Investing in watches is not as easy as buying just any watch over the retail counter, according to Dominic Khoo, founder and resident watch expert of The Watch Fund (TWF).
Despite several watch enthusiasts and experts claiming that watches can provide a good return on investment as an alternative investment asset class, he warns that some 99.9% of the watches in the market are unlikely to be resold for a profit.
The way Khoo sees it, there are only two types of watches that can be investment watches. “First, a watch that money cannot buy — meaning that no matter how much money you have, you cannot buy it because it is out of stock, out of production, very limited edition, a provenance piece or a special prototype,” he says.
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“Second, a watch that you can buy at a price that others cannot get. So, for that, you will need to buy the watch under the retailers’ cost price,” says Khoo, adding that one can only achieve this with access to deep relationships within the watch industry.
TWF allows investors to tap on its resources to gain returns through trading watches. Unlike a regular fund, Khoo explains, TWF is more of a private managed account for individuals. With a minimum investment of US$250,000 ($337, 226), TWF will procure the watch and the investor will get to keep that watch.
Also, unlike a regular fund where investors simply get a small percentage of the fund, a piece of paper and perhaps a complimentary water bottle, TWF investors are able to keep their tangible investment — an investment-grade watch — until it is time to sell it off, says Khoo. “You would typically be expecting about 20% annualised return and you can keep the watches in your own safe deposit box,” says Khoo, adding that the watch should be in perfect condition when the time comes to sell it.
Every investor will hold a different watch, as the watches sourced are scarce and it depends on what the experts at TWF deem as investment-worthy pieces. Hence, the returns for every investor may be different, but on average, it should be about 20%, says Khoo.
So far, TWF has delivered rather steady and healthy returns. Its worst performing portfolio gained 11% annualised, while its best portfolio gained 216% annualised. “However, we would ask an investor not to expect our lowest and highest returns — these are anomalies and we would be quite surprised if we got these results again,” says Khoo.
According to Khoo, TWF gives the investor two options to sell at a net profit – the first offer may be rejected for free but the second offer must be accepted, or a 10% close-out fee (based on the investor’s purchase price) will be levied.
“The good-karma business model of TWF means we make most of our fees when the investors profit — so this system has to be implemented to avoid the situation of the investors holding onto the watches for unlimited periods of time,” says Khoo, adding that there are no annual fees or charges for members of any kind.
And, of course, investing with TWF gives investors the opportunity to access highly limited edition watches that they would not usually be able to. After all, they need to have a certain level of passion for watches before they would consider such an alternative form of investment.
The Watch Fund allows investors to tap on its resources to gain returns through trading watches - Dominic Khoo
Demand makes the price go wild
In the watch market, old is gold. The second-hand market is booming and that is where investors are getting their profits. Be it from acquiring the watches from auction houses, second-hand watch shops or online platforms, several watches are being sold at a high premium from its retail price from authorised dealers (AD) due to the high demand and low supply.
According to McKinsey, the pre-owned watch market reached some US$18 billion ($24.2 billion) in sales in 2019, and this could reach some US$30 billion by 2025. It also estimates that pre-owned watch sales will be about half the size of the market for new retail watches by 2025, up from about a third today.
Making a profit from buying and selling watches in the second-hand market depends on several conditions.
Gautaman Senivasan, founder of second-hand watch shop Calibre65, says: “If you have bought a watch at retail price from an authorised dealer, you would find that they are worth very much more in the second-hand market.”
But it is not as easy as walking into an AD outlet and wanting to just buy a watch, even with cash in hand, Gautaman explains. There is a knack to acquiring an investment-grade watch from an AD.
First, one would have to establish a good relationship with the AD, usually by buying a few non-investment-grade watches to help the AD clear the stock of these less popular models. Then, the AD may one day decide to allocate the buyer an investment-grade watch.
Furthermore, the ADs are not particularly thrilled when their customers flip their newly-acquired pieces for a profit. They tend to closely monitor the second-hand market to see who are the ones flipping and make their allocation decisions accordingly.
Both Khoo and Gautaman both point out that even if a buyer is sitting on a handsome gain from the allocation of an investment-grade watch, it could still be less than the money already spent on non-investment-grade pieces.
There is also the supply cap the popular brands have in place, so that not all demand can be met. According to Gautaman, new customers might be steered towards less popular models. “ADs don’t have an incentive to sell the popular models to new customers, because they have many customers who shop with them regularly. And they will rather reward these people first,” he explains.
In some cases, the price of having to buy the non-investment-grade watches cascades down to the investment-grade watch and hence drives its price up in the second-hand market.
Of course, one could just purchase off the second-hand market and resell the watch for a profit later on. But that comes with risks, such as the watch’s authenticity and condition, and whether or not it comes in a complete set. Another risk in the second-hand market is the “Frankenwatch” — a watch that is not in its original condition as some components have been replaced with fake or original ones from a different model.
Taking into consideration the “AD game”, condition of the watch and the market demand, how does one determine the price of a watch?
“Any price of any watch in the second-hand market is determined on a ‘willing buyer, willing seller’ basis. So, whatever you think is the right price, if it matches my ideal price, then that is an accurate evaluation,” explains Khoo.
Second-hand shop dealer Gautaman says: “We don’t follow retail prices. We are a grey market dealer and we follow the market price. We do not get our watches from the manufacturer themselves, but we source them from the second-hand market.”
“The market price is then determined by what a customer is willing to pay and what the rest of the market has ‘ascribed’ the price to be. The market price, however, will generally increase depending on the condition of the watch and such,” adds Gautaman.
Investing vs collecting
So, with market forces at work, will the norms of investing apply? Will the current boom continue? “Obviously, there is no hype that can last forever,” says Khoo, adding that it all depends on what the market wants. One day, an unpopular model can suddenly be coveted in the market and its price could skyrocket, while the hype for a popular model can fizzle out and trade at a much lower price a year later.
However, some collectors, such as Ronald Chiew, will not lose sleep over the price fluctuations, as they appreciate the pieces as an art form and a hobby.
Khoo is careful to draw a line between a watch investor and a watch collector. He believes that the best watch investor would be one who is not an enthusiast. “If you’re an enthusiast collector, all the more you should not be investing. You should be buying what you like and make up your own mind on what you like,” he says.
“I have never met a collector who bought hundreds of watches that he or she liked and sold all of them for a net absolute gain,” he adds, as collectors tend to develop an attachment to the watches and would find it difficult to part with them.
Chiew, who has over 300 watches at hand, admits that he only buys the watches he likes. Chiew does not plan to sell any at the moment, which means he is not profiting from them. He says: “Just as long as I can keep the maintenance of my watches, I have no intention of selling them.”
Perhaps, the advice for those looking to invest in watches is to set a profit goal and work towards it, while putting aside passion into the investment. “My only advice for those looking to invest in watches is to find someone who is aligned with you. That is the most important. Make sure that only when you make money, the person also makes money,” says Khoo, adding that due diligence is also important to understand the market and investment product.
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