Is premium art a sound comparison to premium domain names?

By , June 18, 2010

That is the question posed by DomainSuperstar upon reflecting on the WSJ’s observation that the wealthy appear to be fleeing to tangibles such as art.

To his first question, will the wealthy start investing in premium domain names the same way they seem to be doing in art, I cannot guess. While I’ve made predictions in the past, and sometimes even happened to be correct, the main refinement to my overall investment methodology over the years since the advent of the Global Financial Crisis is that I cannot predict the future. Long story and certain to be the subject of other posts.

So who knows….maybe money does start flowing into premium domain names. I just don’t know.

What I can say however, is that there are indeed many parallels between art and domains. You can lose your shirt in both.

The similarities are striking: Art, like domains are generally unique. Neither of them throw off any cash on their own, although domains can be parked for PPC revenues and I suppose artwork could be leased? (does it work like that? I have no idea).

Both are highly illiquid and despite what the Wall Street Journal article says, neither of them are a store of value.

For the most part, all activity centers around price action, not intrinsic worth, making them more speculations than investments. But, don’t take my word for it. I reached for my trusty copy of John Train’s Preserving Capital: And making it grow, who had a lot of great insight into “art as investment”. As I read through it I found many instances where I could simply swap out the word “art” for the word “domains”. Allow me to quote at length:

Since there is no current cash return from a work of art, it is more accurate to talk about “speculating” in art than “investing” in it. The buyer hopes that others will eventually pay more for the object than he did; enough more to cover two heavy commissions, taxes, lost interest [my note: let’s call this opportunity cost in general] insurance, and possibly storage.

The only good reasons to buy a work of art are that you know a lot about it and want to live with it. Buying art to make money is a vulgar business, and rarely successful for the non-professional. [Emphasis added].

I suggest that the standard slogans one hears about investing in art are only true for the expert. Here are some restatements for the non-expert:

1. First, works of art in general probably do not tend to increase in value

Quite often specific schools or categories advance in value for some time, but others may quietly decline or even fade out completely. Also, sometimes the advance is based on a small number of transactions…..

Then we have the further problem that the expression “increase in value” presumably means increase in relation to other things. I suspect the average work of art steadily declines in constant-dollar terms from the date it is first sold, but a fairer approach in a discussion of investment would be to ask: How does it make out in relation to the least interesting investments in securities? If you reckoned a total return of 6 percent compounded on a portfolio of securities, a dollar in 1923 would have become over thirty dollars by this time [ 1983 ], before taxes.

I doubt if anyone could claim that all the works of art that changed hands in 1923 are worth on average over thirty times as much as they were then.

There’s too much to quote here, but it’s all pretty interesting and yes, strikingly similar to domains. They both contain their own challenges and are dangerous terrain for the non-expert.

However, in one key respect, art differs from domain names: art will definitely be around in 1000 years. There is no guarantee “DNS” as we know it will still exist for another 25. Domain names could easily become obsolete within our lifetimes. Art won’t.

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