Trophy Assets đ
Status as an industry
On some level, we all enjoy signalling and celebrating wins whether we pretend weâre above it or not. Holidays, art, expensive clothes: we like to front, treat ourselves, and spend when things have gone our way or when we feel good about our economic standing.
Some of these increased expenses can be simple improvements in oneâs standard of living (e.g. paying off stressful debts, buying better quality food, employing a gardener to free up time). But often, surpluses flow into what weâll collectively call trophy assets.
Some quick contextâŚ
Trophy assets, in the sense of buying things to signal something about yourself, purely exist because of our desire to play status games.
Status games describe the zero-sum social dynamic where individuals and groups compete or âsignalâ their social standing within a society, community, or groupâdriven by our propensity to occupy positions within a hierarchy. Status also acts as a barometer for making snap judgements about people, similar to stereotyping; it doesnât replace genuine value, it just makes it easier to âproveâ oneâs value to others.
When viewed holistically, unconsciously playing status games and actually attaching self-worth to them is always a net-negative; theyâre all pretty inconsequential when you take a step back. The true costs greatly outweigh the genuine benefits, yet we still have an evolutionary drive to play them. This doesnât mean you have to submit to blindly competing but recognise the pull will always exist and you will never fully âkillâ that desire. Thinking youâre above status games is itself a form of status game⌠and usually youâre playing it unconsciously. But I digress, youâre not here for the platitudes.
The games we playâto gain approval, respect, or envy from othersâcan span the entire gamut, for better or worse. Curating a certain lifestyle on social media, signalling virtues such as piety or honour, or acquiring respected possessions (trophy assets), to mention but a few. Itâs this last subset weâre focusing on today.
Journalist Robert Quillen defined âAmericanismâ as âusing money you havenât earned to buy things you donât need to impress people you donât likeâ. That was written in 1928. Since then, âAmericanismâ has arguably become western cultureâs most âsuccessfulâ global exportâonly made more pervasive this century by the amplification of desire through social media platforms like Instagram and TikTok.
Iâm not going to tell you what you should and shouldnât spend your money on. Hopefully though, I can help familiarise you on the concept, show how to actually think about them as an asset class (hint: theyâre more of a liability), and clarify my own thinking in the process.
Trophy assets are more than just luxury items; theyâre symbols of aspiration that aim to signal, âIâm doing well,â or âI belong hereâ. Framed this way, it quickly becomes apparent humanity has spawned many avenues aimed at satisfying this longing.
Penthouses, a Damien Hirst original, Cartier jewellery, châteaux, first-edition books, high-profile horses, vineyards, Patek Philippe watches, rare baseball cards, Giacometti sculptures, an ownership stake in Manchester United or the Dodgers, highly coveted records, RomanĂŠe-Conti wine, yachts, vintage âfast Fordsâ, rare Pokemon cards, Stradivarius violins, private islands, CryptoPunks. The list goes on.
Different communities, cultures, and generations ascribe value to different kinds of trophy assets. âOne manâs rubbish is another manâs treasureâ comes to mind.
Their designation also varies depending on wealth and peer groupsâthere are levels to this game. For the everyman, it might be limited-edition Jordans, designer handbags, or a new BMW. These items represent accessible âluxuryâ; expensive, possibly quite uncommon, but not unobtainium. For the billionaires and plutocrats of the world, exclusivity and inimitability are brought sharply into focus. Hawaiian islands and even stegosaurus skeletons are on the menuâessentially things no one else on the planet can possibly own.
Itâs worth mentioning the concept of Veblen goods at this point as they form a large subset of trophy assets. Named after economist Thorstein Veblen, these goods do not adhere to the normal rules of supply and demand because the high prices are themselves a signal of wealth and status of the owner (and crucially, the common knowledge that others also know theyâre expensive). The more expensive they are, the more demand tends to increase.
While Veblen goods can offer superior quality, this isnât a given. Often, their value is purely symbolic, tied more to brand perception than to intrinsic value. Iâm sure everyone knows instances of two similar-quality items commanding vastly different prices; one has a brand that evokes status, the other does not.
The perception of status comes at a price. If youâre playing that game, it can seem like a worthwhile deal. If youâre not, the mystique of the expensive item seems illusionary or even delusionary.
Not all trophy assets are Veblen goods, but all Veblen goods are trophy assetsâthey exist to signal respect and admiration.
This isnât to say they are always intentionally bought as trophy assets. You might just love Porscheâs for how they handle round corners, or you might love a certain artist because their work genuinely speaks to you, but they do all signal status whether the buyer cares or not.
Now how to think of them as assets?
Any benefits beyond the signalling?
As we established earlier, people are drawn to signal status on some level, people like collecting things, and weâre told weâll enjoy celebrating our wins with material purchases. This naturally leads to the desire to purchase trophy assets.
A common pitfall is that, to justify discretionary expenses, we convince ourselves theyâre investments. It would be stupid of you not to buy it. You may wholeheartedly believe this, partly because of the money illusion (we forget to factor inflation into things), partly because we underestimate how well productive assets, such as stocks and rental property, perform over time. In a lot of cases, thinking your trophy assets are good investments is nothing but wishful thinking.
Watches, cars, and shoes are âinvestmentsâ for those that donât understand this game.
Just like personal property, these collectables are all unproductive (in the financial sense of the word). They produce no cashflows. And like personal property, they all inevitably underperform global stocks and other risk assets over time, most of them by an order of magnitude less. This isnât even factoring in any potential storage costs, insurance costs, or transaction fees that mean the actual results are likely even lower than this data suggests. As anyone who has bought a home will know, these hidden fees shouldnât be underestimated.
Naturally, some buyers will have outperformed global equitiesâespecially those with genuine informational advantages or know-how of an industryâbut most will have come out poorly.
Thereâs also heavy survivorship bias hidden in the data as the most desirable items are much more likely to survive the test of time and be cared for while everything else either rusts, decays, or just simply loses demand and becomes forgotten, taking them out the data.
Given the tangible nature and non-fungibility of this broad asset class, itâs virtually impossible to adequately index them like you can with traditional financial assets. There is no Trophy Asset Index one can buy, and even if one somehow existed, as the above chart attempts to illustrate, it would still likely underperform significantly. To be worth your time, you need to know exactly the right things to buy, operating akin to an active stock picker, rather than an indexer⌠and we know how difficult that is.
As with a lot of asset classes, extreme outliers drive the bulk of the returns, but because collectables are impossible to index, it means you can only own a fraction of whatâs available. Thus, you'll likely fail to capture the outliers, and significantly underperform productive assets over the long-run.
If you still fancy your chances, the best returns have historically come from things that werenât initially considered trophy assets upon their releaseâthings that were originally priced as high-quality consumer goods such as Omega watches or excellent vintages of wine. Their initial value was tied more to their craftsmanship or quality but over time as these items gained cultural cachet (first watch on the moon anyone?), their status increased.
Add in a naturally decreasing supply alongside growing demand and prices could only rise; they were consumable goods after all. Few survived intact because most of them were used and worn and driven instead of being locked away in hermetically-sealed boxes. As a status-signalling item, they were underpriced, unlike many new luxury items we see today from LVMH and co.
However, the landscape for vintage trophy assets has changed significantly. Decades of cheap capital, the rise of nostalgia-baiting, and the increasing financialisation of almost everything have driven prices to levels that are now fairly efficient. The misguided idea that any and all of these items make solid investments has, ironically, further inflated prices, making future returns worse going forward.
This doesn't mean opportunity is entirely absent. We could see further demand increases as AI and robotics become a lot more prevalent in the production of goods. The value of human craftsmanship and connections to our analog past is very likely to increase. However, knowing which items will do wellâwhile appearing easy in hindsightâis hard to predict ex ante.
Keen observers with a deep understanding of a specific niche might be able to identify future trophy assets but this will require anticipating shifts in cultural trends and an individual-mindedness to recognise currently under-appreciated items, much like how an astute investor identifies undervalued companies.
Beyond the individual items, it's crucial to understand that many trophy assets, particularly those tied to fashion or cultural trends, move in cycles. Consider the fluctuating desirability of vintage cars: pre-war models have given way to those from the '60s and '70s, which are now facing competition from '80s and '90s models. Similarly, the art world sees generational shifts in taste, with the demand for a Pollock or de Kooning potentially losing ground to the likes of Damien Hirst or XCOPY as younger collectors enter the market.
These cycles are often fuelled by nostalgia. As individuals reach their peak earning potential, they may seek to acquire the status symbols they admired in their formative years. This surge in demand, driven by a desire to recapture a piece of the past, inevitably drives up prices. However, as a new generation matures and establishes its own cultural icons, demand for the previous generation's trophy assets tends to wane.
Complementing the longer-term generational cycles, prices also exhibit shorter-term fluctuations tied to the broader economy. Typically, there's a lag of 6 to 18 months between changes in economically-sensitive metrics and corresponding shifts in trophy assets. Factors like real wage growth, the performance of speculative assets (such as crypto), and overall economic and risk-taking sentiment can all influence demand so being able to navigate macro environments well can be very useful.
We saw this play out during the broad boom in trophy assets during the Covid eraâNFTs, watches, Ferrariâs, you name it, everything was going up. Almost all of them saw their zenith in 2022 after global markets (and economic euphoria) peaked the year previous. This period was characterised by pent-up pandemic-induced demand, easy financial conditions, and buoyant economic sentiment that pushed up prices well beyond sane valuations.
If youâre trying to value any asset, trophy or otherwise, correctly anticipating both the longer trends and short-term cycles is paramount. Executing this well is much harder than Iâm making it sound, but the idea is to ride the wave of the longer trends, and be ready for turns in the shorter-term cycles.
As with any market, the worst time to be buying something is when everyone around you is celebrating and wanting to do the same. In the context of trophy assets, this means looking beyond the current hype and perhaps recognising that sometimes the best decision is to simply walk away.
âDonât always go through the tiny door everyone else is trying to rush through; maybe go around the corner and through the vast gate that no oneâs takingâ â Peter Thiel
Iâll leave you with this: trophy assets are only ever a good potential investment if you have an edge in a particular marketâexactly the same principle as picking individual stocks or crypto. If you have special access to limited-edition releases, if you know how to value Spanish wine better than most, if you can fix cars yourself and add value to them, they might make good investments.
For the vast majority who donât have an edge, think of them as liabilities that may keep up with inflation if youâre lucky. If you get enjoyment from the item, and it retains its value against inflation, youâve done better than most, but spare pretending itâs a great financial decision.
Brands will happily prey on our temptation to think anything remotely costly is an investment, and look to reinforce that perception at every opportunity, but this is an underhanded trick. Most people who bought a Rolex in 2022 thinking they were great investments have been played as fools⌠by Rolex.
Unless you really know a specific item or market, just buy things you can afford that youâd still want to buy even if you couldnât show or tell anyone else about them, and enjoy them for what they are; forms of consumption, futile attempts to fill the void.
Open that bottle when the occasion calls for it, drive the Porsche on your Sunday afternoons, put the artwork on display for people to enjoy, wear the watch. Enjoy them for them and just put the money you want to invest into genuine assets.