What the Value of a Single Picasso Can Teach You About Investing

You can look at a Picasso one of two ways.

If you’re a rank amateur, you think, “My kid could do the same thing.”

If you are one of the world's great art collectors, you instantly recognize it as a product of genius.

Or do you?

As it turns out, evaluating modern art can be as challenging as… well… identifying the next market-crushing stock.

It is possible to identify ahead of time the big winners of tomorrow.

But it has little to do with the kind of financial analysis you learn in business school.

Yet, it’s a strategy used by venture capitalists in Silicon Valley, movie producers in Hollywood, and book publishers in New York.

And yes, even collectors of modern art.

What is this ubiquitous but rarely discussed approach?

Think of it as throwing stuff up against the wall- and seeing what sticks.

The Remarkable Life of Heinz Berggruen

Heinz Berggruen showed little interest in the art world as a young man.

After fleeing Nazi Germany in 1936, he wasn’t sure what to do with his life.

He studied literature at the University of California, Berkeley. Afterward, he worked as a journalist and part-time art critic.

Later, while on his honeymoon, he bought a small watercolor by an artist named Paul Klee for around $100.

This small investment launched Berggruen’s career in modern art.

Fast-forward to the 1990s, Berggruen had become one of the most successful art collectors of all time.

His collection of 165 works – including 85 Picassos, over 60 works by Klee, and 20 by Henri Matisse – became one of the most important collections in the world.

And at the time, Berggruen valued his collection at 750 million euros (about $1 billion at the time).

What was Berggruen’s grand strategy to amass this impressive collection of the 20th century’s greatest artists?

Did he attribute this to his uncanny eye for modern art?

The truth is far more prosaic.

It turns out that all great art collectors do the same thing.

They buy vast quantities of art.

A handful of acquisitions in their portfolios turn out to be great investments.

The majority, however, turn out to be duds.

The trick is to hold on to the few winners until they make up the most of a portfolio’s value.

Berggruen spread his collection across a wide range of artworks.

He did more than buy pieces he happened to like or admire. He

Instead, he bought everything he could get his hands on.

And then he sat back and waited until a few winners emerged.

The Takeaway for Average Investors

On the surface, art collectors like Berggruen and Silicon Valley venture capitalists have little in common.

Yet when it comes to investing – or collecting art – they think the same way.

Silicon Valley VCs know that NOT investing in the next Alphabet (Nasdaq: GOOGL) or Uber (NYSE: UBER) is the real risk.

Miss out on the few big winners that could account for all of your gains… and your returns would approach zero,

And no one knows in advance who the big winners will be.

Hollywood producers think the same way about movies. Likewise, publishers think the same way about books.

Each knows that a few significant investments, blockbuster movies, or bestselling books will make all the difference.

As Silicon Valley, angel investor Jason Calacanis says, "A grand slam is worth 100 home runs.”

Like venture capitalists betting on an unknown entrepreneur, modern art collectors know most of their investments in no-name artists will be duds.

It’s all part of a wildly unpredictable and uncertain process.

But when you’re sitting on one Picasso, you don’t have to worry about the 99 duds in your art collection.

And Berggruen made sure that he was sitting on a lot of Picassos.

What does this mean for your investments?

You should expect a small handful of stocks to account for most of your profits.

But you'll need to kiss many investment frogs to find your investment prince.