Watches as an "asset class"
Should you buy watches as an investment or is it simply speculation?
Many a conversation on this topic has led to a debate about basic nomenclature... so we shall start with definitions. Then we can talk about the parallels with the art world, the psychology of buying watches as an investment (or speculation), and then round off with some concluding thoughts on the matter.
This is likely the first question a person asks when they find themselves with excess cash to put into some sort of vehicle, with the expectation of growing that money over time. Asset allocation refers to how you split your investment across different types of assets. On a basic level, that means deciding the proportions and distribution of your investment among the various options such as stocks, bonds, real estate and other such 'traditional' investments... but also includes the more exotic options like cryptocurrency, fine art, or even watches... more that the final one later.
Investment vs. Speculation
Now rather than trying to reinvent the wheel with definitions, I will refer to Investopedia which summarises it as follows:
The main difference between speculating and investing is the amount of risk involved.
Investors try to generate a satisfactory return on their capital by taking on an average or below-average amount of risk.
Speculators are seeking to make abnormally high returns from bets that can go one way or the other.
Speculative traders often utilize futures, options, and short selling trading strategies.
As discussed previously with Todd Levin, the issue with watches, is that you can't attribute any inherent underlying value to the piece. When buying a share in Amazon, you can break down its valuation into all the relevant components such as buildings, prime subscriber revenue and so on... thus making you able to calculate the “present value of future cash flows” - you can then take a view on the future growth opportunities to decide what the share is worth, and buy or sell it accordingly; simplified, but that's the general idea with investing.
What is a Rolex Daytona worth? If you buy one at retail, you can double your money (or more) the moment you leave the store - but there is no underlying rationale for this. Supply isn't a problem, as the watches are readily available - people often cite 'hype' as the reason... ok fair enough. How do you quantify 'hype' and how does one feel certain that this 'hype' will sustain itself into perpetuity? I am not saying it will, or it won't - merely highlighting how speculative it is, solely because there is no quantifiable driver for it.