The Economics of a Steel Patek 1518
Taking a break from serious essays
If you are not a billionaire, nor worth more than $100M, and you buy the grailest of grails steel Patek 1518 for $20M today, and sell in 5, 6, 7 or 8 years for $50M, inflation (2.4%) adjusted pre-tax CAGR/IRR is as follows:
5 - 17.2% / 6 - 13.9% / 7 - 11.3% / 8 - 9.6%
This assumes you pay and receive in USD and no transaction or running costs like insurance, deposit box, currency hedge, etc, just a simple buy and sell, which is not realistic but a starting point.
It also assumes that someone in Malaysia does not dig up old auction photos and write pun-laden blog posts about your new investment.
There is no official public registry for high-value watches and jewelry, but let’s assume you lucked out and the dealer/auctioneer will obtain the following documents, all notarized in Italy, where I guess the watch is currently located?
bill(s) of previous sale
declaration of ownership, lien-free and sole ownership statements from owner
invoice with serial, description, etc.
Patek Philippe archive
purchase and sale agreement
owner’s ID and tax number (equivalents for entities)
You also had your lawyer check for any lawsuits and obtain lien-free statements from well-known lenders. The dealer/auctioneer might introduce you to the owner, who is probably a real stand up guy, and they will make you feel like an honorary Italian. You will be reminded however that there is competition, and that they hope the watch goes to the most passionate collector. At this point you are in “deal heat” and may not really care anymore if a document or two are missing - what’s a piece of paper between paisans? Escrow may be available but they will put a dent in your returns, so you transact the old fashioned way: After sipping ristrettos together in a bank conference room waiting for your wire to land (and/or Brinks to walk in with suitcases of cash), he hands you the Patek and congratulations, you are the new owner, at least physically if not on paper. For what it’s worth, you file your own declaration of ownership at a local notary, and if you live outside of Italy, get it apostilled or legalized.
If you will fly back with the watch to a country that levies import duties, you might want to make sure the customs officer in your country is not a watch enthusiast. If you successfully traverse that 70-yard stretch from baggage claim to the exit doors, you’ll feel like Tim Robbins in The Shawshank Redemption. Thankfully, in the US, the IRS and CBP don’t talk to each other, and I believe it is the same in most places. If you live in a duty free country and will have it shipped to you, you’ll be on the phone several times with Ferrari or Malca. You could also disassemble the watch, but you’d effectively be switching from duties’ risk to destruction/impairment risk, which may or may not be a good trade.
If you are an individual, you would probably want insurance, but it’s possible that during your investment period, Chubb installs an AI bot that automatically rejects claims from your account. Old fashioned jeweler’s block insurance is more complicated and may take longer for AI to replace, but a $20M travel (carry) clause might be prohibitively expensive. This is kind of annoying because you don’t have the handy option of getting “robbed”.
Well intentioned people would subtly disapprove of such a purchase? investment? and will nudge you towards more respectable alternatives, from gold to equities and maybe even Bitcoin. To these people you will hand wave with an irrefutable fact - there is no daily price chart for a steel Patek 1518!
Anyways, I guess those starting numbers are attractive as a basically passive investment (you just leave it in a safe), although I’m not sure if the risk/return profile is adequate given the liquidity risk.
Per the dealer/auctioneer’s own words, the target sale price of $20M is not likely to be achieved in auction, and I am assuming the same when it comes to sell. This is actually good because if it did go to auction, people with cash that they are not supposed to have would not be able to buy the watch, and that would not be fair from an equal opportunity standpoint.
Given that there aren’t many people that can move a Patek privately for $20M, you will pray that the dealer/auctioneer doesn’t choke on a cannoli, and if he does, that his son responds to your Whatsapp messages about selling a stainless steel watch for $50M.
If you instead consign it to a major auction house, you run the risk of them consigning it against your will to a high security vault in Geneva for a decade, which would be a real downer. Therefore you’ll probably go back to the dealer/auctioneer to sell the watch, and pay them a sales commission. This is a high value item, but you are at their mercy, so let’s assume a sale commission of say 5%. They are smart and will be throwing money around prior to the sale, so will legitimately if not officially have some expenses. For simplicity, let’s assume no insurance. Pre-tax IRR would be:
5 - 16.1% / 6 - 12.8% / 7 - 10.5% / 8 - 8.6%
If you want to hedge FX risk, you’d probably have to pay at least 0.5% annually (if not more given the current 200bps USD-EUR 5 yr int rate spread, but depending on risk appetite), which would lower your returns:
5 - 15.2% / 6 - 12.1% / 7 - 9.6% / 8 - 7.8%
If you are able to sell within 5-6 years, I guess that is on par with private equity type returns, not to mention the aesthetic appreciation and bragging rights you will enjoy. Even if you sell in years 7-8, those numbers are respectable, perhaps commercial real estate/private debt type returns. You don’t have to pay management fees nor worry about an unexpected taxable capital gains event. And if the CEO of Patek Philippe continues to give interviews that blow up, there could be tremendous upside.
If you forget to setup fake businesses to generate enough NOL to offset the capital gains, I guess you’ll have to move to Florida or some other jurisdiction with extreme weather fluctuations. Or if you are really greedy, transfer ownership to an entity that you and a couple lawyers in Aloha shirts control via a PO box in a Caribbean island.
It would also be prudent to set up and regularly update a will or irrevocable family trust, to prepare for the unlikely but possible event that you choke on a cannoli. A Yoko Ono situation would stretch out the investment horizon and erode the IRR, not to mention reveal your salacious personal details. Mr A, B, C or D might take to YouTube to explain why they are the rightful owners, which your heirs may find rather tiresome.
If the senior loan officer at your bank happens to be your cousin and is somehow able to leverage your investment at say 50% LTV, 1% loan fee and 8% interest, then assuming no fx hedge and the USD-EUR is unchanged when you sell, your IRR and cash multiple would be as follows:
5 - 22.1% / 6 - 16.6% / 7 - 13.3% / 8 - 10.6%
5 - 2.6x / 6 - 2.5x / 7 - 2.3x / 8 - 2.2x
Assuming a 0.5% annual fx hedging expense,
5 - 20.6% / 6 - 15.6% / 7 - 11.8% / 8 - 9.3%
5 - 2.4x / 6 - 2.2x / 7 - 2.1x / 8 - 2.0x
Again, those returns don’t include insurance, which would lower returns slightly depending on clause and coverage, but are still very attractive.
Your total exposure actually increases as time goes by because there is no income during the hold period. In other words, the returns are totally dependent on a successful sale for the Euro equivalent of $50M in years 5-8. That’s kind of unsettling given that there are no sales comps, but the key is to maintain the spread - if no one thought it would sell for $50M, the initial sale price would be adjusted down accordingly. However a sale at $20M would seriously reinvigorate the currently lackluster watch market, so you would literally be “taking one for the team”, and I personally would forever be grateful. Regardless, this dealer/auctioneer has a strong track record and is making a compelling case for someone with a lot more than $10M lying around, whether watch enthusiast or pure investor.
The way a diligent MBA would structure this investment to mitigate liquidity (and implied operator) risk is to get the dealer/auctioneer to accept a performance hurdle(s) and put up some of his own money in a lower equity position. But then you have the very un-MBA problem of who actually owns the watch and who gets the keys to the safety deposit box, resulting in the watch itself going back to sleep in the depths of a re-insured facility somewhere in Italy.
But the most difficult risk to mitigate is caving in to sudden psychological urges to sell for a lower or negative return. Hopefully your passion and the enjoyment you gain from owning the watch will mitigate this risk.
None of this is investment, financial, accounting, legal or tax advice.
If you are new to watches, here are some links for background on the subtle references. I did not link them in the body to maintain the flow of the post.