Is the real estate bubble about to burst?

> The main drawback of art as an investment,
> it seems to me, is that you have to be
> willing to wait. It can take time for the
> value of art to appreciate. Also, it helps
> to be rich already to even be "in the
> market" for many pieces of fine art.

When I think about valuation and an item's worth, I think about two main types of valuation an investment can have:

1. Value in Use
2. Value in Exchange

Value in Use is essentially the value derived from an investment from its ongoing use. From a purely financial viewpoint (that is, ignoring any personal or psychological benefits of owning an investment, such as the pleasure of looking at fine art if you're an art lover), the value in use is simply the present value of all of the future cash flows a particular investment will generate.

So if you're looking at an investment property, the Value in Use would be the present value of all of the expected future cash flows from the property -- so essentially your rent received minus costs forever.

When looking at listed companies, fundamental analysis and valuation is basically all about looking at their intrinsic Value in Use.

Value in Exchange, on the other hand, ignores any "inherent" value in the item due to future cash flows and simply looks at what other people are willing to pay for it.

When looking at listed companies, technical analysis and trading is more about Value in Exchange, in that it focuses on what others may pay for it in the near future, rather than any underlying fundamentals.

In other words, Value in Exchange is -- as Michael puts it -- a value based on the greater fool theory. And art definately does fall into this category.

And thus the main drawback of art as I see it is that you're really relying on others to pay more for it later, rather than counting on any cash flows arising from the art itself.

Items of this nature, in my view, are what I'd call speculative investments. :)