What do cars, art, wine and watches have in common? If you answered “they are all the province of the particularly annoying over-educated, under-experienced snobs you don’t want to be seated next to at a dinner party” you’d be right. But we’re not here today to talk about Hodinkee writers. The answer we’re looking for: none of them are an asset . . .
Like many men of a particular age, I’m a regular reader of Bring a Trailer. The comment section is generally a productive place to spend time – I usually walk away knowing more than when I started.
Sitting in bed one night, idly looking for a Ferrari 456GTM, I came across this comment by a user in another auction:
Prices on collector cars have never been higher due to the Covid-19 virus. Smart money buyers (investors) are purchasing vehicles as a hedge against our volatile stock market.
Needless to say, this ruined my night.
Never mind that this statement is provably false. What interested me was the idea that collector cars could be considered asset diversification, let alone a hedge.
It’s a pretty common theme, usually in magazines for people with more money than education, or when people talk their book.
Intuitively, it seems to make sense. Financial assets can be a bit abstract. Cars, art, wine and watches seem like real tangible things that should increase (or keep) their value. But . . .
These are consumption goods, not assets. The fact that some examples – some not most or even many – have appreciated in value doesn’t change that fact. There are a lot of ways to define an asset. Let’s use a pretty simple framework to demonstrate that watches are not an asset. An asset must . . .
- Possess a claim on an income stream, or have some use in creating an income stream
A share of Apple has a claim on the company’s cash and dividends, a T-bill has its coupon, land can be rented out for productive uses. A watch is simply a thing that was created to be sold, and then worn: to be consumed. It has no income or productive value aside from its precious metals.
[True, it was, very briefly, an income stream for the manufacturer, wholesaler and dealer. But it was so as inventory, not an asset. It existed to be bought and sold and was recorded on the balance sheet as such.]
2. Have relatively low holding costs compared to said income stream (don’t @ me, everyone who buys bonds at negative yields)
Slapping a personal articles insurance rider on a watch and keeping it in a drawer is pretty low cost. Honestly? I’m only including this criteria so the IRS can’t classify my children as assets.
3. Be able to be valued and compared to other assets by a reasonably intelligent person based on intrinsic factors
Since there’s no productive use to which a watch can be put, it can’t be valued, at least by the standards above. Sure, you can look at transaction data and get a market price, but that’s not its intrinsic value – how much an item is worth in the complete absence of liquidity.
If you bought a 5-year Treasury today for $100.22 and could never sell it, five years from now you would have $102.50. If you bought a Panda Daytona for MSRP today and could never sell it, five years from now you would have a Panda Daytona.
And that might be fine with you! I hope it is, because that watch will never, ever, produce a single cent for you during your ownership no matter how hard you shake it. Hence, fail.
And it being uncorrelated or negatively correlated to financial markets? Using Hagerty’s “Blue Chip” index as a proxy for our luxury goods, because time-series watch data is hard to find, we see:
These look SUPER-uncorrelated [/sarc].
The more eagle-eyed of you will be sputtering right about now, about to accuse me in the comments of engaging in a bit of sophistry. Namely, most people argue that watches and other goods are investments, not assets. And the standard for an investment is pretty loose: “Something that is purchased but not consumed with the intent of selling it for a profit later.”
See the problem with that statement? Since that definition hinges on intent, it’s unfalsifiable. By that standard anything can be an investment: watches, cars, boats, lottery tickets, cocaine and so on.
Watches can be instances of masterful engineering, art objects, expressions of style and so much more. And in some cases – some very rare cases – they can make their owners a lot of money. But don’t confuse a watch for a productive income stream. And don’t call it an asset.