Matt Levine's Money Stuff newsletter wasn't that interesting today, but he had one short segment on this paper.
hilarious from both a finance and a bitcoin-bro/money-system-is-broken point of view.
So, the authors investigate "luxury watches" as a portfolio investment. (LOL, talk about monetary premia gone nuts, #830458.)
Here's how Levine introduces the topic:
so for outsiders, the background here is that financial economics is dominated by modern portfolio theory mostly/and initially associated with Harry Markowitz. The idea is that a rational investor should optimize between returns and risk, where adding uncorrelated asset classes to a portfolio (up to a point) reduces the volatility across time but not the returns, and so the entire portfolio offers a superior investor product.
(lots of things to say, there, but bear with me.) And so large asset managers buying up different types of houses, or land, or adding some non-stock, non-bond/private equity-type things makes sense because it makes your entire portfolio less dependent on, say, the Mag 7.
...and so financial economists go around finding other asset classes that could perform that role. And when the money doesn't work, everything else takes on a monetary role, so houses, watches, art, whisky etc all become "savings vehicles."
Luxury watches as investment -- vòila!
Anyway, these dudes ran some numbers and found that there's roughly zero correlation (often negative!) with traditional asset classes. AWESOME, GO PUBLISH OMG WE'RE GREAT.
Levine, perfectly undermining their entire research idea: ughm, friends, liquidity?
“The watch market has low correlations with traditional asset classes,” says the paper, with a correlation of “0.04 with equity and around zero or slightly negative with the other asset classes.” One of my toy theories about alternative investments is that stocks trade every day and you can observe their prices instantly, while less liquid alternatives tend to trade less frequently, particularly during equity-market crashes. (If your hedge fund implodes, you stop buying new watches, but you probably don’t go sell your AP that week.) So when some general economic effect causes a broad decline in asset values, stock prices go down instantly, but various illiquid alternative prices go down six months or a year later. Which, depending how you measure it, looks like low correlation.
Maybe this is just a feature of the market itself not trading, and so not having updated prices, looking like "uncorrelated." Start-ups/venture-cap financed growth companies have similar element where, in down-cycles nobody raises money but you keep telling your investors and anyone who asked what the "latest valuation in our Series A/B/C round" was... even though that price, ~two years back, is completely outdated given some macro event/environment.
Anyway, fun observation.