In the present day I’m going to share with you the Fall letter I wrote to IMA shoppers. As a consequence of its size, I’ll break it into three elements. Partially one, I’ll focus on the rational irrationality of luxurious items and premium tonics. Partially two, I’ll deal with what wonderful administration seems to be like at Babcock. And at last, partially three, I’ll conclude by taking you with me to London and Scotland. You possibly can learn the total letter right here.
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I’m in awe of writing—I really feel like I’m a visitor on this journey. Once I sat down to write down this letter about my journey to London and Scotland with my son Jonah, I had a plan. I used to be going to speak in regards to the musicals we noticed, examine Scotland to New Zealand – each are inexperienced, stuffed with sheep, have rolling hills, folks communicate with humorous accents, drive on the fallacious aspect of the highway, and in any case of that finally get round to discussing Babcock’s investor day and the way it’s a modified firm. However after a number of pages I used to be a bit shocked to find that this isn’t the place my writing muse took me. We’ll revert to my authentic plan, however in elements 2 and three of this essay.
Babcock – our largest holding and the second largest protection firm within the UK – introduced that in early September they have been going to carry a marine investor day in Rosyth, Scotland (a suburb of Edinburgh). This wasn’t going to be only a presentation in an air-conditioned convention room however a tour of its shipbuilding yards. The second I heard that, I stated “highway journey!”
I’m at all times on the lookout for an excuse to go to Europe, particularly when accompanied by my 24-year-old son Jonah. Although he’s well-traveled for his age, he’d by no means been to London, and I’ve by no means been to Scotland. IMA additionally owns two different British firms I wished to go to – Watches of Switzerland (WOSG) and Fever Tree. Sadly, each firms have been of their “quiet interval” (the time when administration is legally not allowed to fulfill with buyers), so as a substitute Jonah and I visited half a dozen WOSG shops in London, together with their four-story flagship Rolex retailer, and did a good quantity of analysis on combined drinks in UK eating places and bars.
However regardless of not having the ability to meet with administration, this journey turned out to be one thing much more beneficial to me as an investor: a masterclass in companies which have found the artwork of being rationally irrational.
The World of Luxurious
Let’s begin with the WOSG – it’s the largest “retailer” (extra on that later) of Swiss watches within the UK and the US.
Once I begin doing main analysis, I typically get a bit too deep, particularly if I actually just like the product. Earlier than we owned WOSG, I used to be detached to mechanical watches, however after I was researching WOSG, I spent appreciable time learning the watch business and started to equally admire each the design (the artwork and craft) of mechanical watches and their advertising. Mechanical watches characterize the final frontier of the analog world; every little thing else has been captured by digital.
There’s one thing stunning and weirdly nostalgic about mechanical watches – they’re one of many solely remaining echoes of the analog previous. Spend time with watch aficionados and you start to understand the complexity and nuances of watchmaking – all these unique features (largely pointless if we’re being utterly trustworthy) that they lovingly name “problems.”
What impresses me most is watchmakers’ consideration to element – their skill to pack a lot performance into a bit spherical case. It’s craftsmanship in its purest kind, the place precision meets artistry in an area no larger than a silver greenback.
If you happen to assume that the iPhone and Apple Watch have decimated the watch market, you’d be proper – however solely in regards to the “low-end” of the watch market (these below a number of thousand {dollars}). The excessive finish stays alive and effectively (although it’s coming off a severe pandemic bubble).
That’s as a result of whenever you purchase a Rolex (or any luxurious mechanical watch), you’re not shopping for a tool that tells time. You might have a smartphone in your pocket, and you may get a quartz or digital watch on Amazon for $10 (and a fantastic one for $25) that may preserve time extra precisely than a mechanical watch. What then is its objective? Put merely, mechanical watches are males’s jewellery.
It seems that there are a number of varieties of patrons of Swiss watches. There are these projecting standing. Social scientists name this peacocking, signaling to the world they’ve more money for frivolous trinkets (from an evolutionary perspective, they’re displaying potential mates that they will help them).
Then there are watch fans who’re actually obsessive about them – who know tiny nuances, model historical past, how they’re made, and which actions they use. If you happen to want a parallel from a well-recognized universe, consider your favourite American Civil Battle buff, minus the dressing up and reenactment (my brother Alex and Jonah match into this class).
After which there are collectors. Some folks acquire stamps, others vehicles, and nonetheless others watches. (I suppose there’s a tiny minority of patrons who really put on watches to inform time.) I ought to notice that these teams aren’t mutually unique and sometimes overlap.
In terms of advertising, Rolex is the middle of my fascination. It’s considerably of a paradox —it’s the largest maker of Swiss mechanical watches with about one-third market share, but you continue to should beg your approved seller to promote you a watch. It is sort of a dominatrix for wealthy folks—they should undergo abuse from their Rolex sellers. That’s partially as a result of demand for Rolex watches far outstrips provide (you’ll be able to see this play out within the secondary market, the place costs are sometimes larger than within the retailer).
It most likely prices Rolex lower than a thousand {dollars} to fabricate a watch that sells for fifteen thousand. The hole between these numbers is defined by the story Rolex has so rigorously crafted. They’ve mastered not simply watchmaking however human psychology, turning a easy transaction into aspiration.
That is the place retail is available in. Shops promoting Rolex (and most luxurious Swiss watches) are usually not conventional retailers however approved sellers. Their mannequin resembles auto dealerships: manufacturers give out solely a restricted variety of dealerships and are very selective about who will get them. This adjustments the enterprise mannequin’s economics and aggressive dynamics tremendously, which is why I name WOSG a “retailer” in quotes.
We don’t sometimes personal retail shares – my EQ may be very low with regards to them, most don’t have moats, and I are inclined to lose cash in them. However I don’t have a look at WOSG as a retailer; it’s a pure extension of luxurious Swiss manufacturers. If Walmart, Macy’s, or Goal wished to get into this enterprise, they wouldn’t have the ability to. In contrast to conventional retailing, the place a retailer chooses which items to promote from a distributor (and what number of), Rolex and different Swiss manufacturers tightly management who sells their watches and what number of every seller receives. Over the previous decade, Rolex has been culling the herd—the variety of Rolex approved sellers within the US has declined by a few quarter to about 300, whereas gross sales elevated.
The great thing about this approved seller mannequin is that WOSG doesn’t want to fret about competitors from a retailer opening subsequent door. However they do should be paranoid about their relationship with Rolex, which needs only one factor from retailers: an ideal buyer expertise that aligns with its story about its craftsmanship and obsession with high quality.
Because of this each approved seller is micromanaged by Rolex – all the way down to the place the Rolex counter sits inside the retailer, the way it seems to be, even what supplies are used. If a retailer needs to rework, blueprints and closing design want Rolex approval. I heard a narrative a few McDonald’s opening on the identical road as a Rolex approved seller who had operated from that location for many years. Rolex requested the retailer to maneuver. On the floor it sounds absurd, however in my dive into the model I noticed the genius of this method.
Let me offer you a counterexample that illustrates simply how essential this managed atmosphere is. I used to be lately strolling by a Macy’s retailer in Denver and noticed a counter that bought Gucci watches. It was positioned proper subsequent to the loud, bustling shoe part. The show itself seemed barely scratched up and dusty with dim lighting, as if it had come from a pawn store promoting nostril rings. That is exactly why Gucci will not be identified for its watches.
Our notion of a product is profoundly formed not simply by the product itself however by the atmosphere round it. This perception doesn’t apply solely to Rolex and different luxurious items. It’s why Apple is obsessed in regards to the field the iPhone is available in, the look and placement of its shops, the customer support expertise, and so forth.
The notion of worth imparted by the atmosphere grew to become crystal clear to me after I visited the Rolex retailer on Bond Road (London’s equal to NYC’s fifth Avenue). It was immediately clear that whereas WOSG could also be working this retailer, it’s a visitor at Rolex’s celebration. Rolex doesn’t wish to retail its watches immediately however wants companions that may care as a lot about consumer expertise and storytelling as they do, and in WOSG they discovered the right match. As Jonah put it with a smile, “Watches of Switzerland has soul within the sport.”
So long as WOSG continues to inform Rolex’s story to their requirements, they’ll preserve that coveted relationship. For us as buyers, WOSG is our approach to not directly personal a part of Rolex, because the model accounts for a big chunk of WOSG’s revenues and profitability.
There’s one other fascinating side to Rolex that makes it distinctive as an funding and explains its willingness to supply fewer watches than the market calls for. Its founder had no descendants, so the corporate was left to a basis that has an infinite time horizon, not simply the following quarter. Consequently, the corporate’s decision-making focuses on maximizing money flows and preserving its model; short-term progress is secondary. I want all my firms may function with such readability.
That is tougher than it sounds, particularly for public firms the place administration tenure lasts only some years and shareholders demand quarterly revenue progress. Contemplate what occurred to Coach, the maker of luxurious purses. It went on a progress spree and determined to open outlet shops. Its profitability skyrocketed … however then mothers found their teenage daughters may purchase the identical Coach bag.
The difficulty wasn’t simply logical (financial) but in addition psychological: we hate to confess it, however we consistently examine ourselves to others. When your well-to-do associates carry Coach purses, your purse telegraphs that you simply share their social standing. However when their youngsters begin shopping for the identical purses with their allowance cash, the social hierarchy immediately will get distorted. Demand collapsed, and the model was almost destroyed.
Sounds foolish? Welcome to human psychology and luxurious merchandise, which require an infinite time horizon – a level of endurance that few firms can pull it off.
I’m obsessive about high quality and even romanticize it. That’s as a result of a deal with high quality places you on the trail to fixed enchancment. I like firms that put high quality entrance and heart. We reside in a world that prioritizes effectivity and the endless pursuit of reducing prices. That has been the story of industrialization and trendy progress. However the artisan pursuit of high quality – one thing you continue to see in luxurious manufacturers like Rolex watches, Louis Vuitton purses, and Ferrari vehicles – is an try and decelerate time and elevate craftsmanship over effectivity.
Because of this the posh watch market is rationally irrational. On one hand, it is smart to try to do much less and get extra. Arguably for this reason the standard of life has improved a lot through the years. As an alternative of a donkey plowing a area, a mechanized, soon-to-be self-driving mix does the work. However on this pursuit of effectivity, we lose a little bit of humanity, and these partially handmade, inefficient merchandise fill that void. When somebody buys a Rolex, they’re not simply shopping for a watch – they’re shopping for into the concept that some issues ought to take time, that mastery issues, and that there’s worth in doing one thing the laborious manner.
Fever Tree
The identical obsession with high quality led me to a different British firm. In 2025 IMA purchased a small (“enterprise”) place in Fever Tree. They make alcohol mixers, and their slogan explains their enterprise mannequin: “If ¾ of your drink is the mixer, combine with one of the best.”
The extra I studied Fever Tree, the extra fascinated I grew to become. The corporate singlehandedly created the premium mixer class. They’ve captured the UK marketplace for premium tonic water – the Brits are keen on their gin and tonic – and are synonymous with high-quality tonic. Similar to Rolex, Fever Tree (which is run by a co-founder) is obsessive about high quality. Business interviews are stuffed with tales of their relentless pursuit of perfection.
And identical to Rolex, Fever Tree obsesses over the notion of its product. They can’t management distribution like Rolex does, however they will management the bottle. You gained’t discover Fever Tree in plastic bottles. Most is available in glass bottles – sometimes cans, however by no means plastic. It’s priced a number of instances larger than the low-end chief Schweppes, and clients fortunately pay the premium. In any case, they only paid $50 for a bottle of vodka or gin, and wish to combine it with one other high quality product. Charlie Munger may have licensed his saying to Fever Tree: “While you combine a turd with raisins, you get a turd.”
Through the pandemic, glass costs have skyrocketed as a result of provide chain points. Glass is Fever Tree’s largest value merchandise, and this has considerably dented the corporate’s profitability. Administration may have relented and switched to plastic bottles, nevertheless it determined to endure short-term ache to protect the model. I like that.
Let me make a not-so-obvious confession: I’m a shame to Mom Russia. I don’t actually drink. I haven’t had a straight shot of laborious liquor since I used to be in faculty, and don’t even just like the style of wine. A part of me needs I did; wine tasting seems to be like enjoyable. My spouse and I toured Coppola’s vineyard in Napa a decade in the past, and after I sampled half a dozen wines, I politely requested for a beer. I’m persona non grata at Coppola’s vineyard.
However now that I’ve found Fever Tree and combined drinks, my alcohol consumption has gone up from a number of drinks a 12 months to some a month. Since Jonah and I couldn’t go to administration throughout their quiet interval, we did area analysis the normal manner – we ordered gin and tonic all over the place we went (the lengths I am going to!). On our journey we tried many aggressive merchandise, and although I could also be biased, Fever Tree was our favourite by far.
After we returned to Denver, I requested my assistant to purchase each Fever Tree product she may discover. I wished to attempt all of the flavors. I posted this image on x.com (you’ll be able to comply with me on x.com/vitaliyk) with the caption “One other day on the workplace… We take our analysis significantly.”
My pal Chris responded, “Now do PM [Philip Morris].” Chris and I are each shareholders of PM, the maker of Zyn, cigarettes, and different nicotine merchandise. However I’ve to attract the road there: quitting smoking three many years in the past was some of the troublesome issues I ever did.
Similar to Rolex, Fever Tree is aware of its strengths and weaknesses. They’re good at creating excellent merchandise and model constructing, however are usually not pretty much as good at manufacturing and distribution. In order that they do what good firms do – they outsource what they’re not good at. Fever Tree simply signed a three way partnership cope with Molson Coors to fabricate and distribute their merchandise within the US. Get able to see Fever Tree in additional shops and bars over the following few years.
My spouse, youngsters and I not often drink conventional soda, however after our “analysis,” we began ingesting Fever Tree ginger beer as a deal with. It is available in many flavors, has little or no sugar, and makes use of solely pure elements. This represents a moonshot upside for the Fever Tree funding case – they change into “grownup soda,” a really nascent class within the UK.
My largest concern is that administration should stroll a really wonderful line to remain premium and high-priced. I’m certain in the event that they lowered costs, gross sales would surge initially, however this could mark the start of their demise as a model. They’d lose their id, may not afford the very best high quality elements, and most significantly, customers’ notion that they characterize top quality would evaporate.
Key takeaways
- I have a look at Rolex’s enduring worth and Fever Tree’s inventory to know how craftsmanship compounds over time.
- Rolex proves that model management, shortage, and obsession with high quality construct lasting price.
- Fever Tree exhibits how staying true to your product—even when it hurts income—protects long-term worth.
- Each firms remind me that actual excellence typically seems to be irrational within the brief time period.
- The most effective investments, like one of the best craftsmanship, reward endurance and objective over velocity.