Looking at financial assets, the current situation may look confusing. We have negative, or near negative interest rates in a lot of countries, equity asset valuations are approaching their pre-COVID-19-highs, and, globally, real estate values continue to increase. All of this while we are seeing the worst economic contraction since the Great Depression of 1929.
The reason why I mention these things is because recently, I have seen articles in fashion magazines and online retailers and market places lobbying for purchasing so-called “investment bags”. These articles claim that bags such as the Chanel 2.55 or the Hermes Birkin Bag would be a better investment than a house, equities or gold. At first, their arguments may seem really compelling, but then I started to do some research of my own and got results that differed greatly.
Before I start my analysis, I would like to draw attention to a couple of things:
- Fashion magazines will, of course, encourage us to “invest” in fashion items rather than any other asset. This is their job. Online retailers or websites which focus on the resale of designer items will also encourage us to do the same.
- The goal of this article is to give you a broader overview if you are considering to purchase a designer bag. As with any investment, there are multiple dimensions to consider. (Please note that I am not a financial advisor and this article just shares my point of view.)
- I do not aim to push you into buying anything.
The first argument which I am going to discuss here is the way value is defined by most articles in favour of these “investment bags”. The graph below is taken from a fashion magazine(1) and shows the price development of the Chanel 2.55 bag, a “classic”.
Merely looking at the price, we may assume it was a good investment. From the equivalent of almost EUR 200 to over 5.000 – that would be 25 times the value, right? What this graph fails to mention is facts such as inflation, purchasing power and rate of return. Secondly, I can only assume that they converted Euros back to the original purchase currency as the Euro was not around back then. The article did not explain how this was done. But for the sake of argument, I will not bother with that.
In 1955, the Chanel 2.55 cost EUR 194 – with an average monthly household income in Germany of EUR 235 (DM 470), this was approximately one month’s salary. The Hermes Birkin Bag at USD 1,000 at this time was about four-and-a half times the average monthly salary in Germany. In the US, it would be half the average monthly salary and almost three times the average monthly salary.(2)
Bear in mind, this does not take into account living expenses and taxes. Factoring those in, the multiple of monthly salaries would increase substantially. So essentially, you have items that people could only afford if they spent all of their money on them and nothing else. Let me put it this way: in order to buy a designer bag, you would not be allowed to eat, pay for school fees, pay rent or do anything else.
Today, the multiples of monthly salaries would be as follows: In Germany, the Chanel 2.55 is 1.3 monthly salaries, the Hermes Birkin Bag almost 3.8 monthly salaries. In the US, one monthly salary is needed to buy the Chanel 2.55 and almost three for the Birkin Bag.
We can see two things here: firstly, these “investments” are not accessible to the masses. Four-and-a-half times your monthly salary is not amount which can be invested easily. Secondly, comparing the bags purchasing price to the monthly income in Germany, shows that the bags have not increased in value as much as the studies claim. The Birkin Bag even decreased taking into account how many monthly salaries in Germany would be needed to purchase it. (In 1955, it equalled 4.5 monthly salaries, today only 3.8.)
The studies claim that these bags offer higher rates of return than investing the same amount of capital in, for example, the S&P 500 or gold. This is where I take issue with their analysis. Firstly, they have shown that the Chanel 2.55 and the Birkin bags have appreciated in value by 2,555% and 1,400%. However, their calculation does not take into account inflation or the time value of money.
Using MS Excel’s XIRR function, I get a rate of return that is around 5.17% for the Chanel 2.55. This rate of return will form the basis for our analysis going forward.(3)
Below is a table that summaries the returns of other asset classes such as stocks and gold.
At first sight, this looks like a mixed result. While stocks outperformed the bags in terms of annualised rates of return, they failed to do so in terms of total asset appreciation. However, the able table does not yet consider a vital component – dividends. Stocks pay dividends (well, some do). Factoring this into the equation increases the return of stocks substantially due to compounding effects.
Looking at the above, we can see that when factoring in dividends, stocks greatly outperform the bags over the same period. I have used USD here at not EUR, but this is not something that should move the needle substantially. Stocks beat bags hands down due to the effect of dividends.
A study by baghunter.com argues that while investment in the S&P 500 fluctuated between the 1980s and 2015, the Birkin Bag “has never fluctuated downwards and has steadily and consistently increased”. There are several issues with this argument:
Firstly, the data and sources of the article are limited and it is ill-advised to form a strategy off limited data. Furthermore, this argument is far-fetched because it would mean that even in times when stock markets crash or purchasing power decreases, the demand for a designer handbag would still steadily increase. Granted, according to economic theories, luxury goods have higher chances to make it through tough market periods. But I would doubt that there is no effect whatsoever on Hermes bags when the overall economic environment deteriorates. Market dynamics also apply for designer handbags. Even though it is a luxury item, the bag market is also a market determined by demand and supply. If we go back to the comparison of the monthly salaries needed for a Birkin Bag, the fluctuation argument is further weakened.
Another key point to note here is timing – we have assumed a buy and hold strategy for stocks. You could time your stock market plays to amplify returns. These bag articles seem to suggest that this can be done with bags, but with these transactions not being public the way stocks are traded, I find this also hard to believe. (I also elaborate on this in more detail below.)
The bag articles miss out a key component of being a collector of such items – storage. These bags need to be in mint condition when they are resold. That means you can never wear or use them, not even once! Another way of looking at this is depreciation. As this is a physical asset, it wears down over time if used. So you would not be allowed to wear it and you would have to spend money to keep the bag safe. On the other hand, stocks do not depreciate and the costs to keep stocks safe is really minimal.
Furthermore, I have to point out that with bags there is no way to manage your risk. What if you cannot resell it? What if it goes out of fashion? When it comes to stocks, you can buy options that can protect your position. Furthermore, if you are brave enough, you can even sell options to cover your position and get paid in the process. Such instruments are not available for bags as far as I know.
From a wealth building perspective, bags have no compounding effects. Hence, growing in the position relies on the asset appreciating and not compounding. Through reinvested dividends and compounding your position will grow more than what I have shown above. This is not something you can do with bags – bags give you no interim cash flows. While you can buy additional bags, they still do not compound on themselves, whereas you can add to a stock position and see dividends increase by the additional units and then the compounding will also increase. Therefore, stocks offer better opportunities to build wealth over the long-term.
Additional Costs and Opportunity Cost
Another point which is often not mentioned in the articles is the fees taken by reselling services. Selling your designer bag on these platforms does not come for free and there are commissions between 10-60% (sometimes in addition to monthly flat fees) which you would need to deduct from your return.(6) Furthermore, there would also be a tax element if done according to the law.
Here is where stocks win out – there are tax advantaged accounts that shield your income from tax. Furthermore, in the US, dividends are taxed but capital gains are not.
If you want to buy a Hermes Birkin Bag, you cannot just walk in, you need to make an appointment for pre-order at their boutique. It can take up to eight years until you receive your bag. It is a bit tricky to find concise information about the pre-order process, but I assume that it means to pay on the day you pre-order as the item is customized. In addition to the investment you just made, you then look at the opportunity cost of having your money somewhere without interest or any other form of value appreciation for up to eight years.
Challenging Selling Conditions for Bags
What most articles in favour of investing in designer bags fail to mention is that in contrast to stocks or gold, designer bags are relatively difficult to sell:
1) The bag needs to be in fashion.
A popular argument is that a Chanel 2.55 or a Birkin/Kelly Bag never go out of style. But as we know with fashion trends, the market is highly volatile. What may be considered a “classic” now may not be considered one in ten or 20 years. At the end of the 1990s and in the early 2000s in Western Europe, there was nothing more uncool than showing logos. Hence, brands such as Louis Vuitton and its monogram bag or Burberry were considered something for the nouveau riches. Only after 2003 did they manage to revamp their image.
Another example in a cheaper price category than the Chanel 2.55 or the Birkin Bag is the Louis Vuitton Monogram special edition by Takashi Murakami which was launched in 2003. Recently, there was a new hype after Kylie Jenner was seen with it at the beginning of 2020. Later on, more and more influencers featured the pattern (mostly in black) on their feeds and the hype was perfect. The “Pochette”-model in white with the signature colourful logo-pattern which cost around USD 300 at the time of its launch, is now listed between USD 500 up to USD 1,750 on various online market places. If Kylie had not stepped out of her home with the bag, the value would not have gone up like that. This is another indicator weakening the argument that certain designer bags do not fluctuate the way stock markets do. (I am aware that this is not the Birkin example but it should illustrate that also the bag market is not a “perfect” one and weaken the argument of many articles that bag values only increase.)
If I want to sell stocks or gold, I can sell them on the day I decide to sell – at the market price. Even if I do not make a profit, I can still sell. With a designer bag, I need to find someone who is willing to buy the bag on the day I want to sell. It may take weeks or months until I find a buyer – and maybe longer if the item is not “on trend” at the time I want to sell.
2) Immaculate State
I have mentioned this above: As with any collector’s item, your bag needs to be kept in a pristine state. You can renovate a house, but scratches on a Birkin will significantly lower the chances of re-selling. Additionally, you will need to keep the boxes, cover bags, certificates and even the receipt to prove that your item is not fake. This means, you would not be able to wear the item. You would need to store it in a safe place and ensure that nothing happens to it. Hence, you do not only miss out on potential dividends but cannot even use the item itself.
3) There needs to be a willingness to buy.
If you critically ask yourself – who will buy a designer bag of multiple thousands of Euros? Will the people who have the capital to purchase these items really buy them second hand? Unlikely. Unless it is a very unique item or special edition. And then we are not talking about USD 5,000 but rather ten, 20 or even 40 times that amount.
4) Who is able to invest in such a bag?
The bags frequently referred to as a great investment case are the “Rolls Royces” of designer bags. We do not talk about a USD 2,000 bag. We are talking 100 times this amount when articles refer to auctions by Sotheby’s or Christie’s. Let’s be realistic – who can invest that amount and just have it stored in a safe for over 50 years – losing out on potential dividends and opportunity cost? This is probably only a valid “investment” for the top 1% earners.
Summing up we can conclude that the simplistic and one-dimensional analyses used by many articles is not enough to determine the attractiveness of designer handbags as an investment form. Furthermore, the analysis shows that designer handbags such as the Chanel 2.55 or the Hermes Birkin Bag cannot compete with investments such as gold or stocks of the S&P 500. Especially looking at stocks and factoring in dividends, they greatly outperform designer bags.
If you want to buy such a bag, do it because you like and because it has emotional value for you rather than hoping to make a profit by potentially reselling it later on. It may be an “investment bag” but the investment will be an emotional rather than a financial one.
(1) Weekend Style Magazine, May 2020, pp. 18-20; (Note: no sources given in the article)
(2) Sources of this and the following paragraphs and the table: https://chroniknet.de/extra/zeitgeschichte/1955-steigende-preise-durch-hoehere-loehne/ ; https://web.stanford.edu/class/polisci120a/immigration/Median%20Household%20Income.pdf ; https://www2.census.gov/library/publications/1956/demographics/p60-23.pdf ; https://www.welt.de/wirtschaft/karriere/article206799501/Gehalt-Einkommen-Wie-hoch-ist-das-Durchschnittsgehalt-in-Deutschland.html ; https://www.census.gov/library/stories/2019/09/us-median-household-income-up-in-2018-from-2017.html
(3) Not adjusted for inflation.
(4) Source: https://financial-calculators.com/historical-investment-calculator
(5) Source: https://dqydj.com/sp-500-return-calculator/
(6) Source: https://multimerch.com/blog/fashion-marketplaces-second-hand-luxury-consignment/
Additional sources for this article: baghunter.com/pages/investment-guide ; time.com/4182246/hermes-birkin-bag-investment-gold/ ; baghunter.com/pages/hermes-birkin-values-research-study ;
All information as of the date of publishing/updating. We cannot accept responsibility for the correctness or completeness of the data, or for ensuring that it is up to date. All recommendations are based on the personal experience of Elisabeth Steiger, no fees were received.