Traditional investments such as real estate, bonds and stocks offer predictable income streams and are therefore less complex to value.
The Financial Times is reporting these days on the crisis at Sotheby’s, whose decline in profitability is largely due to a downturn in the art market and a lower propensity to consume luxury goods.
This news gives us the opportunity to ask ourselves the question: what is the difference between investing in stocks, art, or bitcoin?
To answer this question, we can divide the different investments into two categories.
Those whose value can be estimated through an operation that technicians call "discounting future income flows" and those for which this operation is impossible.
Let’s start with the first category, assets that generate predictable income flows.
Investments such as real estate, bonds, and stocks are characterized by relatively predictable income flows. Real estate, for example, can generate income through rents, and therefore the value of a property can be estimated by discounting future cash flows (i.e. rents minus expenses).
Bonds offer interest payments that can be easily discounted and therefore it is also possible to determine their current value. Shares, although more volatile, can under certain hypotheses also be valued based on the discount of future dividends.
With this first type of object, investors can make more "reasoned" predictions based on less volatile criteria.
I imagine that at this point someone might object that shares are actually very "volatile" compared to, for example, real estate.
The observation is only partially true. It is an "optical effect" due to the different structure of the markets: the stock market is much more liquid than the real estate market. For this reason, when there are drops in demand, the stock market records a drop in prices, while the real estate market records a rarefaction of trade.
If this observation is not clear to you, do not worry; this is a very technical passage that would deserve a series of separate articles to be explained in detail.
leggi anche
Bitcoin: is it time to be bullish again?
Let’s now look at non-income-generating investments.
Investments such as artworks, commodities and precious metals cannot be valued using the above methodology. Art does not generate direct income streams and its value is therefore highly subjective, depending on factors such as the reputation of the artist, rarity and market trends.
Similarly, commodities, cryptocurrencies, and precious metals, such as gold and silver, follow market dynamics influenced by industrial, economic, and geopolitical factors, and their value can fluctuate dramatically in response to changes in sentiment and economic or strategic conditions.
Furthermore, art buyers are often motivated by emotional factors and a search for status, rather than purely financial considerations and in times of economic uncertainty, the propensity to invest in luxury goods tends to decline, leading to a contraction in demand and, consequently, a fall in prices.
For this reason, demand (and therefore prices) for works of art and luxury goods is intrinsically more erratic than more traditional investments.
Therefore, investors who venture into these markets must be prepared to face a high degree of risk and uncertainty, and personally, if the goal is only profit, I advise against a good part of the sector.
But if despite everything you wanted to invest in these sectors, how do you mitigate the risk?
Either with specialized mutual funds or by buying listed companies that work in the luxury sector
Investing in shares of fashion, jewelry, or art companies can provide a way to benefit from the growth of the luxury market, maintaining a less unpredictable dynamic for the assets. If on the one hand, these companies can offer exposure to proxies (i.e. the same factors that influence the luxury market) thanks to the management action, the risks associated with direct investments should be reduced.
In summary, traditional investments such as real estate, bonds, and stocks offer predictable income streams and are therefore subject to less complex valuation, while investments in works of art and the like present a series of challenges related to the concentration of risk on the single investment and the greater erratic nature of the factors that influence demand.
Original article published on Money.it Italy 2024-09-16 07:02:00. Original title: Che differenza passa tra investire in azioni, in arte o in bitcoin?
