On Investing in Rolex Watches

Many people are sceptical of the idea that a Rolex could be an investment, often arguing that a typical Rolex bought (say) 25 years ago has only appreciated in value by a few percent a year, and has therefore underperformed stock markets.  But this is a rather narrow perspective to take on "investment".

First, remember that these stock market returns were made in a time of (by historical standards) relative peace and stability, at least in the US and Europe.  In less stable times a fine watch can represent an excellent store of value.  Watches can be used in barter: they are portable and fairly easily hidden: if they are properly made (like a Rolex) they can take quite a bit of punishment and in extremis even be buried or inserted in more intimate places for safekeeping (anyone remember Pulp Fiction?).  So, when the Soviet stormtroopers are raising the hammer and sickle over your town hall, which are you going to grab: your share certificates or your Rolex? 

What's more, when you by a share or bond, you are trusting someone - a company or a government - to stay solvent and honour their promise to pay.   A Rolex, by contrast, does not represent anyone's liability.  So you are not exposed to the risk of your favourite company going bust and making your investment worthless, or to your country being brought to its knees by political corruption & incompetence.  Watches do well in times of crisis simply because people trust them when they do not trust managers and politicians (explaining why those Soviet troops took millions of watches from the wrists of dead Nazis). Were you better off with shares in Enron, or a Yacht Master?  'AAA'-rated subprime mortgage bonds, or a Milgauss?  1920s German government bonds, or a tasty Oyster Unicorn Viceroy?  For that matter, in 1971 when Nixon took the US off gold, would you have preferred to hold US dollars in the bank, or a well-looked after 1968 Submariner? 

Hardly a single stock market anywhere in the world avoided being closed down completely for at least some of the 20th Century.  When you want to buy or sell a Rolex, you do not need to wait for the exchange to open.  Nor do you need to worry about the exchange never opening again.  There are some delightful share certificates still in existence which were issued by Russian companies before 1917.  They make excellent wall decorations. 

Some charming items hold their value for a while, but can be overtaken by events.  I have a lovely Leica camera which I adore, and which takes very nice pictures: but one day the last piece of film will be exposed, and everyone will finally have a digital camera (which they will throw away six months later when a better one is released).  Some put their money into vintage cars, but one day the oil will run out.  In a hundred years, my camera will be a curiosity, and a Ferrari a laughable anachronism, but people will still want to know the time (and will still have wrists).  And having survived the onslaught of quartz, a Rolex is already obsolete technology, yet has kept its value.  If that didn’t do the trick, it is hard to see what else could happen to make your Rolex redundant.

Being a bit more technical, you can think of your Rolex as an "alternative asset", in the sense that its value performance over time is unlikely to be correlated with the performance of any financial asset.  This simply means that when the value of financial assets is falling, the value of "alternatives" need not.  In recent years sophisticated investors, including hedge funds, have increasingly sought investments of this kind to try and diversify their risk - which is why they have ended up buying things like wine, stamps, farmland, works of art and musical instruments.  The trouble is that as more and more investment money goes into these things, the more correlated their performance inevitably becomes with that of the stock market, since they are owned by the same people as own shares, and who therefore behave the same way under changing circumstances.  Also, there is a limited supply of top quality art, violins and wine, and as the saying goes, they ain't making any more land.  So even a small amount of new investment can distort the market, i.e., starts to push the price up very rapidly - and creates the risk that the price will fall rapidly when things start to go wrong.  Moreover, many of these investments are not liquid, i.e., cannot easily be sold when you need cash quick. Some of them, like wine, stamps and musical instruments, but unlike the relatively robust Rolex, need specialist storage which is expensive and inconvenient (and try doing a "Pulp Fiction" with your Stradivarius).  Moreover, willing buyers can typically only be found by using brokers (who are expensive and usually a bit creepy).  Finally, buying a quality violin, never mind a a cattle ranch or a Picasso, is a major commitment, requiring you to tie up millions at a time, and meaning that when capital is tight buyers may be few and far between.  Plus a sale of such a high-value item attracts a lot of attention – from, for example, people who think they have a claim of ownership (or at least are willing to take you to court to assert it), the press, and the tax man.  And if you own a farm, one stroke of the bureaucrat's pen can replace your name on the land register with another.  By contrast, there is a large existing supply of Rolexes.  So, firstly, new money is unlikely to cause major distortions, secondly, the market is deep and strong, thirdly, no brokers are required, fourthly, possession is ten tenths of ownership, and fifthly, your investment can be broken up into bite-size chunks of a few thousand dollars at a time so you don't flood the market or alert the press when you need to liquidate.  

In sum: a Rolex is extremely liquid, universally accepted as a form of payment, physically robust, portable, inflation-proof, needs no special storage, can be sold in small chunks without the involvement (or knowledge) of regulators, governments, stock exchanges, financial regulators, spouses or brokers, and is immune from risk of bankruptcy, obsolescence and market disruptions.  And when Ivan comes you can stick it up your butt and still run in relative comfort for the border.  Then, when you arrive in Geneva and you need a loan to start your business up again, you can wear it to the bank, and even offer it as collateral (though a rinse in soapy water first is advisable). 

When you take this wider perspective, it is hard to think of another investment which can compete.

Pronounced "Soice"

That Dr Seuss!
That Dr Seuss!
I do not like that Dr Seuss!
And do you like to read each book
A hundred times until it's stuck
In one or other cranial nook?
I do NOT like to read each book
A hundred times until . . . Now LOOK
That's quite enough: with your permission
I'll leave out all the repetition.
Oh . . . well . . . did you read it with a goat
That wrote a note upon a stoat
That wore a coat that didn't float
That . . . STOP!
Don't get me started on the goat
I'd like to grab it by the throat.
And what's with the words of just one syllable?
Is each one individually billable?
As for wumps and zeeps and sneeches
And all the other made-up creatures
As I've said a million times
He should have thought of proper rhymes!
The whole thing simply leaves me cold.
BUT – half a billion copies sold?
That's me told.

CODA
It seemed to me, speaking just among amateurs
Quite clever to write using mostly tetrameters
But sadly my darling's too-narrow parameters
Deny that “creatures” rhymes with “sneeches”
Which seems to me quite frankly facetious.

Abu Dhabi - Trip Report

I recently spent a couple of days in Abu Dhabi, which is – according to Fortune magazine and CNN – the richest city in the world.  The source of their riches is no secret: the place pumps 2.3 million barrels of oil a day and has estimated remaining reserves of about 100bn barrels. One hundred billion barrels. That’s a lot of barrels.

Sadly for thrill-seekers, unlike other resource-rich places, Abu Dhabi is being pretty sensible and responsible about its immense wealth. To put it another way, there are no dictators looting the treasury and sticking the proceeds in a Swiss bank (or at least not on a noticeable scale). Instead, they have set up a number of investment companies to manage the country’s money, all doing different things but with a common goal of preserving the wealth for future generations and making sure the country is ready for when the oil runs out (at current rates, that will be in about 120 years’ time, assuming they don’t find any more).

They are investing locally in manufacturing and high tech businesses, universities and culture (the Sorbonne, the Guggenheim and the Louvre all have "branches" there) plus infrastructure and (inevitably) real estate. The roads are wide, the city is immaculate, everything works and everything is very convenient.

This goes double if you have connections (or in my case, if your employer does). I flew in with a colleague who comes from India and so needed a special visa. The bank sent a Chinese girl to meet us off the plane, who walked us to the front of the immigration queue so my colleague could sort out his visa, and then took us to the front of the passport queue. As our bags had beaten us to the luggage belt, it took us less than 10 minutes to get from the plane to the airport exit. Our car was waiting right outside the door.

I was just beginning to think I might like the place. Then I stepped outside. I was kind of prepared for the heat – at 7.30pm it was 105F – but not for the humidity. All of a sudden I could neither breathe nor see. My glasses had steamed up instantly, and I felt like I was inhaling soup. Even my Indian colleague, who grew up Pune, reeled. Getting into the car (a stretch Audi A8) was like coming up for air.

But even with all this expenditure on local infrastructure, air-conditioning and personal servants, the local economy will never be able to absorb the wealth they are creating. The biggest of their investment vehicles, ADIA, has assets estimated at almost a trillion dollars, and there is a host of others (Mubadala, IPIC, Aabar, the “Council”, etc., etc.) Those 2.3 million barrels they pump add a couple of hundred million more to the pile every single day. And while the population looks small, at under 900,000, it should be remembered that most of these are temporary: only about a quarter of a million of them are citizens. So they are making oil revenues equal to about a thousand dollars a day for every man, woman and child. And all of it is being spent or invested for the benefit of the population.

Despite their immense wealth, things are fairly understated, certainly by the standards of (say) Dubai. They like their cars, but go for luxury and comfort over flash. I saw a lot of Cayennes and Panameras, Jaguars and Land Rovers and many a big Mercedes and Lexus but only saw two Ferraris (both parked outside the Emirates Palace – see below). One evening, a nondescript, grey Mercedes C-class pulled up alongside us at the lights. I looked at it for several seconds before I realized it had the 6.3 litre Brabus-tuned engine. As the receptionist at our first appointment pointed down the hall to show us the way to the meeting, the long, wide sleeve of her jilbab slid down her arm to reveal a Rolex which . . . . well, let’s just say I finally know the meaning of the phrase “diamond-encrusted”. It’s like the money is always there, but just out of sight (most of the time).

True, the restraint only goes so far. In true chip-on-shoulder emerging market style they have built an immense hotel in the centre of town at astonishing expense, namely, the Emirates Palace (it cost about $3bn). However, even this is relatively understated. Rather than the crude bling of similar places – I’m thinking of, for example, the Crown Casino in Melbourne, which looks like a spaceship that has crashed into the interior décor department of Harrods – there is a shortage of metal surfaces that have been polished to look like gold. This is because every surface that isn’t marble is not polished to look like gold: instead, it is in fact gold. The whole place has a strange soft glow about it.

There are other downsides besides the heat and humidity. Alcohol is banned, gambling is banned, pornography is banned and pork is banned. In other words, 100% of my lifestyle is illegal. Actually you can drink in certain designated places (hotels mainly), but even there moderation is advised. Rolling around drunk would be a very good way to get in trouble with the authorities, which in turn – depending who you believe – can be a very good way to get yourself tortured and deported. Drinking and driving is a similar no-no, though my colleagues are protected from this possibility by having a personal driver laid on at the expense of the bank.

So, in a nutshell, if you want to understand what it is like being an Abu Dhabi citizen, imagine living in a country where you win the lottery every year, but as a trade off you have to live in an oven at Gas Mark 6. But you can forget it if you are a gambler, a drinker, a skirt-chaser, or for that matter a Jew (pork or no pork).