Are luxury watches a viable investment?
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With the continuous and impressive rise in watch prices in recent years, many individuals, collectors, and investors have started looking at watches more seriously as an investment. If prices continue to rise as they have in recent years, investing in timepieces may seem lucrative, indeed.
However, as all shrewd operators know, there are always risks associated with all investments; nonetheless, understanding the opportunity & conducting complex calculations/data analysis to quantify the risks can be difficult, and thus, most people start relying on instinct, anecdotal claims, expectations, etc., to predict how prices may rise or decline in the future and whether such an allocation should be made.
This is, nonetheless, not the approach an intelligent investor should take. To fill the gap, this report examines the risk associated with investing in watches and evaluates, based on data, how prices can fall or rise in the future to understand the risks. Whether this investment makes sense financially is also discussed.
The report utilizes our watch price index and numerical analysis approaches such as value at risk (VaR) volatility, an analysis of expected returns using methods such as mean confidence interval & geometric mean. Don't worry, the findings of these calculations are explained in plain English!
An in-depth discussion is also provided in the last section.
Summary results of calculations:
So, how much can you lose by investing in timepieces?
By investing in the most in-demand unworn timepieces—excluding lesser-known brands or brands not considered tier 1—an individual can lose about 10% of the value per quarter, or 20.5% p.a. as per the data analysis.
This, simplistically, means that if, say, an individual holds a Rolex watch, in an unworn condition valued at $10,000, the value of her watch can decline to about $9,000 within 3 months or less, or $7,950 in under a year. These are values calculated as per 98% VaR calculations; nonetheless, there remains a 2% probability of price decline being higher than this range.
The worst observed quarterly decline in the time-series of RCLWPI data, however, is of about-3% decline (July 2020).
Watch price risk calculator: Enter your unworn watch’s price in the green box (then press enter) for estimations regarding how much its value can decline in a quarter and a year
How much can you gain by investing in timepieces?
Here again, data analysis is used for definitive answers. The average quarterly increase in the price of the high demanded watches stands at 5.93%; the growth rate (geometric mean) stands at about 5.5% quarterly & 23.7% annually.
How much can we expect prices to rise further?
As per the 98% mean confidence interval calculations, prices, quarterly, as per the data, should rise in the range of 2.3% to 9.3%; however, there remains a 2% probability of prices increasing or decreasing beyond this range.
Thus, if an individual holds, say, a highly demanded Rolex timepiece valued at $10,000, in an unworn condition, she should expect prices to appreciate in the range of $230 to $930 each quarter, 98% of the time; nonetheless, there remains a 2% probability that prices should increase or decrease beyond this range; still, we can confidently state that as per current market dynamics, an appreciation within the above-stated range is highly likely.
So, does this mean that watches are a good investment?
Inflation, since 2015, has increased by 14.2% while the value of highly demanded timepieces has increased by 295%:
If you invested $10,000 in a saving account in the U.S. at a rate of, say, 3% interest, you would have $11,616.2 (10,000(1.0025)^60) after 5 years in your account. However, if you bought an in-demand Audemar Piguet in the same period, its value after 5 years would be approximately $28,960.
This broader numerical analysis would lead some to think that the answer to the question of this section is a resounding yes. However, it's not that simple:
A watch may be seen as an asset by some, but it cannot be deemed one, strictly in a financial sense.
Why so? Because it is an item that appreciates in value due to more people demanding it and fewer available for sale items in the market; this means that price only rises because someone else is willing to pay a higher amount; put another way, if you invest in a timepiece thinking that its price will rise as per recent trends (considerably higher than the yearly rate of inflation), you'd be assuming that someone else will buy it from you, & that they'd be willing to pay a higher price.
Such a mental model or assumption cannot be associated with an asset, unfortunately.
A financial asset such as a stock, etc., is valuable due to the value generated, or likely to be generated, by the entity it provides a residual claim in. The fundamental value of the stock itself can be calculated by discounting the future value of the economic benefit, or the value inflow(s), at the appropriate cost of capital.
It is an asset because the economic value, the entity it provides a residual claim in, has a present value at the date of purchase. For example, let's assume a stock is likely to provide a dividend and capital gain combined of $100 for the next 10 years, the cost of capital, as per the systemic risk of the stock in relation to the overall market, is 10%, the fundamental value of the stock, which is a financial investment or asset, today in this simple example would be $614.5 (the discounted value of future capital gains and dividend inflows).
On the other hand, a watch does not generate value on its own. If someone assumes that the value of such an item would rise at a rate considerably higher than the rate of inflation, they, of course, don't expect that the item itself would have a role in that value generation, but as explained earlier, they assume that someone else would be willing to pay a higher amount for the item.
Thus, at best, timepieces can be classified as items that increase in value due to high demand, which exists due to their inherent nature (beauty, uniqueness, craftsmanship, etc.) and limited supply (scarcity).
On the other hand, a highly critical financial analyst evaluating such investment, for their high net worth client, may also see shades of 'the higher fool theory' in such aa approach (essentially, this means an item acquired, which, in and of itself, does not generate value but is considered an investment because the buyer assumes that someone else, at a later date, would be willing to buy the item so they then, at a later date, can sell it to someone else for an even higher price—the higher fool).
An analogy that can be used: let's assume that a renowned bracelet producer produced a very intricate piece that is exquisite, priced at $5,000. An opportunistic observer, who understands that the value of the jewels & precious metals used in the production is $1,000, and the cost of advance labor is $2,000, acquires the piece, assuming that he would be able to find a buyer willing to buy the bracelet at a price considerably higher than the cost of acquisition and the rate of inflation in the holding period.
If the subsequent buyer is also acquiring the bracelet for the same reason, then we have no other option but to apply the higher fool theory to explain this condition. On the other hand, if the first or second buyer acquires the bracelet because they admire the beauty of the piece, then we can claim that it is a purchase as per the liking or proclivity of the buyer.
Thus, applying the term investment becomes difficult.
Another factor that discourages the use of the term' investment' with watches is the fluctuating nature of demand; demand that is not based on some fundamental or inherent value of some sort, but on trends, styles, fashion, etc.
For example, while inquiring about the price increase of the AP Royal Oak in recent years from established dealers, one sentence was repeated by almost all: "it's the most fashionable sports watch presently, all the celebrities are seen wearing it."
Anyone who understands the circumspection or prudence principle of investing would immediately understand that an investment based on fashion or celebrity tastes cannot be classified as, or recommended as, a valuable investment by a serious analyst.
Trends, fashion, and celebrity tastes can change rapidly; what's 'hot' or in demand today can be unfashionable tomorrow. Thus, due to this limitation, the use of the word investment with luxury timepieces is, arguably, unjustified.
Another point that must be added here is that even though we have a gauge of the overall market prices of this category, selling a timepiece isn't as simple as selling a stock through your brokerage account.
The investor may have to find the buyer through online market places, or find a broker to sell the piece in an emergency & the broker may not pay the going market price; thus, there exists a market liquidity risk that must be taken into consideration. This risk is far more pronounced for used items, as such items, just like the used car market, are sold depending on their condition, and a flat price cannot be quoted.
Thus, even if an unworn, highly demanded Rolex's owner sees prices skyrocketing on the secondary market, selling the item wouldn't be as simple as clicking the sell icon on an app (as is the case with stocks). The actual selling price may also be 10%-15% lower than the average selling price due to broker commissions, etc.
Lastly, it is important to note that if an individual has substantial disposable income and they, as per their tastes, acquire luxury items, one cannot claim such an action to be right or wrong, or pass judgment; people are free to spend their wealth in whatever way they choose.
The problem, nonetheless, arises when those without an in-depth understanding or background in finance preach to others regarding investments, that too for their own petty objective/advantage. Such selfish behavior is highly irresponsible, to say the least.
Therefore, in conclusion, if you personally like, say, a Rolex Submariner, and you have enough disposable income to justify that purchase, then yes, there's nothing wrong with buying it.
However, if your primary motivation is to acquire an unworn piece so you can sell it at a later date for a higher price, then, perhaps, you should rethink that idea. Broadly, in conclusion, we cannot categorize watches as an investment asset, strictly financially.
They can, nonetheless, be categorized as fashion-related accessories or items of utility, and we all know how expensive being fashionable can be. Still, acquiring fashion-related items, because their price may be increasing due to scarcity, as explained earlier, wouldn't be a prudent financial strategy as one cannot estimate the lifespan of specific trends and demands.