TTAW recently reported on the nose-diving prices of pre-loved luxury watches. We gave advice to buyers, sellers and traders. Financial services giant Morgan Stanley has joined the prognostication party. They’ve issued a stark warning: don’t invest in luxury watches . . .
Given the current watch inventory for sale and the worsening macro backdrop, we would expect second-hand prices to contract further quarter over quarter.
With most financial assets deep in the doldrums and a recession looming in the distance, it’s hard to say when sentiment will change.
finance.yahoo.com
Morgan Stanley’s don’t-touch-it-with-a-ten-foot-pole market advice isn’t news to us. Our man Adams warned against “investing” in watches back in April 2020 (A Watch Is Not An Asset).
If you ignored Mr. Adams, somehow managed to buy a grail watch (e.g., a blue-dial steel Patek Philippe Nautilus 5711), rode the pre-owned luxury watch roller coaster until April 2022 and then hopped off and sold your horological Mack Daddy, you would’ve made a significant profit.
That doesn’t contradict Mr. Adams’ thesis: an asset must “possess a claim on an income stream, or have some use in creating an income stream.” Rental property, Treasury Bills, a laundromat, illegal narcotics, etc.
Even if you disagree with Mr. Adams’ definition, buying a luxury watch with an eye to profiting from rising value isn’t an investment. It’s speculation. Let’s be clear about the difference:
The primary difference between investing and speculating is the amount of risk undertaken. High-risk speculation is typically akin to gambling, whereas lower-risk investing uses a basis of fundamentals and analysis.
investopedia.com
Savvy speculators (a.k.a., flippers) made out like bandits during the luxury watch Pandemic-powered frenzy. Initially, they bought low and sold high. As the inflationary spiral escalated, they bought high (in terms of price, not brain chemistry) and sold higher. Quickly. Repeatedly. Profitably.
“Investors” – buyers who parked money in a grail watch as a long-term play – got f*cked. Unless they bought early (roughly between April ’20 and April ’21) and bailed quickly (sometime between May and August ’22), they lost money. On the positive side, they still have a nice watch.
The Tulip Folly by Jean-Léon Gérôme (courtesy wikipedia.org)
This kind of speculative bubble is not unknown in other “hard asset” areas: collector cars, paintings, coins, etc. Students of economic history will tell you: millions of tulips died to warn the wary.
Morgan Stanley didn’t get the memo (admittedly from 1634). Their broadside against the pre-owned luxury watch market suggests fine wine as an alternative. “Since 2005, Sotheby’s Fine Wine Index has gone up 316%.” I call that kind of thinking Yazz-addled.
Meanwhile, a funny thing happened on the way to the forum. The pre-owned luxury market (as defined by watchcharts’ basket of big money, high-end timepieces) plateaued. While a week does not a market trend make, it contradicts Morgan Stanley’s pessimistic prediction.
I reckon the pre-owned luxury watch market is changing. Sensible grail watch buyers – people who want the watch to have and to hold from this day forward, for better, for worse, for richer, for poorer, in sickness and in health, to love and to cherish, until parted by death – are returning to the market, even as speculators are dumping inventory and heading over to Chateau Lafite.
As far as I can tell, prices are stabilizing across the board.
Prices for gotta-have pre-owned Rolex (such as the panda-faced Daytona and the “Kermit” Submariner) are down to a bit more than twice retail.
Near term, I reckon that’s where they’ll stay. I’d bet donuts to dollars that the price of highly collectible pre-owned Rolex will start rising again in 2024. The new/used gap for less desirable pre-owned Rolex (such as the Rolex Oyster Perpetual 41 above) has narrowed even further. But . . .
Until and unless demand decreases or supply increases, the price for all pre-owned Rolex (save real dogs like the deeply forgettable Cellini collection) will remain above retail for the foreseeable future.
Rolex et. al may trend slightly lower from here, but there’s a limit to the depths to which any really desirable, low-volume watch will sink. I’m looking at you Patek Philippe.
It’s a slightly different story for second and third-tier covetable watches. We’re talking timepieces like the OMEGA Speedmaster Moonwatch (reviewed here) and the Grand Seiko “White Birch.” After falling seven or eight percent in the last six months, prices for these nice-to-haves are where they were in 2019: around 30 percent below retail. The new old normal?
We need a few more weeks of data to be sure, but I reckon the flatline is no fluke. Either way, my advice doesn’t change: wait ’til Christmas to buy the really good stuff, but don’t wait too long. Demand at the top end of the luxury market remains relatively robust and the Chinese are coming back into play. Oh, and don’t buy a watch as an investment. Ever.