Investing in Luxury
Investing in luxury products can yield exciting returns. That’s a fact that savvy investors have come to understand very well over the past decades. I’m not talking about buying shares in luxury brands. I'm talking about acquiring the actual products and using them as a store of value.
The concept of investing in luxury revolves around supply and demand. The most prestigious brands in the world have created artificial scarcity of their products. This scarcity is woven into the fabric of their brand image because it radiates exclusivity. “I want what I can’t have” is the one of the oldest truths about the human mindset. Companies like Patek Philippe, Audemars Piguet, Louis Vuitton or Hermes, just to name a few, have been using the limited supply of their products to their advantage and by doing so, have created a myth as well as stimulated demand.
Why invest in Luxury?
Traditional investing can be uneventful and mostly yields single digit returns for your clients. Of course this is an important part of any portfolio. That said, you should also look at putting something a little more exciting and tangible into the mix. If you decide to go down that road, there are only few assets to consider. Only few have the potential to generate attractive returns. There is art, wine, cars and then there are luxury products like watches for example.
Based on the principles of economics we know that if demand for something exceeds supply, the price will go up. This is the case with countless luxury products. Two of the primary and most famous examples are the Hermes Birkin handbag or the Rolex Daytona wristwatch. These two items are a fantastic case of instant returns. If you can get your hands on either of them at retail price, you can easily make a 100% return. You can do that on the spot and this premium has been steady for decades.
We live in an age with unprecedented wealth. There it is no wonder that the demand for luxury goods is ever increasing. More and more products have a lengthy waiting list. This clashes with the state of mind of the wealthy consumer who doesn’t care as much about money as he cares about timing. The modern consumer is spoiled by the instant availability of almost anything. We have cultivated our own attitude of impatience. This plays right into the hands of the strategist who created artificial scarcity.
Strategy is Everything!
When investing in luxury, similar to traditional investments, we have to differentiate between two strategies. These are “buy & sell” and “buy & hold”. Like I mentioned above, you can scoop up an item that you know is selling at a high premium. You then go and flip it immediately for a healthy profit. Alternatively you pick your products very carefully and invest with a long term approach of 10, 20 or even 30 years. This approach is much more scalable. It is those investments that will generate the most exciting returns and offer you the possibility to allocate greater amounts as well.
Another great factor is that these investments are mobile and very liquid, much more than real estate for example. Most luxury products, if you’ve bought the right ones, can be sold within a few days on the secondary market. This part is a little tricky because if you’re too hasty you can loose a chunk of your return by selling too quickly. A quick sales isn't always a good sale because you probably leave money on the table.
Nowadays we are also fortunate, based on the fact that the secondary market for luxury products is constantly evolving. It is becoming more and more organised through companies like StockX. This company started out by trading in footwear and are now also offering a real-time marketplace for watches and handbags. More and more platforms are seeing the light of day, making this market evermore transparent and easier for buyers and sellers to navigate.
Is it a risky Business?
Naturally this market, like any other market isn’t free of risk and it’s important to navigate it with the help of someone who has a lot of experience. The key risks are counterfeiting, which is a reality you won’t escape from. There are countless fake products circulating in the market and if you catch a bad egg, you can write off your investment. The seller will be long gone and your chances of getting justice are slim to none.
Another very important factor is the condition of the item. The highest prices are paid for new (unused) products and the value drops significantly if the item is merely in mint condition. Therefore it is imperative that the condition is reflected in the price of the product. This extends to the completeness of the products such as original box and papers. These details are more important that you might think and can greatly affect the price.
The world of luxury is an exciting world to be involved in, whether as an investor or simply as a consumer. The smart money however stays away from the new and hip brands that are able to create momentary or short-lived hypes because the hype by definition doesn’t last. Luxury investing has very little to do with style and everything to do with the fundamentals of economics. Buying into a hype is like a sugar rush for the consumer but it doesn’t create lasting value for your portfolio nor your wardrobe.
Like cars, wine and art, an investment in a luxury product has the marvellous upside of allowing you to enjoy whatever you buy and that is very much your own choice to make.
Please contact us if you have any questions or would be interested to know more !