"Quality is priceless: The Discipline of Investing from Wall Street to the Hermitage"

"Quality is priceless: The Discipline of Investing from Wall Street to the Hermitage"

 

In May, Finance Departmentlecturer Mikhail Munenzon (CFA, ASA, CAIA, PRM, MIA) conducted two guided tours at the Hermitage for undergraduate and graduate students of Finance. Here is the teacher's review of the event:

 

As an Ivy League / Wal Street trained practitioner who is also a passionate teacher, I find that there is immense level of misunderstanding as to what can actually qualify as an investment (most financial and non financial instruments are not investments but are simply an expenditure of capital or even worse ill - conceived speculations).  While purchasing a stock of a high quality business as popularized by Warren Buffett is a sound approach of investing, a much older investing approach is what would now be called the acquisition of fine art by Old Masters.  While Catherine the Great is well known as a strong leader who grew and expanded the Russian Empire building on the heritage of Peter the Great and who also corresponded with the cultural elite of Europe, much less known is the fact that she is one of the greatest investors of all time.  Her art collecting decisions over the course of her reign served as the foundation for creating one of the best collections of art in the world.   Using the location of HSE in Saint Petersburg, I offered my honors bachelors and master students the option of visiting the Hermitage to study principles of investing through the decisions of Catherine the Great, which they agreed to try.  In late February, I conducted 2 visits, one for each group with around 40 students attending in total.

 

Investing relies on clearly indentifiable and measurable principles to establish quality that can stand the test of time.  This fact can therefore reasonably be expected to contribute to the growth in value naturally over time so that purchasing power is not only preserved but also increased.  These investing principles can be applied to judge the quality for a business or by analogy a painting and through practice developing a certain degree of connoisseurship.   In the case of fine art, the skill or lack thereof in composition and expression found in pose or gesture or facial expression, technique available to model fabrics and hands and other parts of the work, handling of light and color, interpretation of a story provide the foundation for a critical evaluation of the value of an artwork.  Such a vocabulary existed among collectors for a long time, creating a sustained, verified and growing market for great Masters.

 

We started by studying key works in the Rembrandt gallery - the best collection of his works outside of Amsterdam.  We started with this early masterpieces (the Descent and the Sacrifice of Issac) and then progressed to his late achievements (4 late, intimate and tragic portraits and the monumental and mysterious Prodigal Son).  We also studied the works of his contemporary and felllow Dutch portrait master Frans Hals and miniature masterpieces of Gerrit Dou that Catherine the Great loved (one of Rembrant’s most famous pupils).  We spent the reminder of our time with the Italian masters.   We studied 2 masterpieces by Titian, the greatest painter of the Venetian School (a Young Woman in a Coat and Danae - superb examples of his mastery of color and female form), Raphael (the Holy Family - a classic example of the Master’s ability of form and style to create a sense of profound serenity and spirituality), Michelangelo (the Crouching Boy - a very late and mature example by the Master of a simple subject with remarkable attention to detail and composition), Caravaggio (the Musician - a great example of the Master’s extraordinary skill of realism and a preview of his contribution to the world of art of chiaroscuro) and Giorgione (Judith - a highly sophisticated and intricate masterpiece that completely re-works a famous, dramatic biblical episode).  Due to their relevance and importance for other masterpieces we covered during the visit, we also analyzed 2 Madonna and Child masterpieces by Leondardo, which include superb examples of his sfumato technique and one more Raphael’s Madonna and Child painting in the Hermitage collection - they were not acquired by Catherine the Great not due to lack of knowledge but because works by these Masters already came on the market very rarely by the time of her reign.  We concluded our visit by applying the principles covered earlier by comparing a masterpiece by Giorgione (Judith) to a painting in the same gallery by another Italian painter, which represented minimal artistic significance and skill. 

 

Though over the course of each 3 hour visit, I had a chance to cover very few works even among indisputable masterpieces acquired by Catherine the Great, it is important to emphasize that due to the quality of her decision making, even these few works are literally priceless and therefore represent extraordinary return on investment of state funds.  As always, it is quality and not quantity that matters, provided one can clearly identify and purchase such high quality in a disciplined manner whether a great company or a great painting.  Finally, we discussed and established how the disciplined application of timeless investing principles (whether to companies or works of art) is the proper way of capital management and allocation for both personal and state purposes, which is particularly relevant for Catherine the Great as her personal decisions had significant state consequences. 

 

By request from both student groups, I will continue teaching students proper investing through the decisions of Catherine the Great when we plan to visit the Hermitage again in late June again to study Spanish, French and Flemish Masters she acquired.