Investing in African art and ‘the rule of 72’

I’m often consulted concerning the investment potential of African art, so I want to share a simple rule of thumb that may help when considering the acquistion of a particular object for investment purposes. In finance, the “rule of 72” is a method for estimating an investment’s doubling time. It’s a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. Here’s the formula:

Years to double = 72 / Interest Rate

By dividing 72 by the annual rate of return, a collector can get a rough estimate of how many years it will take for the initial investment to duplicate itself. Vice versa, when you know the number of years it took for an object to double its value, you can deduct the interest rate. If an object’s value doubled in 7 years, you for example have an interest rate of roughly 10%. If an object you bought in the year 2000 now is worth double, you have an interest of 5 % (72/14) – still better what you get from the banks these days. So, practically, imagine you buy a € 10K object today and pursue a 7,5 % interest. Adding 1,5 % inflation, a rate of 9 % will imply, that the value of your acquistion will have to been doubled in 8 years, by 2022. If you buy wisely, that’s certainly possible.

Notice that, although it gives a quick rough estimate, the rule of 72 gets less precise as rates of return become higher than 10 %. Extending the rule of 72 out further, other approximations can be determined for tripling and quadrupling. To estimate the time it would take to triple your money, one can use 114 instead of 72 and, for quadrupling, use 144. The Fang figure from the Georges de Miré collection below for example was sold by Christie’s in 2004 for € 371K (info). In December 2013, nine years later, Sotheby’s sold the same figure for € 1,441K (info). In 9 years, the value of this figure thus roughly quadrupled; equalling an interest rate of 14 % (144/9).

Note that this formula doens’t consider inflation. You can also calculate the length of time it will take for inflation to halve the real value of your money with the rule of 72. Assume an average inflation rate of 3%. Divide 72 by 3, and you’ll quickly see that your money’s purchasing power would halve in 24 years. An inflation rate of 1,5 % (like in the US in 2013), makes that 48 years.

 

Fang figure Georges de Miré