Monday, October 28, 2013

Are Watches A Good Investment?

This is a question often asked not just by watch collectors and connoisseurs but also by pretty much anyone who is buying or have bought or considering buying an expensive watch. Believe it or not the recurrence of this subject is more often than you'd think and quite frankly, just like everything else that require opinions, everyone has different ones. As a person who appreciates watches along with other finer things in life I'll try to offer a subjective view on this. I'll also draw comparison between a few other items that people can seemingly invest in but aren't your conventional stocks, shares or real estate.

So, let's get down to business. We are talking about investment, meaning we are expecting some form of positive return, rather than say lease, where you pay a smaller amount of money for the usage of an item for a specific time frame, or quite simply dumping your hard earned cash down the drain. Most of the time when we buy something it ends up being the last point - money down the drain.

In the sneaker game the companies are all too aware of the hype, so they cash in on it by limiting supplies. Due to the relatively lower barriers of entry there are more and more people investing in sneakers, and quite simply, also because the demand is there i.e. there are enough people willing to pay way above retail just to get a pair of sneakers.

Don't laugh. Things aren't all that different with watches. Plus there is also the matter of ego. For example, to be the first on the block with the latest and flashiest, or the rarest. Plenty of people with more sense than money.

Ah the vanity. Some will pay stupid money just to be the first to own something. Or just to have it earlier than everyone else.

What makes a good investment? I suppose a good investment is when you get back more than what you put in. A ‘safe’ investment, but a boring one is to stick your money in the bank and you’re guaranteed a return over time. Right now? You’d be lucky to get 5% return per annum. That means if you put $100 in the bank, you get $105 back after one year, provided you don’t spend it. 5% is nothing, really. Perhaps you’d like to ‘enjoy’ the investment while waiting for it to appreciate? I suppose watches come into this category.

Ideally, this is what happens. You buy a watch. You enjoy it for a while. After you get bored with it, you sell it off at a profit. You make some money whilst having enjoyed the usage of your investment. There aren’t many things that could command more money the older they are. Houses and wine are two quick examples that come to mind. However, in real life, watches behave much more like cars, in that they lose a huge chunk of their value the moment you drive it out of the dealership, or in the case of watches, strap it onto your wrist.

So watches aren’t good investments then? Yes and no. It depends on a number of factors: hype, supply and demand, price, timing, scarcity (ie vintage pieces, unique pieces) and a bit of luck. You also need to completely take emotions out of the equation. You can’t buy a watch for investment simply because you love it. No. That’s a big no no. Watches that are good investments may not be the watch you like, but has to be the watch that will bring you the biggest financial return. Good if you happen to also like it but that’s not a prerequisite. If you can get all the factors working in tandem for your benefit, that's when you rake in the profits.

Let's break down each of the factors in detail and see how they influence the ROI.

Hype - The more hype there is about a certain product, the more possible demand there is for it. Over in the sneaker game, there are people known as Hypebeasts, who, as the name suggests, prey on products that are ‘hyped’, buy in bulk, and hope to then resell at a huge mark up. Hype also drives people into a frenzy, when the purchase is no longer a rational decision, but becomes a "must-have" heart decision. This in turn leads into the next factor -

Supply and demand - This simplest of all economic models is also the one that works best (in my very un-economic mind). When demand is greater than supply, the price moves up until an equilibrium is reached. However, the less supply of something also causes more people to want it, simply because it is rare and more 'collectable'. This also causes people to start using "quan xi" or "connects" to try and jump the queue or to guarantee that they'll get the product. This leads to -

Price - When something is so hyped up that just getting the product is already difficult due to supply and demand, price doesn't even come into the equation. There are other times when the old adage "buy low sell high" works, but when hype is in overdrive, no one cares about the price as long as you can get it. This of course, then leads into -

Timing - Let's say you were able to get your hands on that all-elusive product and demand is sky high due to the hype, when do you sell? How do you know you're getting the biggest possible return on your rare commodity? Do you flip it straight away and capitalise on the hype and frenzy as most people will probably be doing? Or, do you buy and hold and wait until there are fewer of these items on the open market available, before selling, as the secondary market supply dries up? This is when you need a bit of luck.

Scarcity – Well, if it is a vintage piece, tracking one down might be a bit of an issue already. Perhaps finding one in serviceable condition? If you do find one and it costs more than the watch itself to bring it back to good condition, do you still want it? A unique piece also doesn’t guarantee you immediate ROI. What if it’s a unique piece because there is only ONE person in the world who actually wants it?

People will tell you that watch brands like Patek Phillipe, Rolex and Panerai are great investments. But are they really? Are you looking for a positive return on your investment or are you happy to get say, 60% of your original spend back? Another question will be – how long are you willing to wait. Granted some, and the emphasis is on SOME, models from a particular brand can command higher than retail at the secondary market, but this depends on whether you can get a piece in the first place and the timing – when you flip it for a profit. It’s a fine balance that is not easy to get right.

Believe it or not Rolex WILL depreciate straight away. You won’t get your money back on a new Rolex. You need to be patient. But then you also need to factor in inflation, servicing costs, etc. and not just a plain number – as in” I bought this watch for $300 30 years ago and now it’s worth $1000. I’ve made $700!!”

What about vintage Rolexes, you ask? Sure, but again, only certain models are desirable, and then there’s the provenance. The more you can prove the more the watch will be worth. Condition of the watch also comes into play, and most important of all, you need to have done your homework. You need to able to tell the most subtle differences between model years and replacement dials/ fake dials/ re-dials, etc.

You’d be amazed at the wealth of information and misinformation on just one particular model. Then there’s the price you’re willing to pay. With so much variation in the quality and age of the watches, what is a reasonable amount? I’m not saying that it’s hard – just that it’s wise to invest some energy into researching your investment. As you would with shares and real estate. Eh?

You can of course, also speculate. This is the high risk/ high reward section of investment. How do you speculate on watches? The same way you do with stocks. It can also help if you have the means to manipulate the market that you’re speculating in. For example, you can control the supply and demand of a certain model, and therefore price, (assuming there is a demand) by reducing the supply. Or you can take the long term approach, by betting that certain unpopular models now will become highly sought after in a few decades, so you buy and hold and hope and pray. It’s happened before so why wouldn’t it happen again?

You need to be really good at reading the market, keep track of what all the influential people are saying, on the various forums at the very least, and to keep a close eye on all the forums that has a sales sub forum - this is one of the best places to find out the market value of certain pieces. I would avoid auction houses such as Antiquorum or Christies, unless you have an 80 year old stainless steel Patek perpetual calendar. But then again, if you have one of those what the heck are you reading this post for? The reason to avoid the auction houses as their prices tend to be overinflated to due various reasons and are not a true indication of a watch's worth.

Brands such as Rolex have a very established second hand market value, and there are various trends and price tracking services. This is extremely prevalent in Japan, where they will track the price of a certain model over time. This does make it easier to determine the value of a piece and whether it will make good investment or not. This is almost like your 'blue chip' investment. As long as you buy the right product at the right price.

There are riskier investments and these are the brands that does not have an established trend. This is where your research comes in. Whatever you do, investment is a brain exercise rather than an emotional one. If you let emotions take over - this is the downward spiral that can and will happen. You get emotional about a product because it got hyped up, with low supply and high demand. You lose all rationale and pay too much for it just to get it. Once you get it you get buyer's remorse, but then the hype died down, supply in the market increased from buyer remorse sell off and the price goes down. You end up getting stuck with something you only liked at the time and now can't get rid of, or you take a big hit and sell at a loss...

Keep in mind that the context of this entry is purely on the notion of investment and is not taking into consideration that you buy a watch because you like it, etc etc. That’s a completely different topic. This entry also only deals with individuals thinking about investing in watches. Putting watches into self-funded superannuation scheme might work but I feel most of what is mentioned is still relevant to this. International managed watch investment funds are something else entirely therefore we won’t deal with the here.

Disclaimer: BY no mean is this article sound investment advice. This is purely one person's point of view, and before you embark on investment please consult your investment advisor. We take no responsibility for the accuracy of the article.


NickO said...

It's you want a good investment buy bank shares.

If you sell a watch for mayor than you paid for it (including servicing and those four straps that you just had to buy) good luck to you. Just don't expect it to happen.

And before you say "but Pateks always go up" they won't. Nothing defies gravity forever.

Buy 'em, wear 'em, love 'em, but find something a little more secure for your superannuation

Horologium said...

Unless you're playing up the pointy end of the watch buying spectrum, where you're spending a lot of money on very important pieces, you're going to be hard pressed to make any money out of it. Although there is an element of luck if you buy something and it turns out to be 'hot' for some reason in the future.

As with anything that is also deemed a 'collectible' I think that in the end, buy because you love it. If you buy a watch because you want to flip it/ make money on it as an investment, as Nick said, find something more secure.

If you buy every watch with a profit motive first and foremost