"World of DaaS"
deep dive into Data-as-a-Service (DaaS) businesses. World of DaaS is a podcast for data enthusiasts, by data enthusiasts, where Auren Hoffman talks to business and technology leaders about all things data - building it, acquiring it, analyzing it, and everything in between.
"World of DaaS"
Masterworks CEO Scott Lynn - Data-Driven Art Investing
Scott Lynn is the founder and CEO of Masterworks, the first company to securitize art. Masterworks manages $940 million in art assets and has nearly 900,000 investors on its platform. Scott is also a multitime founder– prior to Masterworks, he founded companies in online gaming, advertising and fintech including AdKnowledge, Virtumundo, V2 Ventures and Payability.
In this episode, Scott and Auren discuss:
- Data insights on the art market
- Art trends and investing strategies
- NFTs and other collectibles
- Fraud, money laundering and art scams
World of DaaS is brought to you by SafeGraph & Flex Capital. For more episodes, visit safegraph.com/podcasts.
You can find Auren Hoffman on X at @auren and Scott Lynn on LinkedIn.
Follow World of DaaS @WorldOfDaaS
Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com)
Welcome to World of DaaS, a show for data enthusiasts. I'm your host Auren Hoffman, CEO of Safegraph and GP of Flex Capital. Hello fellow data nerds my guest today is Scott Lynn. Scott is the founder and CEO of Masterworks. Masterworks is the first company to securitize art. Masterworks manages almost a billion dollars in art assets and has nearly 900,000 investors on its platform. Scott's a multi-time founder. I've known him for many, many years. Prior to Masterworks, he founded companies in online gaming, advertising, fintech, including AdKnowledge, and many others. So, Scott, welcome to World of DaaS.
Scott Lynn:Thanks for having me. I didn't realize this was described as a data nerd podcast.
Auren Hoffman:Oh, totally yeah, we're going to dive in. We're going to like really dive into the data stuff and actually the first data said that you're like uniquely qualified to talk about is just data about the art world. How big is the art world for people that don't understand it?
Scott Lynn:I use this analogy to help people understand how big the asset class is. But you can think of art and that's really art owned by private individuals, so art that is not owned by museums as a $1.5 trillion asset class, and the comparison for people is typically venture and private equity, which is a $3.5 trillion asset class. So you have a very large market that I think most people are generally unfamiliar with. There's 6,000 firms that help people allocate to venture and private equity. There's really only us in the art market today. So I think we're in the very early stages of seeing this asset class evolve over time and being more investable.
Auren Hoffman:I imagine it's a bit more opaque where it's hard to track how things are going. Is there like a simple pricing transaction database where you can track all these things somewhere?
Scott Lynn:So this is what's super amazing, so it's not opaque at all. This is one of the things that really attracted me to the asset class when I first got involved with it. But half of the art market trades at public auction. Sotheby's and Christie's are the two largest auction houses, and Sotheby's has been around for 275 years so just like internalize that for a second.
Scott Lynn:That's like longer than the United States. Yeah, so prior to Sotheby's going private on the New York Stock Exchange, they were the oldest listed company. Art has been trading at public auction before financial markets even existed. So you have this data set which has been reported for at least decades. I mean, our data goes back to 1960s, 1970s. I'm sure there were people that were sort of tracking and assembling data before that, but you have this data set that goes back decades, maybe centuries, on how much different paintings were selling for over time. And that's really the basis of our research team is using paintings that sell at public auction to understand how different artists, markets perform, how prices appreciate, even how we think about simple things like volatility in the art market.
Auren Hoffman:Yeah, so basically 50% of art, let's say over a million dollars get sold through these auction houses or something like that, and I assume, like maybe under that it's sold at galleries and those types of things.
Scott Lynn:There's two different things in the art market. There's something called the primary market, which very simply are paintings sold for the first time, so that's always through galleries and then there's what's called the secondary market, which are paintings sold for two or more times, typically at auction.
Auren Hoffman:Okay, got it. So primarily, you're buying it directly from the artist, or maybe with an intermediary and secondary you're buying it from the buyer. The artist may or may not even be alive at that point. Yeah, that's right.
Scott Lynn:So when we talked about a trillion and a half dollar total value of the asset class, out of that, roughly $60 billion turns over every year. Half of that, approximately, is through auction.
Auren Hoffman:Got it. I don't even know what to think. If I would have thought about it ahead of time, I would have said $60 billion is smaller than I would have expected. When you came into this, was it smaller or larger than you would have expected?
Scott Lynn:It's interesting because I think, if you think about that as a percentage of turnover on $1 a half trillion, it's whatever 4%, 3% turnover every year. I don't know how that necessarily compares to other asset classes like real estate. I think it's probably slightly less right. I think people probably own a home for less than whatever 30 years I don't know precisely. Like in the art market, we tend to talk about something called the three Ds, which are death, divorce and debt. That's typically when people sell paintings. So a lot of these paintings exist in families for decades. Sometimes they exist in families for multi-generations and that probably to a certain extent, drives the lower turnover when most people.
Auren Hoffman:If you bought this very expensive painting, are people like putting it in their house to show it off? Or do they just keep it as an investment in some sort of air-conditioned airport warehouse and never actually see it and just kind of have a sense that they own this asset somewhere? Or do they like loan it to a museum? Like, where do they actually put the asset?
Scott Lynn:Those are known as free ports, where at least non-US citizens typically tend to store a lot of those works outside of the US For tax reasons or something.
Auren Hoffman:It's for tax reasons?
Scott Lynn:yeah, and even masterworks, like we buy paintings and we hold them in high-end art facilities in the state of Delaware because we avoid sales and use tax. You know that's a material portion of the overall cost.
Auren Hoffman:So if you can avoid that from an investment perspective, oh, because the sales tax is like 8% or something like that, that could be very, very high percentage of the transaction In New York.
Scott Lynn:City. It's over 10% between city and state.
Auren Hoffman:Even if I bought it in Delaware, if I move it to my home in New York, all of a sudden I have to pay this 10% tax or something you would pay use tax at that point. Oh, wow, Okay, so that becomes pretty pricey big percentage transaction.
Scott Lynn:A lot of collectors don't really care about that. I mean, I would say that the majority of people are buying these multimillion dollar paintings and they're hanging them in their home. They're keeping them there for long periods of time. But there's definitely collectors who view art as an investment and they own hundreds of paintings and they can't keep them all in their home, so they keep them in storage.
Auren Hoffman:Got it Okay. I imagine there's a whole business of insurance around these things. They're very unique things that could be very easily damaged. Yeah, that's true.
Scott Lynn:It's interesting because insurance on art is actually not that expensive. We have one of the very few multi-billion dollar insurance policies through Lloyds of London. You would be surprised what insurance on art costs. It's generally somewhere in the 20 basis point a year range for larger collections, and the primary reason it's so cheap is that you can't really steal a painting. And if you think about that, the reason you can't steal a painting is because if you steal a unique object and then you go to resell it, the resale value is nothing because the person buying it but you could have a fire.
Auren Hoffman:Someone could be moving it and could damage it. There's probably a lot of other things there, right?
Scott Lynn:Yeah, I think it's primarily young kids and houses that yeah, yeah, exactly, exactly.
Auren Hoffman:Throwing something or whatever, but I mean 20 basis points. I mean, my home insurance is roughly 20 basis points as well and obviously, like a home is much more susceptible to problems. So I would have thought a painting would be lower than 20 basis points.
Scott Lynn:I don't know. We view that as relatively inexpensive for the reason we talked about right Like someone can bump into it. A kid can throw something at it, but yeah.
Auren Hoffman:If I wanted to know who owns every Picasso painting. Is there a good database that tracks the current owners and stuff?
Scott Lynn:So we do that at Masterworks, but there's not a good public database that tracks that.
Auren Hoffman:Because even when the prices happen, you don't always know who the buyer might be anonymous or something.
Scott Lynn:We don't always know. We have an entire team of over a dozen people that are just focused on buying paintings, so they're reaching out to thousands of people in the art market, collectors as well as intermediaries, to try to understand who owns what at different points in time. There's not a good way to know that today.
Auren Hoffman:Besides for like these 3Ds death, divorce and debt generally people might sell for like general portfolio management, and those would be more like the investors who might sell something, just like they would sell a stock or sell a company or something.
Scott Lynn:Yeah, I mean people who trade art, whether that's dealers or whether that's very large collectors who have these $100 million plus collections. They're obviously focused on returns. They'll sell just for profit.
Auren Hoffman:There's no revenue stream on a painting, usually right. I mean, maybe will a museum pay you rent.
Scott Lynn:There's really not. I mean, there's been lots of startups in the art market that have tried to create income by renting paintings and I would say in today's world that hasn't been successful so far. And museums have access to so much art in general, they're just not paying for it.
Auren Hoffman:That's like a way of increasing your value by donating to a museum for a year or something, right? And then it gets shown and then maybe you increase your value. So could you like get the image rights? Is there any other way to like make income? Or because if you own a stock, you can lend it out. Or, obviously, if you own real estate, you can get rent A painting. It just sits there for a while, right, it's really just capital appreciation, okay. And so, like, how do you analyze a painting? Is it really just exactly what you said, like looking at the past data and having a sense of, okay, picassos are only going up 2% a year, but Jackson Bar going up 8% a year on average. How do you think about it?
Scott Lynn:Yeah, it's a super interesting question. So when we started Masterworks and you know the business has been around now a little bit over five years we actually didn't know how much art appreciated. We had all these general ideas there are all these different reports sort of talking about what different people thought it appreciated but there wasn't a really good index methodology that was tried and true to understand how much was art appreciating. So we created the first what I would consider high quality index to track art market performance and we base that index on something called Case-Shiller for home price indices. So that's a methodology that's used to understand how real estate prices are appreciating and that methodology basically relies on an individual home that's purchased and an individual home that's sold, the return on that particular transaction, and then, over the course of thousands or tens of thousands or hundreds of thousands of transactions, interpolating an index based on those individual returns.
Scott Lynn:We applied a similar methodology to the art market using public auction data. So we would look at a painting that was purchased at public auction, the same painting that was subsequently sold at public auction. We collected over 150,000 individual transactions and then we interpolate our index from those transactions, and the thing that was so crazy about that was that and again, this is only a little bit over five years ago. There's no API right. There's no way for us to actually pull that data from any system to record it. So we hired I can't remember 30, 40, 50 interns and we bought thousands of paper auction catalogs and we had them go through and record individual events of paintings that were purchased and then they found the painting that was subsequently sold.
Auren Hoffman:Does a specific painting have like an ISBN or something so you could track it and know, or you have to actually code it in yourself.
Scott Lynn:Generally speaking, you can use an artist's name and you can use the title of the painting.
Auren Hoffman:I'm sure like the titles might change and sometimes artist names might be spelled differently.
Scott Lynn:Yes, it's super messy. So there's definitely lots of issues like that, including that a lot of artists just have paintings that are untitled, which is probably the biggest issue. But we spent millions of dollars basically creating today what is the first reliable index on the art market and that had never been done before. You just think about that in concept and it's pretty crazy that you have an asset class that's that big, that does that much transaction volume. There was no reliable indicator for how much it was appreciating.
Auren Hoffman:And then I imagine you found out that impressionists were not going up as much. I'm sure you found out interesting ways of making your investments or something right.
Scott Lynn:Yeah, so the very first thing that we discovered which is, I think, really fascinating and most people in the art market still don't understand this today is that the older art gets, the less it appreciates.
Auren Hoffman:And you would think like maybe there would have been the opposite. That's not obvious to me. I would have assumed it was the opposite.
Scott Lynn:going into this, I think a lot of people assume the opposite. A Rembrandt is appreciating faster than whatever a Picasso, but the opposite is true. Now, the other thing is that more recent art also has higher volatility, so it can go down faster. So it can go down faster. So the predictability of the return.
Auren Hoffman:You have a sense a Rembrandt is always going to have some sort of market, so it's like a safer asset Maybe it won't go up that much, but it won't go down that much Whereas maybe a newer artist is more like a growth stock or something.
Scott Lynn:Yeah, our best hypothesis as to why that is true is that appreciation rate tends to follow fashion, and in our world, in the art market, fashion moves in very large increments. It moves generationally, it moves over centuries, but it still changes. And what that means today is that if you decide that you want to spend $10 million on a painting, you probably don't want to hang a Rembrandt above your bed. You probably want to hang a Basquiat above your bed or something that just feels more contemporary, feels more of your generation. And when we look at the data, that's what we see. So we see contemporary art appreciating, art created after 1970 appreciating at 12, 13% a year, modern art appreciating at, I would say, 8, 9% a year. Now Impressionist art appreciating at 6, 7% a year. And old masters appreciating at 1 to 2% a year. So over the course of a couple hundred years you had old masters which were very fashionable, obviously appreciating very quickly at that point in time, slow to inflation-like appreciation rates in today's world. Okay, interesting.
Auren Hoffman:Obviously there's also a transaction Buying it from an auction house, you're going to have a pretty high transaction price that you're giving to Sotheby's, christie's etc. So from an investment perspective it becomes even worse. If it's appreciating 1% a year, it's really negative appreciation at that point.
Scott Lynn:There's no question that transaction fees in the art market I think are a problem for investing in general, I mean at Masterworks. We've had to kind of engineer our way around a lot of that.
Auren Hoffman:You're going to buy directly from the seller, or something.
Scott Lynn:Yeah, working with collectors directly, avoiding sales and use tax, really getting down carrying costs.
Auren Hoffman:What is like a Sotheby's charge on a typical transaction or something.
Scott Lynn:It depends on the price of the painting. But if you're a typical collector and you walk into an auction house and you're buying something that's over a million dollars, you'll generally pay on average 12 to 15% in total commission, after rebates et cetera, the buyer pays. This gets complicated and it's a little bit of a rabbit hole, but there's technically a buyer's commission and a seller's commission. Almost always, if you're a big seller, that commission gets waived or eliminated. There's really just a buyer's commission. And then if you're a big seller, that commission gets waived or eliminated. There's really just a buyer's commission. And then if you're consigning something and you're a big enough client, a portion of that buyer's commission will get rebated to you as an incentive to consign, which effectively reduces the net commission that the auction house charges. It's a complicated construct and I think in general we would probably say it's not good for the art market. These complicated transaction fees inhibit new people from moving into the market and probably discourage investing generally when transaction fees are high.
Auren Hoffman:I assume, because you're basically creating index funds and other types of things to help people invest well, help even the average investor invest well. You're trying to invest in the safest, highest growth thing possible.
Scott Lynn:Yeah, so we think about artist markets just like you would think about any asset class. So we think about what is the risk-adjusted return, meaning what is the appreciation rate divided by the volatility and what's referred to as a Sharpe ratio in most asset classes. We look at Sharpe ratios in individual artist markets and the higher the Sharpe ratio generally, the better we think of that artist market.
Auren Hoffman:There are I assume there are points where you are a seller, you're not just a buyer, and you're selling at the point where, essentially, the only reason you would sell is if you feel like the appreciation in the future is no longer going to look like the past. Is that correct?
Scott Lynn:Yeah, I mean that's generally correct. I think that decision is a hard decision and we have a data science team that has created basically ML models to try to understand what do we think the future moiks or the future appreciation rates of these artist markets. What do we think they'll be In today's world? Those ML models are governing more and more our decisions around selling. If we think an artist market is decreasing or if we think it's declining, based on that ML, we'll start selling.
Auren Hoffman:If you own enough of an artist, you have an incentive to market that artist broadly. In this case, if I own a bunch of Apple stock, it's going to be hard for me to move the needle to help Apple. I could tell my friends that Apple's amazing but it really won't really change their earnings very much.
Auren Hoffman:Even if I earn billions of dollars of Apple stock, it really won't do very much. But if you own 10 paintings of a cool artist, whether they're alive or dead, you have an incentive, a real incentive, to start marketing that and browsing it up, et cetera, and to increase appreciation. I know a lot of early collectors try to do that. Is that still applicable at your stage, at the later stage?
Scott Lynn:It's not applicable at our stage. I mean, there's definitely people that try to make markets in the art market and I would say that almost every very major artist today, very major living artist, has had someone help them make their market throughout their career, whether that's a gallery that's bought things for inventory, whether that's a large art collecting family that has commissioned a bunch of paintings and then tried to get them to sell for a lot at auction. But at our stage it's not really a scalable strategy. We're more interested in how do we provide predictable double-digit returns for investors?
Auren Hoffman:You can't get it into a movie or get people talking about a particular piece, or you get the New Yorker to write a new profile about the artist, or something like that.
Scott Lynn:That game is typically played at the $50,000, $100,000 a painting price point.
Auren Hoffman:So once you're a $20 million painting or whatever, it's not happening. The audience's reputation is what it is at that point. It is what it is at that point. Yeah, okay, interesting.
Scott Lynn:What else is not obvious about the art market that the average person would understand, I think when we think about the art market qualitatively, we tend to think about this call option on the top 1%. So if you just sort of break down allocating to art as an ultra wealthy person, you can think about it like this Most blue chip paintings cost over a million dollars. If you want to buy a Rothko, a Rothko costs whatever $30 million. A Basquiat costs $20 million. A good Picasso in today's world costs $20 million. So if you start thinking about a portfolio of art, you're probably spending somewhere between $50 to $100 million to have a good art collection. Now if that art collection represents whatever 5% of your net worth, you now have to be over a billionaire. When you think about what is driving prices in the art market, it's really wealth creation at the top 1%.
Auren Hoffman:In this case it'd be the top 0.01% 0.01%.
Scott Lynn:yeah, so these are new billionaires coming out of China.
Auren Hoffman:The 1% Americans net worth is a little over $10 million. Maybe $10 to $15 million would be like the top 1% net worth in America.
Scott Lynn:Yeah, I mean it's people like Jeff Bezos moving into the art market, which he has been recently, and buying $100 million paintings. The Qataris previously buying $100 million plus paintings. The market is very correlated.
Auren Hoffman:When someone does that. Why do they do that? Are they doing it just so they can brag to their friends that they have this thing? Because at least with the yacht, you kind of enjoy it If I create a fake replica of the painting-.
Scott Lynn:People do enjoy paintings, though, right.
Auren Hoffman:Well, but if I had a replica of your favorite painting, no one would be able to tell the difference. I could still enjoy it just as much. It's just the fact that it's the real thing gives me so much more enjoyment of it and stuff.
Scott Lynn:I think it's owning something that is culturally significant, part of art history. I think that's right.
Auren Hoffman:It's the same reason people buy any type of collectible or any other type of owning the original writings of da Vinci or whatever it might be.
Scott Lynn:But I would say, to take a large collector like Steve Cohen, for example, is obviously a very financially motivated guy. He has one of the largest art collections in the world. I think if you asked Steve, he said hey, do you intend to lose money on your art collection? I think he would say definitely not, absolutely not. Yeah, he's doing it for investment. He may not be able to quantify exactly.
Auren Hoffman:He would make way more money of just leaving that money in his hedge fund. It's really doubtful. He makes more money on ARK as a percentage than on his hedge fund. He's been so successful. He compounds so much faster there, I would think.
Scott Lynn:I think that's right, but I think it's also probably just one of those dynamics where, like you know, I know which is, you know, as an entrepreneur, you have so much risk in your core, your core strategy. It's a diversification.
Auren Hoffman:And also he likes it right. It's fun. Yeah, I assume that's one of the big motivators. It's enjoyable to talk about it and learn about it.
Scott Lynn:I think so, and I think a lot of people like him kind of get addicted to collecting at a certain point. I mean, I don't know how many paintings he has, but my guess is he has a thousand or more paintings, that's definitely.
Auren Hoffman:So, just like you buy sneakers or something, it's like oh, okay, yeah, or some people collect old cars or whatever it might be. Everyone has a different kind of hobby that's out there. How does the macro affect? Is it in a Zerp? Is it going to go up more? How does it affect? Is it correlated to stock?
Scott Lynn:more? How does it affect? Is it correlated to stock? Is it anti-correlated? We do a lot of research on correlation.
Scott Lynn:In general, art is not correlated to almost every major asset class. The highest correlation is actually with gold, which tends to be around 0.1 or 0.2. I'm surprised it's so low correlated. I think the reason it's lowly correlated is that there's a couple of reasons. So one is that there's a few unique characteristics about the asset class. One is that you can buy a painting in New York, you can put it on a plane and you can sell it in Hong Kong. So it really acts as this almost neutral currency that you can sort of move between different countries at different times, and we see that a lot in practice. For example, we have the largest collection of Banksy. If we want to sell a Banksy, we're probably going to sell a Banksy in the UK rather than in the US. In the UK prices are just higher. There's more demand. In the UK. We generally think we can get higher prices. So I think that's one reason is that it's not country dependent, any particular economy at any point in time. The US economy is horrible.
Auren Hoffman:Okay, got it. So it's like a global index which is less volatile or something.
Scott Lynn:It's global and less volatile. The second thing that I think is very interesting, and we've spent a lot of time trying to understand, is that it's one of the few asset classes where you have continuously decreasing supply in major markets, meaning, once Picasso reaches a certain point where everyone knows who he is, everyone wants to own Picasso. One of the things that naturally happens is that collectors throughout generations wind up donating those paintings to museums.
Auren Hoffman:Yeah, so it just keeps going. It's like Bitcoin becomes harder and harder to get.
Scott Lynn:Yeah, but unlike Bitcoin, it actually starts decreasing, and it starts rapidly decreasing. One of the examples I use is Jackson Pollock, the drip painter in mid-century America. So in today's world there's 21 Jackson Pollocks left in private collections, most of those paintings there's only 21?, only 21.
Auren Hoffman:Oh my God.
Scott Lynn:Exception of those paintings there's probably only two that are really A paintings. Most are B paintings or C paintings.
Auren Hoffman:Why is something an A painting versus a B painting or C painting A?
Scott Lynn:great example versus not really a thoughtful, smaller executed painting. So even a B or C example of a Jackson Pollock in today's world is $30 million because there's 21 left. There's only 21 of them.
Auren Hoffman:So if you want to own a Jackson Pollock, you got to pay up.
Scott Lynn:That's it. I think that's a very unique characteristic. I mean, when you look at other asset classes like gold, there's more gold mined every year, there's more companies started, more houses built, but in the art market you have a vast majority of the market that's really concentrated in these top 100 artists and the supply for those artists is shrinking every day.
Auren Hoffman:That makes sense to me. There's been a bunch of lawsuits recently against the auction houses, some of them accusing them of taking advantage of their customers, some of them accusing them of manipulation. Are there any truth to these accusations? How do you think about that?
Scott Lynn:There's definitely truth to it and the unfortunate thing is a lot of this sort of revolves around fiduciary concepts that I think are misunderstood in the art market. So, for example, in the state of New York, if you're my client and I tell you hey, oren, I have a great Jackson Pollock for $30 million, I think you should buy it. I have a fiduciary obligation to you and I need to tell you how much I'm making on that transaction.
Auren Hoffman:Because there could be like a side thing where you get paid more or whatever.
Scott Lynn:Okay, this is usually the origin of all these lawsuits, which is that I sell you a $30 million painting which you bought for $15 or something. I'm secretly making $10 million on the side. You find out about it and we wind up in a lawsuit, and you almost always win that lawsuit, because the laws are pretty clear In the state of New York, yeah, but the art market doesn't really operate understanding those laws, unfortunately.
Auren Hoffman:Sometimes you read about these things where the seedy side there's money laundering going through it, there's other types of things. How much should one believe that, and how much do those affect price?
Scott Lynn:The money laundering comment. I mean you do hear that sort of in popular press but it's really not true. I mean there's KYC rules in the US. In Europe it's very hard to launder money with art. Now I think laundering money can be broadly defined, like we did see at certain points of time where a lot of very wealthy Chinese were trying to move money out of China. I wouldn't call that money laundering.
Auren Hoffman:So just because they're also buying Manhattan real estate, it's just a safe asset they could store somewhere else and even if it appreciates not as much, at least it's fungible and they can get access to it. Yeah, I think that's right. Yeah, Okay, you guys are already like the largest buyer in our world.
Scott Lynn:If you think about the art market today, it's really families that are buying and selling. So we're really the only institutional-like firm that's trying to kind of make this an asset class that people think about from an investing perspective. Our competition is really families in today's world.
Auren Hoffman:How much art are you buying every year, or something? Is that public?
Scott Lynn:It's not public, but depending on the month, we'll buy anywhere between $30 and $60 million a month $30 and $60 million a month.
Auren Hoffman:So let's say you're buying like $500 million a year of art or something and you're saying that 60 billion changes hands. So you're still a very, very small percentage.
Scott Lynn:Very small percentage.
Auren Hoffman:Okay, less than 1% of the market, it's still a very small percentage. Is there a point where, if you got to like 4%, 5%, 6% of the market, all of a sudden you're distorting prices and stuff?
Scott Lynn:It's an interesting conversation, so I'm not sure. First of all, that's a bad thing, right? Because if we go into an artist market and we have thousands of new investors that we're introducing to that artist and those investors are inherently driving up prices, I'm not sure that's a bad thing.
Auren Hoffman:Some of them may appreciate it later and become collectors on their own.
Scott Lynn:They can sell their securities, they can invest in new paintings. We're sort of building investor markets for these artists, independent of the collector markets. I'm not sure it's necessarily a bad thing, but today we're not more. I think the biggest concentration of any artist market is we're 10, 15% of that market in terms of transaction volume, so still relatively small.
Auren Hoffman:And you mentioned some of these whales. Like Jeff Bezos, Stevie Cohen, have the personality or the prototype of these whales changed over the last X number of years?
Scott Lynn:I wouldn't really say so. I mean, the personality tends to be just these multi-billionaires that come from different industries, different countries, all pretty diverse backgrounds, but those are the really big collectors in today's world.
Auren Hoffman:I assume there are years where the art market has gone down or something like that, just like any asset class. What is the reason for it?
Scott Lynn:to go down. We've seen this over the past 18, 24 months as well. When there's concern from collectors that art prices are going down, they don't sell. God, it's just like real estate's like that sometimes. Just like real estate. Yes, one of our biggest challenges, I think, over the past couple of years with the current economic climate has frankly been that collectors aren't selling, so we see transaction volume go way down, even if prices don't necessarily go down.
Auren Hoffman:There's this weird sense where it seems like everything in the world is becoming like Vanguard, where you have this Vanguardization of everything and you have an index of everything. In some ways, you're driving that in the art market. How do you think that plays out? You can think of all these other collectibles like art or baseball cards or something, and then, of course, you could have like real estate and you could have all these other types of things. Do you think we just get there in all the major asset classes?
Scott Lynn:I do think that probably happens for a lot of major asset classes, but I think things like baseball cards are not. I mean, I say this a lot, and I would even say this about cars that they're just not expensive enough to securitize. The total value of a baseball card is not high enough to justify the cost of securitization in today's world, and that's definitely true in the US.
Auren Hoffman:I mean the regulatory framework that we operate under but can't buy a securitized a thousand baseball cards or something like collection or something.
Scott Lynn:You could. But then, like as an investor, I can just buy one of those thousand baseball cards and just feel like, yeah, own it. Okay, yeah, I can just own it.
Auren Hoffman:Got it. So if a baseball card sells for $20,000, well, any high net worth person could just buy it and they could pay 24,000 if they really want to own it or something.
Scott Lynn:Yeah, and I think that's generally what we see happen with things like baseball cards and watches and wine and all of those asset classes I think people struggle with why do I need to invest in it if I can just buy it myself?
Auren Hoffman:I could buy one share of Apple stock. That's pretty easy to go do and stuff like that. But I still invest in like an S&P 500 because I want a low cost basket and stock is very cheap to buy. The transaction fees are really really low, so it'd be easy, but I still invest in the S&P 500. Whereas these collectibles there's high transaction costs, it's hard to get, you have to take care of it, you have to manage it yourself. So if I really want to get an option on the baseball card market, I don't know how I would do that today.
Scott Lynn:I mean there's been a lot of asset managers that have approached us to add art to kind of a general collectible strategy. I think a lot of those general collectible funds haven't really gotten that much traction. One of the challenges is that when you look at collectibles broadly, art is 80% of the value of all collectibles Things like wine, baseball cards, classic cards.
Auren Hoffman:So the $1.5 trillion is 80% of all collectibles. It's 80%, oh wow. I had no idea that the other collectibles were such a small person. So all the other combined is just 20%.
Scott Lynn:Yeah, oh wow I mean, but think about that qualitatively right, Like your most expensive painting is $450 million.
Auren Hoffman:Yeah, that's true. Okay, there's nothing even close to that, right? You know like I assume there's million dollar wine bottles, right? I'm not a big wine guy, so I don't know. I'm sure someone's paid a million bucks, for I saw someone once paid a million bucks for a tuna fish.
Scott Lynn:I'm sure that someone has paid a million bucks for a wine bottle. I was in Tokyo recently. I walked by the restaurant of the chef that bought that tuna fish for a million dollars. Yeah, exactly.
Auren Hoffman:I'm sure it was really good tuna. I'm sure it was amazing. Do you think of artists by market cap? Would you say, okay, this artist has X amount of market cap, or something?
Scott Lynn:Yeah, definitely yeah. We think about artists in terms of market cap turnover, appreciation rate, volatility, sharpe ratio. We think about all those metrics at an individual artist market level. That's the reality, right, if you look at someone like Basquiat. Basquiat trades $200 million, $300 million a year, has several billion dollars in market cap.
Auren Hoffman:Basquiat, one artist is $200 million to $300 million a year.
Scott Lynn:Yeah, okay, so 0.5% of all transactions are in dollars are basket, yes, and the top 100 artists? I always tell this to parents who have children who want to become artists the top 100 artists are 64% of the value of the art market overall.
Auren Hoffman:And, by the way, that's top 100 include a lot of dead people too.
Scott Lynn:By the way, that's top 100 include a lot of dead people too. The top 100 athletes today are all a living.
Auren Hoffman:Maybe Muhammad Ali still makes a lot of money or something.
Scott Lynn:Yeah, out of the top 100, the majority are not living. It's really the career as an artist. To actually become a very successful living artist in today's world is very difficult. Interesting.
Auren Hoffman:How did you get into it personally? Is it just something that you were just kind of collecting on the side and then got passionate about it?
Scott Lynn:figuring out how to invest in them, and you just don't have that in the art market today. Right, it's really us, with our research team and our data science team, that are competing with families who are buying paintings, and obviously families don't have the resources to kind of build the same infrastructure that we have. So my experience was I started collecting in my early 20s, built an important collection over 10, 20 years after selling companies that I had started and saw the value of the collection go up and thought this is a really interesting asset class, but there's not a good way to invest in it. That was the origin of Masterworks.
Auren Hoffman:It's kind of like a REIT, except you don't make rent.
Scott Lynn:Yeah, there's no income dynamic In our model. Today, people are picking and choosing individual paintings to invest in. We don't offer fun products today. That's different as well.
Auren Hoffman:They're passionate about a specific type of painting, or something like that.
Scott Lynn:Yeah, I mean we publish all the data on these individual artist markets when we launch new paintings to invest in, which we do now about every day, every other day, and people kind of build their portfolio through us launching new paintings.
Auren Hoffman:There's other models. There's like a company called Fundrise that does something similar in maybe a much lower dollar for real estate. How do you think about all these other companies that are in some ways very similar to what you're doing, probably going after similar types of investors?
Scott Lynn:It's really us and Fundrise. So Fundrise focuses on real estate. They just launched a venture product as well, in terms of scale, kind of at the billion dollar plus level. It's really us and them. We know those guys well. I think they're very smart. I think their product, their investment products, are actually quite good.
Auren Hoffman:Their main revenue is just they take a small management fee. I don't think they have a carry on it, they just take a management fee.
Scott Lynn:You guys have like a similar model, or? Yeah, for us we have carry. So it's one and a half percent management fee and 20% carry.
Auren Hoffman:Okay, got it, so it's like a fund.
Scott Lynn:It's like a fund. We also have secondary markets where people are trading shares in these vehicles. We're not a broker dealer today, so we don't earn commission on those secondary market trades.
Auren Hoffman:So if I spent 20 grand to get into a small, if I'm a small investor in one of these things, you deem it worth 24 grand. I could sell that to somebody who wants to buy into this painting or something. Yes, Okay.
Scott Lynn:I think for us that's really important because we currently tell people to think of these as long-term illiquid allocations. If you're investing in a painting, think of this as a three to 10 year investment, and that's still one of the bigger obstacles for most investors. So the secondary market really helps address that objection of otherwise having to wait many years to receive a return.
Auren Hoffman:In photo rises business. Really anyone can invest in it. You don't have to be like a qualified investor, but I imagine with you do you need a more sophisticated investor of a higher net worth to be allowed to invest.
Scott Lynn:No, so all of our products are public products, so anyone can invest. If you're interested in investing, we onboard you with a conversation with the financial advisor, who's non-commissioned. They have a fiduciary obligation to make sure that you're making good investment decisions, so they'll recommend particular paintings, particular allocations. Most of our investors start with less than a 5% allocation of a portfolio to art and they grow it over time.
Auren Hoffman:Interesting, and this wouldn't be like a tech thing if we didn't mention NFTs and stuff like that. What's your take on the NFT market? It's obviously a highly speculative market.
Scott Lynn:Historically, we were always sort of the outspoken anti-NFT people. There's nothing that we technically have against NFTs, meaning like we still think that NFTs could be interesting down the road. But I think the objection that we have to investing in NFTs is the data is very messy, meaning we've tried to do index construction on NFTs similar to how we do index construction on physical art, and there's a lot of NFTs that go into marketplaces that never sell. There's a bunch of wash trades on the blockchain which make it difficult to tell when things are actually transacting. We could just never get comfortable with how much are NFTs appreciating and what is the volatility of NFTs, and if we can't understand those two data points, then for us it's hard for us to recommend it as part of an asset allocation model.
Auren Hoffman:I mean you mentioned you have data going back well over 50 years so you can make some sort of smart decisions on it, and in some ways it's like a momentum trade too.
Scott Lynn:Yeah, I think it's a momentum trade. I think it's just highly speculative and for us, you know we have a lot of people investing with retirement accounts. We're a regulated business, so it's never really been anything that we could get into.
Auren Hoffman:Besides for art I'm sure you've gotten this question before. You've talked to people what else and obviously with real estate, what else do you think will be done in this way where you could have lots of small investors buying into something? Obviously, people have talked about DAOs, they've talked about other ways of doing it, but what other categories do you think we'll see that happen in the future?
Scott Lynn:I think it's really hard. I struggle with a lot of these businesses that are trying to do this, like we discussed with lower price point objects, just because I know how complicated the regulatory framework is. We're also very skeptical, I think, of anything that has a security that's quote unquote traded on the blockchain, like a lot of these STOs or securitized token offerings, and the reason we're skeptical with that is we know regulators very well and we actually think that the SEC is moving further away from approving things like that rather than becoming closer to approving that. So, in general, if you think about the criteria of something to securitize, I think it has to be something that, in today's world, is not on blockchain. I think it has to be something that has a high price point. I think if you really want people to invest in it, you need to have enough data to show that it's appreciated historically.
Auren Hoffman:Yeah, what about like a sports team? Obviously it'd be very hard to buy like the Chicago Bulls or something, and obviously that's a very high price point. But like a minor league sports team, I don't know what they trade for $20 to $50 million or something.
Scott Lynn:Yeah, someone actually approached us about securitizing volleyball teams. You know, I don't know anything about that, but I think something like that is potentially interesting, yeah.
Auren Hoffman:Yeah, yeah, yeah, like a pickleball team or something like that. Yeah, I could see a lot of different types of things out there and it makes sense, especially if you believe this manager is going to manage it well. In some ways it's kind of more like a REIT, where you have to believe in the manager managing it. In a REIT, you have to get your rents. There's still a business to run. It's not just an asset. In your case, you could be putting it just in an air conditioning vault or something, and so it's a little bit easier. They vault or something, and so it's a little bit easier. They don't have to like believe how well you are as a manager.
Scott Lynn:They just have to believe that you're a good picker. Yeah, I think that's right and I think that is the challenge with businesses, even with real estate to a certain extent. You've got to actively manage a lot of that.
Auren Hoffman:Oh, yeah, absolutely. A couple of personal questions. Is there like one white whale piece, what is something like you'd just love to own.
Scott Lynn:So the artist market, I would say in terms of expensive paintings that we like the most continues to be Basquiat. That market just continues to perform very, very well 16, 17% appreciation for the past 25 years, with lower degrees of volatility. Basquiat in general we tend to gravitate towards. Why?
Auren Hoffman:is it? Is it just because somehow the marketing just got it right? Or is it just lightning in a bottle?
Scott Lynn:I would say people who have had a lot of money for a while, definitely want to own a Basquiat.
Auren Hoffman:If there's something about the marketing and it's like that's the best bragging point to. Obviously the best bragging point would be like I own the Dallas Cowboys or something that like number one. But then number two is like I own this Bosco painting or something. I think that's kind of right. I just move up the social hierarchy. I'm going to just start telling people I own a Bosco and see what happens.
Scott Lynn:The other artist that we hear a lot of now is Banksy, too. For people who are newly wealthy, we can see that being the next phase.
Auren Hoffman:I don't know anything about art I personally don't own any art but I've heard of both of these paintings. So, even a complete dummy like me, it would impress me if someone owned a Buffett or a Banksy.
Scott Lynn:Yeah, and I think there's definitely bragging rights to it and most people that are buying it again, they're buying it not exactly knowing how much it'll go up in value, but believing that it will go up in value regardless. Okay, interesting.
Auren Hoffman:Two more questions. We ask all of our guests what's a conspiracy theory that you believe?
Scott Lynn:A conspiracy theory that I believe. I'm not a conspiracy theory guy, I don't know Really. Okay, so I don't have a conspiracy theory that I believe. I don't know how to answer that one. What would you?
Auren Hoffman:say to that. In some ways, art seems like it's filled with conspiracy theories. There's probably like this cabal somewhere who's managed to get this art specific artist. I assume it's just a fad, it's not like certainly like one better than the other or something. If you get an art above $10,000, it's pure marketing. It's brand. It's that amazing. It's like Hermes or one of these LVMH, but to the next level.
Scott Lynn:I don't know how to answer that one. What's your second question?
Auren Hoffman:All right. Well, last question we ask all of our guests what conventional wisdom or advice do you think is generally bad advice?
Scott Lynn:I was talking to someone this morning about, I guess, just inflation over time. We often get these questions about is art an inflation hedge? How do you think about it as an inflation hedge? I think common wisdom still continues to be that the US dollar is a good store of value, and it's really interesting. I don't know if you've done this or if your listeners have done this, but if you just go to Google and you Google, how much has the US dollar lost in purchasing power over the past 100 years? What do you think the answer to that is?
Auren Hoffman:Well, if inflation was 2% a year?
Scott Lynn:or something. It's pretty crazy.
Auren Hoffman:So the US dollar has lost whatever 97% of purchasing power over the past century and inflation is actually accelerating rather than decelerating compared to those early pre-World War II periods, rather than decelerating compared to those early pre-World War II periods, in some ways you could say until very recently maybe. At the lower end of the spectrum there's been somewhat deflation, but on the higher end of the spectrum, which is where your investors probably spend most of their money, there's been massive inflation because we've seen increases in real estate, increases in vacations, increases in education, increases in healthcare often 3x the rate of inflation there.
Scott Lynn:I think when we think about investing broadly, we have to think about what does that mean for our portfolios and how do we allocate? Do we think about real assets? Do you think about Bitcoin? How do you think about those trends in inflation over the next several decades? I think inflation on an individual annualized basis doesn't matter that much, but when you start compounding it into the future it does get concerning.
Auren Hoffman:Especially, I imagine, a lot of people in art. These are people who think about things for like generations, generations. Yeah yeah, this has been awesome. Thank you, scott Lynn, for joining us on World of DAS. I follow you at Scott Lynn on Twitter. I definitely encourage our listeners to engage with you there. This has been a ton of fun and super interesting.
Scott Lynn:Thanks for having me.
Auren Hoffman:If you're a super data nerd, go to worldofdascom that's D-A-A-S. Worldofdascom and sign up for our weekly data as a service roundup newsletter. Thanks for listening. If you enjoyed the show, consider reading this podcast and leaving a review. For more World of Das and Das is D-A-A-S, you can subscribe on Spotify or Apple Podcasts or anywhere you get your podcasts, and also check out YouTube for videos. You can find me at Twitter at at Oren. That's A-U-R-E-N. Oren, and we'd love to hear from you. World of DAS is brought to you by Safegraph. Safegraph is geospatial data for physical places. Check it out at safegraphcom. And by Flex Capital. Flex Capital invests in data companies like those we talk about at World of Das.