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Investment talk: Luxury watches as a replacement for traditional methods?

December 04, 2020

Be honest, how many times have you seen a post on a watch forum talking about how a particular watch can be treated as an investment. Usually, it is at this point that I would switch off mentally and scroll onwards, I hear about how watches can be investments quite often you see. But the thought that a luxury wristwatch could be an investment popped back into my head the other week, and it set me thinking. With interest rates in the UK so low, could it be wise to hedge some of your money in a luxury wristwatch?

Let's take a look at the current state of affairs. To be clear, I'm not going to cover the enormity of returns you can get from selling a brand new luxury watch on the pre-owned market. We've all heard the stories of how brand new GMT Master IIs, Submariners and Nautiluses usually fetch between double and triple their RRP on the used market. That's been done. I'm interested in whether storing money in assets that just so happen to be wristwatches is a good idea, both in the short and long term.

Way back in October the Bank of England, the UK's central bank, sent a letter to banks in the UK asking them if they were prepared to deal with a negative interest rate. The Bank of England cut the UK's interest rate down to 0.1% at the beginning of the global pandemic. (Click here to read the letter sent by the Bank of England: )

What does this mean? 

Interest can be thought of as the fee for borrowing or saving money. When you take out a loan or pay for something through a finance plan, you will most likely have to pay an interest rate on it. This is the money that you will have to pay back on top of the loan you took out, and it's usually shown as a percentage. If you buy a car on finance, or a watch from Watches of Wales, for instance, there is a cost for doing so. This cost is called interest.

If you save your money in an account with a bank or building society, that financial institution will pay you a variable rate of interest in return for using your money as an investment as a part of their daily activities. A lower interest rate means you won't be repaid much by your bank or building society, while a negative interest rate will mean that you will start paying that financial institution for the privilege of saving your money with them.

The effect this has on you depends on the type of financial asset in question. For example, a fixed-rate mortgage will be unaffected by the change in interest rate, as you already agreed on an interest rate with your mortgage lender. If a negative interest rate is issued by the Bank of England (the first one in its entire history), then it could mean that new mortgages come with a negative interest rate too, so the bank may end up paying customers money on top of the money they lent to them in the mortgage.

The real issue for both banks and savers is that a negative interest rate could cause savers to leave the bank and take their money elsewhere. An extreme form of this was witnessed in 2008 when people queued outside Northern Rock branches to withdraw their money as they were worried the bank would collapse. This is called a 'bank run', and it's the worst thing that could happen to a bank. 

A bank run is unlikely to happen if the negative interest rate is kept as low as possible, but both the Bank of Japan and the European Central Bank have already issued negative interest rates. Though the Bank of England has never done this, even during the Financial Crisis of 2008-2009, the possibility of it is on the table. 

"What does this have to do with watches?" I hear you ask. The answer is "quite a lot". While the prices for most luxury watches only deteriorate on the pre-owned market, there are some exceptions. The majority of these are pre-owned Rolex watches, particularly their sports models. If you want a brand new GMT Master II 126710BLNR that will cost you £7750, but if you look at buying one on the pre-owned market their price sits somewhere between £13,500 and £14,500. Of course, purchasing a brand new Rolex and selling it for double sounds ideal, but good luck on getting one within a year. That would mean that if you withdrew your money into cash and then had to wait for a year, your cash money would have spent a year doing nothing. Idle cash is inanimate and best used for something where it can create a return.

This means then that we should look at pre-owned luxury watches as potential assets. It's often said that a Rolex is like a bank vault on the wrist, as you will still have your money when you decide to sell up. Of course, it's not always that simple. You'd need to factor in servicing the watch if you plan on holding it for an extended period. You'd also need to think about potential damage to the piece if you wear it about, and the loss of satisfaction if you decide to keep it locked away. The most joy we can get out of this hobby is undoubtedly wearing the watches we love. 

Perhaps the biggest downside I can see to relying on luxury watches as a method of hedging funds the risk of a total loss. This could be through a home burglary, a mugging when out and about or it could be down to a clumsy owner. All these scenarios are possible, and with an easily transportable asset like a wristwatch, once it's gone, it's usually gone for good. Having your money in a bank means you have legal protection and compensation measures in place should the worst happen. These are all essential points I would advise someone to consider seriously. 

Having said that, there are advantages to using watches as a hedge for money. The most important point in favour of this approach is that you get to play around with a fancy watch for a bit. If you're considering hedging your money in a wristwatch, you're probably into wristwatches anyway. And if you're not and you've never owned a high-end wristwatch before, then you'll undoubtedly find it a pleasure to finally buy that watch knowing you won't really lose your money on it. Of course, when it comes to selling that watch to get your cash back, well, you'll have to cross that bridge when you come to it!

As well as being able to flash your fancy watch around, you'll be pleased to know that there is empirical evidence which suggests your watch will hold its value. 

According to Chrono24, market prices for a 2019 Rolex GMT Master II ref 126710BLNR in good condition have slowly started to increase to around £14,000 from the lowest market price of £13,100 which we saw in April. That means your watch could rise again in price on the pre-owned market. If you're interested in the old 116710BLNR (that's the one on the Oyster bracelet), then it's sitting at around £13,500 currently. It has also recovered from the April price slump which was undoubtedly caused by the outbreak of the current pandemic.

The difference between watches like these and cash money is that cash is a liquid asset. This means that it's straightforward to transform it into a different asset, that's why everyday transactions in our lives use either hard cash or digital cash, a Submariner won't pay for your groceries or a second-hand car as it's not an accepted currency for instance. The problem with most watch brands is that while their watches are second to none, they can take a little while to shift, which isn't useful if your circumstances change and you need cash quickly. Of the watches that are generally 'quite liquid', that is, relatively easy to sell, Rolex is one maker, and Patek Philippe is the other.

Watches are a delicate balancing act between finding something that's going to hold its value or potentially increase and finding a watch that's going to sell quickly if you need it to. In my mind, you should treat an investment in a wristwatch as an investment in any asset, and you should approach that with the understanding that the watch's price could depreciate. Every watch I looked at (and many more which I didn't include) took a hit at the start at the global pandemic, no matter its collector status, you must be prepared for this. I look at it like I look at going to Las Vegas, it's probably going to be great, and you'll love it, but you should only go to Vegas and gamble if you can afford to lose your money there. While investing isn't the same as gambling (hopefully you're not gambling with your investments), you must prepare yourself for the worst and hope for the best.

So, if things continue the way they are in the world of banking, then using watches as a way to hold value could be a feasible idea. The Bank of England has never issued negative interest rates before, but then again, we haven't seen a pandemic like this in a long time.

Author's note: Chrono24's average market prices are made up of the average of final sale prices for watches listed on Chrono24, as well as the current listings on the site. If these data are not enough, Chrono24 is also able to use historical sales data as needed. Chrono24's prices may not reflect those found on other sales websites or those found on pre-owned dealer's sites.

Always make sure you understand how investing works and the risks of investing before committing yourself.