Time is Money: Can Watches Be a Smart Investment?
Time is Money: Can Watches Be a Smart Investment?
The Economics of Investing in Luxury Watches.
Investing in luxury watches can be a tempting prospect for collectors and enthusiasts. Not only are these timepieces aesthetically pleasing, but they can also hold their value and even appreciate in value over time. However, it's important to be aware of the risks, costs, and things to consider before diving into the world of luxury watch investing.
Today I'll cover the potential rewards of investing in luxury watches, as well as the costs and risks involved. I'll also provide some tips and things to know for those interested in entering the market, and a few hands on examples!
Brands such as Rolex, Patek Philippe, and Audemars Piguet are well known to the world for producing some of the most luxurious timepieces that money can buy. They are also very well known for being expensive.
Perhaps less well known is that, for many of these brands, their more popular models are almost impossible to get hold of. For example, if you go into any Rolex dealer in London at the moment, you will be lucky to find a store with watches in stock to buy and walk away with that day. Brands like these exercise discipline in supply, to make sure that demand consistently exceeds supply year after year. This has a twofold effect - limiting supply, but also generating a level of hype, exclusivity, and desirability for the brands’ watches.
Not only that, but these watches are so well made that they will continue to function for 100 years or more if taken care of properly. This, together with their aesthetic appeal, functionality, and potential for value appreciation makes watches a compelling alternative investment.
An alternative investment is a financial asset that does not fall into one of the conventional investment categories. Conventional categories include stocks, bonds, and cash. Alternative investments can include private equity or venture capital, hedge funds, managed futures, art and antiques, commodities, and derivatives contracts. Real estate is also often classified as an alternative investment.
Let’s now talk about some of the reasons people choose to invest in luxury watches, before turning to a few illustrative examples, and a more deep analysis of the costs and risks involved in investing in watches.
Potential for appreciation in value: Luxury watches, and particularly those made by well-known brands, can hold their value and potentially appreciate in value over time.
Enjoyment: Collecting and owning luxury watches can be a hobby that brings joy and satisfaction to the owner. Owning a luxury watch can be seen as a symbol of success and a way to celebrate life’s milestones.
Quality and durability: Luxury watches are often made with high-grade materials and craftsmanship, which can make them last for a long time and retain their value both from a financial and enjoyment point of view.
Potential for resale: Luxury watches, particularly those that are rare or in high demand, can be resold for a profit. Not only that, but the UK Government exempts profits on most watch sales from capital gains tax.
Diversification of investment portfolio: Adding luxury watches to an investment portfolio can also help diversify and potentially mitigate risks.
Potential for rental income: Some luxury watch owners can even rent out their timepieces for special events or photoshoots, providing an additional source of income for high-end collectors.
Heirloom potential: Finally, luxury watches can often be passed down through generations as heirlooms, providing sentimental value in addition to any potential financial value. Bearing in mind that in the UK, any gifts, including watches, made more than 7 years before death are not liable for inheritance tax, makes this even more compelling as a way to securely pass on wealth to the next generation.
So what does this actually look like in practice, and what are the potential outcomes? Let’s dive into a few examples:
Speaking of diving, let’s take a look at a classic luxury dive watch - the Rolex Submariner. This watch is known for its durability and reliability. It features a stainless steel case and a unidirectional rotating bezel, as well as a waterproof design that allows it to be submerged to depths of up to 300 meters (984 feet). The Submariner is powered by an automatic movement and has a choice of a metal bracelet or a rubber strap. It is available in a range of dial and bezel colors, including classic black and blue. The Submariner is a timeless and iconic watch that is recognized and respected by collectors and enthusiasts around the world.
Variations of this watch have been in supply for decades, and are no exception to Rolex’s signature steady appreciation in value over time. In this example, we took a look at data on used Rolex Submariner Dates (reference number 16610), in good condition, from Chrono24 - a leading marketplace for watch buying and selling.
Over the last 5 years, prices increased by ~80.7% for this particular model (in good condition). That represents a CAGR (Compound Annual Growth Rate) of ~12.6%, beating out the returns from the S&P 500 index over the same period by over 2x.
The compound annual growth rate (CAGR) is the rate of return (RoR) that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each period of the investment’s life span.
It is calculated as follows (where EV is the end value of an investment, BV is the beginning value of an investment, and n is the number of years the investment is held for):
\(\text{CAGR %} = ((EV/BV)^{1/n}-1)\times 100\)
Impressive returns. Especially considering that the owner has the benefit of owning and potentially even wearing this timepiece for the duration of the investment. The idea of owning and wearing a luxury timepiece for 5 years, and at the end of that 5 years observing an increase in its value by over 80%, is a watch collectors dream (and an oft quoted justification for a collectors next purchase!).
Now let’s look at a more extreme example. In this case, an unworn Patek Philippe Nautilus (reference number 5711). This is one of the most popular and sought after watches in the entire world, and being from the most elite and coveted watch brand in the world, is subject to even more aggressive demand patterns, and borderline impossible to get hold of from Patek Philippe themselves.
In January 2022, Patek Philippe set the already frothy market for this model into overdrive, by announcing that they would discontinue the model. By the end of February, the value had exploded from an already ridiculous £120k at the start of the year to an eye-watering £196k - enough to pay off the average UK mortgage in full.
This chart above demonstrates another type of opportunity which can be exploited by more experienced and knowledgeable watch collectors - being able to anticipate supply and demand dynamics, predict market moves or trends for particular models or brands, and profiting from large market movements. This is a high risk strategy, but one that can heavily reward the knowledgeable and brave.
At this point, it may be a good time to talk about some of the risks involved in investing in watches. There are several risks that individuals should be aware of when investing in luxury watches:
Market risk: The value of luxury watches can fluctuate over time due to changes in demand and supply. It is important to understand that there is no guarantee that a watch will appreciate in value, and prices can move up as well as down - even with good watches. For instance, using the example above - a Patek Philippe Nautilus bought in February 2022 for £196k, would be down over 35% in the months since. Market timing matters.
Counterfeit risk: Unfortunately, there is a significant market for counterfeit luxury watches. It is important to do thorough research and only purchase from reputable dealers to avoid buying a fake watch. Don’t get caught out, as if you do, you will likely lose the entirety of your investment.
Fraud risk: There have been instances of fraud in the luxury watch market too, where individuals have sold fake or altered watches as authentic, or taken payment without releasing the item to the buyer. It is important to be cautious and do your due diligence to avoid falling victim to fraud. Again, don’t get caught out.
Insurance risk: Luxury watches can be expensive, and it is important to consider how you will insure your investment. Make sure to research different insurance options and choose a policy that will adequately protect your investment.
Damage risk: Although luxury watches are generally very durable and reliable, wearing them carelessly or abusing them can affect their value significantly, or lead to significant repairs or maintenance costs.
Liquidity risk: Finally, luxury watches are not as liquid as some other forms of investment, meaning it may be more difficult to sell them quickly or at their full value. It is important to consider this when deciding how much to invest in luxury watches. It is prudent to only invest excess funds, and money that you won’t need in the near-term future.
By understanding and being aware of these risks, individuals can make more informed decisions about whether investing in luxury watches is a suitable choice for them. There are also significant costs involved in watch ownership and investing, which individuals need to be well aware of before making any investment decisions.
Maintenance and repair costs are an important consideration when investing in watches. Like any mechanical device, watches require regular maintenance to keep them running smoothly and to ensure that they remain accurate. This can include regular cleaning and oiling, as well as more complex repairs if necessary. Depending on the exact model and brand, these costs can vary from a few hundred to a few thousand pounds. It is recommended to get a full service once every 5 to 10 years, depending on the model.
It's also important to consider the costs associated with storing and insuring your watch collection. Depending on the size and value of your collection, you may need to invest in specialised storage solutions to keep your watches safe and protected. You may also want to consider purchasing insurance to protect your investment in the event of theft, damage, or other unexpected events. Insurance on luxury watches can be sourced for around 1% of the watch’s value per year.
Finally, when it comes to liquidating or selling luxury watches, there are inevitable fees that come into play when selling. Due to the fraud and counterfeit risks surrounding the watch market, to get the best price for your watch it is usually advisable to use a reputable platform to sell. These selling fees can vary from between 5 and 15% depending on the transaction. A site like Chrono24 will protect the transaction and payments in a secure account until all parties are happy. This costs the seller a 6.5% fee.
These costs all erode the potential returns from investing in watches. Let’s dig into another example to illustrate what more realistic returns could actually look like. In this example we will take a look at a Rolex Datejust (reference number 16234), in very good condition.
This Rolex Datejust is a classic and elegant watch that is suitable for both formal and casual occasions. It features a 36mm stainless steel case, a stainless steel jubilee bracelet, and a date window at the 3 o'clock position. It is powered by an automatic movement, and this particular example comes with a silver face and fluted bezel. A timeless classic suitable for both men and women.
First, let’s dig into the price movements for a used model, in very good condition, over the last 5 years:
The data suggests a return on investment of ~62.5% over the time period, beating out the S & P 500 return of ~36% over the same period. But what about the costs during those 5 years?
Let’s start with the purchase price of the watch of £3,406 in January 2018.
Now consider storage and insurance. While it is possible to wear a watch rather than store it, this also comes with a cost in the form of increased wear and tear / servicing costs. So to be prudent, here we will allow 1% per year towards insurance, as well as 1% per year towards storage or additional wear and tear costs. Over a 5 year period this amounts to around £340.
Considering that 5 years is a long time to own a watch, it is also likely that the watch should be serviced during this time to protect its value. An official Rolex dealer will charge you around £750 for this service, depending on the specific work that should be done. It is possible to have independent watch experts service a watch for less, but this can have its own knock on effects when it comes to selling the watch with its full service history.
This brings the total cost of ownership to around £1,090 over the 5-year period, or a total sum invested in this watch of ~£4,496.
With a current value of £5,534 this watch has still managed to generate an ROI of over 23%, but definitely less impressive than the ~62.5% ROI before costs (as shown in the chart).
The picture worsens further when considering that, to sell the watch, you will likely incur costs of around 10% in the form of platform fees, postage, transaction fees, and selling at slightly below market to attract a sale. Meaning that the amount you actually receive from a sale, is more likely to be ~£4,980. In other words, a measly ~£484 profit (10.7%) on the £4,496 invested into the watch.
This is clearly below the kind of returns you can get from the stock market, and even some bonds or cash based investments over the same time period. But, that said, what other investments give you access to an item as coveted and aesthetically pleasing as a Rolex watch, while still generating returns? For me, I would definitely settle for wearing a beautiful Rolex watch for 5 years, without it costing a penny.
What’s more, if these investments are scaled up or optimised, you can easily imagine that some watches or collections could yield significantly better returns than this, indeed, in some cases, market-beating returns.
So, in conclusion, who is this right for? And what should an aspiring watch investor look for to maximise their margin of safety?
There are several factors that may influence whether investing in luxury watches is a suitable investment for an individual.
Financial stability: It is important to have a solid financial foundation before considering investing in luxury watches. This includes having enough savings to cover emergency expenses, as well as any other financial obligations you may have. Watches are relatively illiquid investments, and so if you need to access money, you may need to liquidate your investments below market rate to access your funds. You should be prepared to not access these funds for a long period of time, and be financially prepared to maintain, insure and look after them for the duration of ownership.
Investment goals: What are you looking to get out of your investment in luxury watches? Are you seeking to generate a profit, or are you simply looking to add to your investment portfolio for personal enjoyment? Your investment goals will help determine whether investing in luxury watches is a suitable choice for you.
Risk tolerance: Investing in luxury watches carries some inherent risk as their value can go down as well as up, and therefore you may not recoup your original investment. It is important to consider your risk tolerance and whether you are comfortable with this level of risk.
Knowledge of the market: It is helpful to have some knowledge of the luxury watch market and the specific brands and models that have a strong track record of appreciation. This can help you make informed decisions about which watches to invest in.
Personal interest: If you are passionate about luxury watches and enjoy collecting and learning about them, investing in luxury watches may be a suitable choice for you. Personal enjoyment is a key benefit of investing in luxury watches, and so this should be something that brings personal value to you.
Diversification: It is generally advisable to diversify your investment portfolio, rather than putting all of your eggs in one basket. If you are already heavily invested in luxury watches, it may be wise to consider other investment options as well.
When it comes to which watch to invest in, there are also several factors to consider.
What you like: First and foremost, it should be a model that you know and love. This massively increases your margin of safety. The last thing you want is for an investment to go badly, with a watch you don’t even like. At least if an investment on a watch you like goes wrong, you get the pleasure of wearing and owning it, even if its value has depreciated.
Brand reputation: Some luxury watch brands have a longer track record of success and a stronger reputation in the market. These brands may be more likely to hold their value over time. Look for brands that don’t over produce or sell stock on sale. Brands that control retail stock and pricing tightly are more likely to create the demand patterns that lead to appreciating values over time. Some strong brands with good track records on this are Rolex, Audemars Piguet, Patek Philippe, and Vacheron Constantin.
Rarity: Watches that are rare or limited edition may be more sought after by collectors and therefore more likely to appreciate in value. However, always ensure that there is a healthy pattern of demand. A common trap to fall into would be to buy a rare limited edition watch that not many people want. These investments can be risky, illiquid, and hard to find a buyer for (think NFTs!).
Condition: The condition of the watch is important, as a watch that is in poor condition may not hold its value as well as one that is well-maintained. Try to buy watches with their original box and paperwork, and keep all your receipts and service history to add to the watches records.
Age: Older watches may be more valuable due to their rarity and historical significance. However, putting your name down on a waiting list for a brand new model can also prove profitable too, as luxury watches can often be sold above the actual retail prices on the resale market. Beware though, quick or frequent watch flipping will get you on the blacklist of your favourite brands and dealers.
Functionality: Some watches have additional features such as chronographs or moon phase indicators that may make them more desirable to collectors. However, beware, the more complicated a watch is, the more likely you are to be dumped with a significant servicing bill.
Style: Classic and timeless watches that are stylish and fashionable throughout the ages may be more likely to appreciate in value over time, and less likely to fall out of favour with the watch market, again, protecting you to some degree from potential downside.
It is important to do thorough research and consider these factors when looking for a luxury watch to invest in, and when deciding whether or not investing in luxury watches is for you. It may also be helpful to consult with a professional or seek the advice of someone with expertise in the luxury watch market. Remember, this article is not financial advice!
I hope you enjoyed reading about this niche alternative asset class. For more valuable insights and analysis, on all kinds of business, technology, and investing topics, be sure to subscribe below! There’s a lot more value coming your way if you do…