In Rejecting the Luxury of Hobbies I talked about the “investor” types of people. The people that seem to feel that participating in a hobby based around collecting should not affect their bottom line. Well, here we are, just a couple of days later, and one of these “collectors” just showed up in my YouTube with his latest video: Affordable Watches Lose You Money. Here's Why.

It didn't take long for me to understand the premise he was going with. He starts off talking about a Citizen Tsuyosa, a Seiko 5 SRPD55, and a Hamilton Khaki Field Mechanical he purchased secondhand for approximately half of the price the original owners paid for them. He goes on to claim that losing money on resale of a watch is the “cost of ownership”. (Not really, it's something different, as I'll talk about in a minute.) And he states that it happens to all classes of watches, but it “hurts more” for “affordable” watches.

Why does this happen? He claims that it's because of branding. Most brands like Seiko, Citizen and Hamilton haven't built up the “awareness” of Rolex and Omega. Add to that the challenge to Seiko, Citizen, Hamilton, etc. from micro brands that offer better products at the same price points. But the micro brands have the same issue: brand recognition.

What are the solutions? Well, the first is to always by second hand and avoid the loss. The other is to only buy what you like, and will not want to sell.

Well no sh*t Sherlock.

But, he has fundamentally misrepresented the underpinnings of how markets actually work in capitalism. In the fair market there is the concept of depreciation (borrowed from Wikipedia):

In accountancy, depreciation is an actual reduction in the fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wears.

For many things we purchase the depreciation occurs the moment the item is taken out of its box and any wrapping removed. Why? Because it is no longer a new item, it is now a used item. And, once an item is deemed as used it cannot be sold as a new item, and therefore must be sold on the secondary market.

This concept of depreciation happens with nearly all the “things” we purchase: cars, computers, cell phones, bicycles, and many other items. They are seen as assets, and assets have a value that decreases over time. (The rare exception to this being realty, in which there are other market forces at play which can affect the value of the asset.)

The secondary market is typically made up of several groups of people:

• The main portion of the market is people who are deal hunters. They are looking to take advantage of the depreciation of the items that are being sold.
• There is a smaller portion of the secondary market that are collectors. These are people that are more interested in the items on offer for their significance. These items hold significant personal, non-monetary value, that is completely separate from the financial operation of the market.
  
• The final people are the investors. They are specifically focused on attaining items that have a perceived value that overrides its depreciation. This is where Rolex, Breguet, F. P. Journe, and other luxury brands fit into the market.

Looking at any item you want to collect as an investment is tremendously stupid. While it may be apparent that you can make money by investing in a Rolex, even that is at the whim of the secondary market. The specific reference you have “invested” in may fall out of favor with the market. There are no guarantees. Looking at any item that is “collectible” as an investment is no better than putting your money in the stock market. And, with the stock market, you have a better chance at getting a return on your investment if you work with an advisor.

So, the video is correct: buy what you like and will keep. Buy on the secondary market to get a deal. Or, buy the items that hold significant, non-monetary, value to you. But most importantly: don't look at purchasing any asset as an investment. And, all collectibles are assets that depreciate over time.

This is why I get annoyed with these “influencers”. Instead of explaining the facts of how markets and depreciation work we get a song and dance about “brand recognition”. That basic marketing junk that really doesn't mean anything to the market. The market is going to do what it does, regardless of the name on the dial. If there is no other lesson to be learned from the Wall Street Bets Subreddit, it is: markets are not rational, and cannot be relied on to act consistently or rationally.

Categories: #Collecting Tags: #watches, #markets, #depreciation, #value, #assets, #new, #used, #secondary, #market, #fair License: Copyright Unattributed. Licensed under Creative Commons BY-NC-SA 4.0.