A while back, I read an interesting segment by University of Alabama researcher Sugata Ray who studies disparate influences on asset management and market micro-structure. The paper explores the relationship of ‘sensation seeking’ and tolerating risk from a quantitative perspective. It can be stated that some people avidly enjoy sensation seeking, whilst others go out of their way to avoid seeking sensation – Ray notes that this is most evident through knowing people personally, but it’s hard to pick up externally. To measure this externally, the research that Ray and his team carried out to pick up ‘sensation seeking flags’ was based around ownership of cars. The description was that people in the field of asset management tend to be very interested in the cars they drive, along with the cars owned by their peers.
The datasets were sourced from publicly available vehicle records (such as brand, model, year etc) and comparing them alongside known fund managers and commercially available hedge fund data (founding date, returns, charges etc)
The question Ray and his team asked was whether listing the type of cars that the managers owned gave any actual insight into how their funds performed. In a nutshell, it was suggested that owning a fast and flashy sportscar would mean that the driver would enjoy the sensation that comes from using it The datasets showed that the ‘sensation flags’ that his team were looking out for correlated with taking on higher risks in the funds they managed. The investors who were highlighted had lower yields of return and higher operational risk.
After reading through the summaries of the datasets, I couldn’t help but wonder if the purchases of high end luxury timepieces could be another variable to quantify fund managers and their capacity to take on risk. I can imagine a sizeable number of watch collectors also being involved in asset management in some form – whether through investing or managing portfolios.
I want to point out that I’m not talking about the idea that wearing a timepiece says something about your personality (I’ve covered this in a previous article) but the purchasing of a timepiece is a different variable. I will also say this is one of the extremely rare instances where I will discuss price as a topic of interest.
You could probably list more watches that retail for over six figures than you could supercars coming out of their respected factories. If there ever was a definitive list of ‘sensation seeking flags’ then I reckon that owning a six figure timepiece would probably be up on the top of the list.
Yet it’s much harder to quantify this data compared to something like cars. A vast majority of high end watch collectors choose to remain private and the closest thing to public data on luxury timepiece ownership is social media. But those tend to be celebrities and not investment advisors – unless you can somehow prove that Floyd Mayweather or Kylie Jenner are moonlighting as directors at Berkshire Hathaway…
The nature of owning and collecting high end watches is an extremely complex area that roots itself in multiple areas of the human psyche and behaviour. There are those who will claim to appreciate heritage, art and design, whilst others seek to own emblems of wealth and uphold appearances in their own social and hierarchical circles. There are also instances of simply purchasing watches as a means of tax evasion – much to the denial of those accused *cough* 1MDB *cough*
I suppose you could see it this way: there are a set of thrilling emotions in buying something of substantial value. This could be taking out a first mortgage, figuring out how to spend your first ever bonus cheque or simply saving up to buy something you’ve been looking at in a catalogue for a while.
Purchasing a timepiece has its own thrills and sensations – a portion of which comes from the risks that come with it. I fully support the notion of buying a watch simply because you like it – watches shouldn’t necessarily be viewed as investment vessels. But let’s be real here. At some point there’s a threshold where simply ‘liking something’ isn’t enough and you have to look at variables such as value retention, volatility in market behaviours, the management and reputation of a company and so forth. Because once you hit six plus figures on a watch purchase, there’s a lot that could go wrong which could render your timepiece nothing more than an expensive hunk of metal and glass on the wrist. In this regard, compiling a dataset on timepieces could be a variable to consider in the same way owning cars can highlight fund managers taking on larger risk.
I mentioned earlier about purchasing things with bonuses. The Bank of England recently lead a study that found putting limits on bonuses as a means to counter excessive risk taking could actually lead to the very opposite – increasing the likelihood of individuals taking on unnecessary risk. Bonuses are the most common form of additional income and tend to be the funding mechanisms to purchase high end watches (with many watch boutiques located conveniently near investment banks and wealth management offices) so I guess a new acquisition of a timepiece could mean a number of suggestions in regards to how a fund manager is performing. Could knowing that the bonuses are being capped mean performance is sloppier because of lower incentives, or performance is higher since they have the capital to buy a high end watch?
The research that Ray and his team conducted also suggested that the principle of risk and sensation seeking also applied to those who were investing into hedge funds. The idea would be that the penchant for higher risk and lower yield that certain fund managers seemed to have would act as a deterrent for investors and that would put an end to the activity of these managers. Yet when the same sensation seeking flags were applied to known investors, it was found that said investors would actively seek out the most volatile securities portfolios; so a hand-in-hand relationship is formed between high risk taking investors and fund managers.
I suppose in the case of watches there’s also the added variable to watch collectors having a large amount of interest in their own collection and the collection of others – a sense of camaraderie if you will.
That begets the final question: leaving you to possibly think about whether the next time you meet with your portfolio manager or wealth adviser and they happen to be wearing a fancy timepiece or talking about an upcoming purchase; is if that raises any alarm bells that you’re dealing with someone willing to take on more risk than necessary – harming your returns. Perhaps the person wearing a Fitbit and driving a Ford Galaxy is a better option for safer investing? Or vice versa, where you stumble on a potential client wearing a flashy timepiece and whether they’ll be willing to inject money into your dubious Bangladeshi mutual funds…