The difference between assets and investments

By DAVID MOON, Moon Capital Management, LLC
March 2, 2014

Wolfgang Beltracchi was profiled on the CBS newsmagazine “60 Minutes” last Sunday. He is an artist whose paintings hang in museums and fancy homes around the world. His works are featured in art books and on the cover of Christie’s catalogues. These pieces have earned him millions of dollars, sometimes requiring only a couple of days’ work to produce a multimillion dollar masterpiece.

His more than 300 paintings around the world are all forgeries.

What may surprise you even more is that many of Beltracchi’s victims continue to enjoy his work, proudly displaying them and continuing to buy and sell them for staggering sums—with full knowledge of their phony background.

Call it life imitating art. Literally.

If I can enjoy displaying a fake Rembrandt in my New York apartment, what difference does it make to my guests if they’ve been hoodwinked?

That guy in the white van on Kingston Pike has been doing it for years with Louis Vuitton purses.

Art is enjoyable. Collecting and displaying it can be gratifying. I have a unique world class “art” collection that I could easily sell for millions…of Argentine centavos. But my collection of used footballs isn’t an investment, because there is no way to value it.

An asset whose sole utility is the pleasure it provides its owner is not an investment. I can easily sell my footballs for more than my cost. But they are not investments.

If you can’t determine the actual value of an asset and you consider it an investment, you are simply trying to predict future price movements. You are buying something simply with the hope someone will pay you more for it. That’s what people do with Beanie Babies, Pet Rocks and sham internet stocks.

Hope is not a very good investment strategy.

In 2011, someone paid $250 million for an 1890 Paul Cezanne work titled “Card Players.” To give you a visual, the painting is the inspiration for the “Dogs Playing Poker” series of paintings.

For comparison, according to rare book expert Kenneth Gloss, a complete first-edition Gutenberg Bible (1456) can be purchased for a mere $35 million.

A seven-page letter written by George Washington in 1788 urging adoption of the US Constitution recently sold for $1.3 million. Mark McGuire’s 70th home run baseball sold for $3 million.

If art was an investment, I would short the baseball and load up on Washington letters.

The starting point for every investment decision is a determination of the value of the asset. The value of an asset is a function of what it produces for its owner. An asset that produces cash is a valuate-able asset.

One that produces only speculative pleasure cannot be valued.

Not every asset is an investment. When my dogs pee in the house I am tempted to sell them. The dogs are assets, albeit ones, like my children, that eat. I can sell them.

But they are not an investment. Neither are the dogs.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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