The Shared Responsibility for Flipping

I've been an outspoken critic of flipper hate. A brief reminder: flipping is defined as a situation where a person buys a highly desirable watch at its retail price and then resells it, soon thereafter, at a higher price. As a result, the flipper earns a return on the timepiece.

Flipping is the inevitable consequence of multiple decisions in watch markets. First is the fact that a manufacturer has set the retail price too low. As soon as this happens, rationing takes place: the demand for a watch model exceeds the available supply.

Manufacturer contributions to flipping.

As a result, some collectors are (possibly) left scrambling to get the watch. Are collectors responsible for setting the stage in this manner? So far, the answer is no. Brands set the retail price and decide how many watches they will manufacture.

Now, let's turn to a collector who flips. Keep in mind that "flipping" is exactly why finance-types take a long position in an asset (for example, buying a stock with the hope that it will appreciate in value).

The flipper's portion of responsibility.

We probably need to acknowledge that a decent portion of the watch market is populated by collectors who are familiar with financial markets and view "going long" as an important part of their financial success. Heck, wealth earned from stock market "flipping" may be exactly why they're in a position to buy a watch in the first place! It probably seems very odd to such folks that the watch community has such a dismal view of "taking gains."

There is also inadequate attention to the question of who enables flipping. The answer is: those who value a watch at above the retail price and also value the watch more than those who were lucky enough to buy it from an authorized dealer. I think this is a very important point. Suppose you love a brand like Rolex and you value a Submariner at $12,000. You will happily fork over the retail price of $9,150.

You will just as happily sell the watch to a person who feels something stronger than your love for Rolex.

The grey market buyer's portion of responsibility.

I'm not sure what you would call that person, maybe a Rolex fanatic, who values a Submariner at $20,000. It isn't your fault that Rolex sold to you instead of the fanatic, it is the fault of the brand and the AD. We shouldn't expect that owners who love Rolex to the tune of $12,000 will pass up an offer to buy at $9,150. Nor should we expect a fanatic valuing a Sub at $20,000 to pass up on the opportunity to buy one at a little more than $12,000, an offer that a lover of Rolex will happily take.

Now let's turn to the question of who is complaining about flippers. As described earlier, we can think of flippers as those who love a brand but, perhaps, do not feel as strongly about it as some others. I believe there is a tendency to infer that a flipper is just a greedy speculator taking advantage of scarcity, but that really isn't necessarily the case. It is ok to feel something less than fanaticism about a brand, that does not imply that you don't care at all. It is likely that fanatics are upset at two things: 1) they didn't get the watch first and 2) they have to pay above retail to get it. They're also the ones most likely to complain vocally about flippers.

But their frustration is misplaced. It is not the fault of someone who loves a brand that they were first in line to get a watch and "beat" a fanatic. The rationing mechanism is the responsibility of the AD and / or brand.

Wait list management and flipping.

I understand that fanatics are not likely to criticize the very brand they feel so passionately about. But it is clear that their upset is misdirected at fellow collectors. It amounts to something like a civil war. Further, once we acknowledge that not all flippers are necessarily speculators, when you complain about paying above retail for a watch, you're probably complaining about the fact that someone loves the brand! It is lovers of the brand who, more often than not, are willing to pay above retail in the first place (otherwise they wouldn't buy the watch).

Next, let's turn to one more missing piece: moral hazard. As recent reporting by Rescapement shows, authorized dealers sometimes do not adhere to the terms and conditions of their agreements with brands. All kinds of shady arrangements can take place so that ADs can get some of the payoff from the grey market premium on desirable watches.

Sketchy AD grey market sales.

This is called moral hazard: ADs are engaging in unobservable behavior (selling at the grey market premium) that doesn't conform to the spirit of their agreement with a brand (after entering into that agreement). If a brand suspects that this is happening, perhaps by observing that recent serial numbers are appearing on the grey market, there are only two people to possibly blame: authorized dealers or flippers. It is clear that ADs will do everything they can to cast blame on flippers even though they, themselves, may actually be responsible for watches appearing on the grey market. If they're successful at scapegoating collectors, their AD agreement remains intact and they can continue to earn more than the retail price. Fanatics should not amplify the message that flipping is a major activity by collectors. This only makes it easier for ADs to veil the moral hazard they're potentially engaged in.

I'd also like to discuss one side note: let's consider the world in which a lover of a Rolex Submariner doesn't flip the watch for $20,000 but, instead, uses the watch as collateral on a $5,000 loan (for example). Is this non-flipping outcome truly better than the flipping outcome? In the collateral case, the fanatic doesn't get the watch, so that person loses compared to the flipping scenario. The watch stays on a shelf or in a safe (so its collateral value stays intact), which violates the principle that "watches are meant to be worn." In my opinion, that outcome would be worse than the world in which flipping happens. So, there is at least one outcome that is worse than flipping.

In conclusion, there are four parties at play in the world of watch flipping: the flipper, the buyer, the AD, and the brand. Even though ADs and brands are responsible for multiple ingredients to the flipping outcome (mispricing watches, not producing enough, ADs selling on the grey market, and not selling to fanatics first), for some reason it is certain collectors who are blamed for flipping. While it is possible to understand why blame is cast in this manner, it is reasonable to ask whether that is fair. At the end of the day, for the reasons discussed above, my answer to that question is no.