podcast Network, the audio destination for business professionals. Success Story features Q &A sessions with successful business leaders, keynote presentations, and conversations on sales, marketing, business startups, and entrepreneurship. One of Scott's recent episodes was with none other than Jack Canfield, where they discuss adapting to life's twists and turns. Listen to Success Story wherever you get your podcasts. So Scott, we're back. And as I kind of teased before the break, I want to really spend the rest of our time here together talking about Masterworks.io.

14:47because I think this is something that Fire Nation who's listening and they're like, well, you know, honestly, like five to$10 million for a painting isn't something in my near term future, but, you know, five to 10 ,000 or 50 to a hundred thousand dollars in part of a painting or in owning shares in a painting could work for me. So can you talk about masterworks.io? Like give us a little background about the company, like why you created it, how it works, and, you know, potentially how Fire Nation can get involved. The reason I started the company and what makes me excited about the company every day is that you have this massive asset class, which is art.

15:20It's roughly$1.7 trillion in value. It's the oldest asset class, 275 plus years old, as I mentioned, from just the age of Sotheby's alone. But the only way to allocate to it has been if you have millions of dollars to buy a painting. So it really has been limited to the ultra, ultra wealthy for generations. but when you look at the characteristics of the asset class you know the top 100 artists have outperformed the s &p 500 from 2000 to 2019 i think based on our latest latest data we did a report with citigroup at the end of last year that concluded it was uncorrelated so we fundamentally believe that it has a role in any portfolio but we were you know we we were the first company to really securitize a painting so up until masterworks there hasn't been a way for anyone to to purchase shares in paintings, which is honestly mind-blowing.

16:10I mean, you think about every other asset class. I mean, real estate has been securitized. Venture capital has been securitized. Private equity has been securitized. But nobody's ever done it for art. So we're a brand new company that's been around a couple of years. We're launching roughly one painting a week now, valued between$1 and$10 million. So each investment has its own unique characteristics. But we think it's a really exciting time to get involved in the art market, simply because there's not that much competition. I mean, we really do have the best research team, the best acquisitions team, and the best investment offerings compared to anyone else in the market.

16:48So based on that, I'd love to kind of know what kind of research and data that your team and you use to determine what kind of blue chip art that you're going to actually buy and sell. We have a proprietary data set that we've collected over the past couple of years, which is based on public auction data in the art market since the 1950s. So we look at every single time an individual painting has been purchased, what it is subsequently sold for, and then what the return is, what the profit or loss is that the collector made on that individual transaction. And we've identified this now for more than 85 ,000 paintings.

17:26So you can actually go to the masterworks.io website, click on price database and search through some of that data to really understand for each individual artist, such as Pablo Picasso, how much money have people made or lost on individual paintings within his market? So I know there's a lot of trends in the art market. I mean, we've already kind of talked about some of those, but what does happen when things fall in and fall out of favor? Do you have an example or two of something that's happened in that world that we relate to as listeners? If you look at the top 100 artists by sales volume, it's very interesting.

18:00Since 2000 or roughly the past 20 years, there's only been three artists in the top 100 list that have produced negative returns, which really speaks to the store of value characteristics in art. So those three artists are Jeff Koons, Damian Hurst, and Murakami. And there's different reasons for each of those artists producing negative returns, but mostly they've been living artists who have just been overhyped by people who sort of back them. And the prices, they've all had work sell for tens of millions of dollars and their prices just haven't been sustainable over time. But I think the thing that's fascinating about that is 97 out of the 100 have produced positive returns.

18:43Do you ever foresee a market where a place where somebody like yourself is like, that person is way overhyped. I'm going to essentially short sell their future earnings on that. How does that work? I mean, there's no options market today in the art world. I mean, Masterworks for the first time just launched a secondary market where people are now trading shares of paintings on our website. But we're a long ways at this point from really having an options market. Some people are like, well, what happens if we do enter a recession? Because obviously, the stock market has been still crushing it and the bull market is still all signs pointing forward.

19:22But the reality is there's a lot that's going on in the world, and a lot of people are worried about some kind of looming recession. So do transactions ever dry up? Do they ever slow down during recessions? This goes back to this concept called correlation. And correlation really just looks at does a particular asset class behave or return in the same way as another asset class over a similar period of time? So this question was actually unknown up until recently. And we collaborated with Citigroup to do a report on correlation between art and other asset classes using our research team's data.

19:56And we published that report, which is now available on our website, at the end of last year. And essentially what it concludes is that art is an uncorrelated asset class. I think the correlation between art and the S &P, for example, was roughly 0.14. 1.0 would be a full correlation. So when you go back in history and you look at, did our prices decline during the dot-com bubble bursting? They actually didn't. They actually increased in value. They had the highest correlation ever during the 08-09 crisis, which was about 0.4, if I recall correctly, which means they declined 40 % as much as the broader market.

20:32And then during COVID, we published this report at the end of 2019, and we were hoping we were right because we basically said it was an uncorrelated asset class, which then means that during COVID, our prices should not have declined when the markets declined. And what we saw is that they've actually increased. So it does behave differently. And again, the reason we think it behaves differently is it's a global asset class traded between the ultra-wealthy people of the world. and that just behaves differently than public equities, for example. Now, definitely correct me if I'm getting any part of this process wrong, but say somebody does buy into a piece of art so they have shares in that and they say, well, you know what?

21:15Something happened, I want to actually buy this house or I want to do this other thing. Are they able to actually redeem those shares before you as masterworks.io actually sell that piece? So that's really where our secondary market comes in And we've made a huge amount of effort to try to help people get liquidity before we ultimately sell the paintings. So if someone decides that they need to recognize their gain or get their money back or whatever, they can go into the secondary platform, list their shares at a certain price, and then try to find a buyer for those shares. And we've seen really, really good activity over the past, I think, four or five months since we've launched the secondary markets.

22:00So that is a core focus for us as a business going forward. So there's a lot of exciting things in the blue chip art market. And so if there's people listening right now who are like saying, you know what, I wouldn't mind dipping my toes in. I'm going to go check out masterworks.io and see what they have going on there. Do you have a recommendation for people that are just starting that don't have a lot of experience? Start slow, learn about the individual offerings that we have, learn about the artists, play around with the secondary market. And I think over time, what we see is when people start out on Masterworks, they start allocating more and more just because of the quality of the investment opportunities and frankly, what a lot of the offerings are trading for in the secondary markets.

22:45So Scott, you have shared a ton of information about Blue Chip Art. I feel like I know so much more than when we started, it, but I'm also going to be going back and listening to this episode again to really clarify a few things, fo sho. But what do you want to make sure of everything that we talked about that Fire Nation really gets that they can walk away from this episode with? I think the thing that we want people to understand is that at the end of the day, this is the largest asset class that has never been securitized. And there's a whole bunch of opportunity in today's world to make money from it.

23:17So I think learning about the asset class is important for any serious investor. The analogy that I like to use is if you think about the size of art at$1.7 trillion, and you think about the size of venture private equity at$3.5 trillion, there's 6 ,000 venture capital firms. There's literally nobody doing this in art, and it's half the size of venture capital. So we think Masterworks is positioned in a really interesting way to help investors gain some exposure to the asset class, learn about it, and then over time make it a considerable part of their portfolio. So Fire Nation, I really, really think that this is something you need to at least be educated on and be learning more about.

23:59That's why I brought Scott on because I want to get educated. I want you to get educated because this is an alternative investment that could be something that really rings your bell in that good way, can be moving you towards that fire that we talked about, financial independence, retire early. And Scott, for people that want to learn more, where would you like them to go and any call to action you might have? Yeah, just check out the website at www.masterworks.io. we publish research on the asset class on the website request access tell our membership team that you're from Fire Nation and we'll work with you to get an account set up as soon as we can that's awesome so Fire Nation you're the average of the five people you spend the most time with and hello you've been hanging out with SL and JLD today so keep up that heat and head over to eofire.com type Scott in the search bar his show notes page will pop up with everything we've talked about but your direct call to action head over to masterworks.io request an invitation there there's going to be a drop down select a podcast from the how did you hear about Masterworks and put in entrepreneurs on fire put in EOF put in EO fire whatever you want to put in there so they know that you came from here and they will definitely take care of you masterworks.io Scott thank you brother for sharing your truth knowledge value with Fire Nation today for that we salute you and we'll catch you on the flip side Thanks, John.

25:55with successful business leaders, keynote presentations, and conversations on sales, marketing, business, startups, and entrepreneurship. One of Scott's recent episodes was with none other than Jack Canfield, where they discuss adapting to life's twists and turns. Listen to Success Story wherever you get your podcasts.