The need to diversify investments is one of the first things we learn when studying finance. “Never put all of your eggs in one basket,” as many parents, professors and mentors would say. And as the world evolves, there are constantly new asset classes being created. The latest example was cryptocurrency, but other asset types have come more into view over the past years, which take the form of luxury investments.
Lifestyle managers are confronted daily with the purchasing wishes of clients and if experience has taught us anything, it’s that the highest category of luxury tends to be recession-proof as it doesn’t move with the market. However, there is a category of luxury that does follow the market simply because these items aren’t bought as investments or stores of value but more to display status by those who have recently come into some money.
To most people, buying luxury is not about how the item makes them feel, but rather how it makes others feel who see them wear it, use it or drive it.
The basics of luxury investments
There are a number of brands and products that have performed exceptionally well over the last decade as they doubled and tripled their market value over time. Looking at the current market (mid-June 2022), investments have corrected heavily over the last six months. The S&P 500 is down 22%, the price of Bitcoin is down 70%, but the price of a Hermes Birkin Bag remains unchanged – valued at around twice its retail price. The value of many Patek Philippe watches is still sky high, trading at multiples of 3-4 times compared to the store price regardless of falling stock markets.
But it does not stop there. Last year Patek Philippe collaborated with Tiffany & Co to release a limited edition iteration of the 5711 model. The dial was created in its iconic turquoise colour, which makes it instantly recognisable, and only 175 pieces were made, to commemorate Tiffany’s 175th anniversary. Shortly after its release, a piece was auctioned for charity, at $6 million whilst the retail price was not evenItar that it can be very exciting to invest in luxury products, with the right guidance to identify the pieces that are worth your while. Even in the case of a phenomenon like this watch, this particular release potentially created millions of dollars in assets instantly for a certain type of client.
However, not all luxury goods are created equal. Certain items are absolutely timeless and therefore represent a store of value and some are easier to store than others, which must be taken into account. For example, a watch collection can be stored in a cupboard or safe, whereas automobiles require considerable storage space and generate more maintenance costs. This is not to say one is better than the other, as there are funds and investment companies that specialise in these types of assets and will provide turnkey solutions, especially in the automotive sector.
How to distinguish between a store of value and a hype piece
Store of value refers to an asset that retains its value, rather than depreciating, due to perpetual stable shelf life. In the luxury asset space, you need to know the rarity and timelessness of the item in order to determine if it is a store of value. The item has to be relevant to the history of the brand or the overall market in which it exists, alternatively, it has to be timeless with its design unchanged over many decades. Anything else is a ‘hype’ product that will go up and then see its value dwindle over time as interest dies down.
Here is a practical example. A pair of sneakers, created by Louis Vuitton’s late designer Virgil Abloh, in collaboration with Nike, is selling, at the time of writing, in the secondary market for nearly $200,000. These are limited edition, like most items that increase in value, but it is a hype piece nonetheless. Some people will pay that outlandish amount for these sneakers now and will even go out and wear them. Unfortunately, once worn, they lose the lion’s share of their value. But, regardless if they are worn or not, this is the kind of item that will most likely not hold or increase in value over the years. They will always be worth more than what they once cost in the store but from a price point of $200,000, the only way is down. Hype largely relies on the greater fool theory, which is never a good long-term investment strategy in any market.
Timeless products, generally, are better options for stores of value. Take, for example, the Audemars Piguet Royal Oak wristwatch, whose design was created in 1972 and remained largely unchanged for 50 years. Another example is the Patek Philippe Nautilus, created in 1976 by the legendary watchmaker and designer Gerald Genta. In this regard, something to look out for will be the 50th-anniversary pieces that will undoubtedly be presented by Patek in 2026. Another example of timeless design is the Hermes Birkin Bag which was introduced in 1984 and has remained unchanged in its shape. The colours are updated each season, so the piece remains highly relevant and on-trend year over year but is still a classic. All of these pieces are perfect examples of stores of value because they will never sell for less than the store price. They consistently sell over retail price, even once they were worn or used.
What to look out for in luxury assets
Investing in luxury assets requires expertise, not only to distinguish between hype pieces and store-of-value items but because there often are small details that can affect the value considerably. In the world of vintage watches for example it is imperative to buy a watch as a complete set, with the original box and all paperwork, including handbooks and warranty cards. Without those, you’re looking at severely reduced market value, often more than 30% when compared to a full set. The box and paperwork play an important role in valuation because if the watch was ever stolen during its lifetime that risk is factored into its worth.
Another important aspect is slight changes in models or variants of luxury items. It is common that products with different colour variations are not valued the same. The aspect of variations is most common in vintage automobiles. A manufacturer like Porsche or Ferrari will have built different series of the same car like the Ferrari 250 from the 1950s and 60s. You’ll find that the 250 GTO, which was only built 36 times, was the world’s most valuable car, worth more than $40 million. Compare that to the 250 GT Lusso from the same era but it’s worth a fraction of the GTO at around $2 million.
Even though not as wildly priced as these Ferraris, the same nuances of production exist at Porsche with the famous 356 which was Porsche’s first production vehicle in the early 1950s. The car’s value can vary fourfold from the A series to the C series. If you don’t know what you’re looking for, you’ll easily miss important details.
Luxury investments are appealing because they combine value and passion and are anything but boring. With the help of an expert lifestyle management advisor, you can not only own the finer things in life but you can also grow the value of your portfolio, and have fun whilst making money.