For god's sake, can we finally put a fork in it? AKA, putting an end to threads about "which watch is a better investment?" or "which watch will hold its value better?"

I saw a thread the other day that made me react thusly…

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It was a thread all about how the OP wanted only to purchase watches that maintained their value, and the OP was saying that although he really liked X, Y, and Z luxury watches, he couldn’t buy them, because they went down in value.

Now, if I were @Aurelian, what I would have done is I would have crafted a hilariously clever comment that would have subtly skewered the OP, but in such a way that the OP would think that I were actually complimenting him…

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It would have been an absolutely brilliant and hilarious comment, like this legendary post of his…

https://www.watchcrunch.com/Aurelian/posts/you-know-we-know-right-250808

…and then, like @Aurelian, I would get reported by someone offended by my wit and get myself temporarily banned from WC for the umpteenth time.  But, I am not @Aurelian, and instead, I kept my mouth shut, and just did this in private for the entire rest of the evening after having read that post…

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But, now, I can hold my tongue no longer!

@AllTheWatches is a genius

I once wrote an 8,000 word diatribe about how luxury watches aren’t investments, because this was back when every other post here on WC was about “investing” in a watch.  

https://www.watchcrunch.com/Mr.Dee.Bater/posts/watches-as-investment-an-8-000-word-dissertation-heavy-on-the-finance-and-economics-wonkery-6349

Thank god, that level of lunacy seems to have largely died out here on WC.  Yet, every now and then, the idea seems to take on a second life, and rears its frightful, undying head yet again, like something out of “28 Days Later”...

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[Which, by the way, if you haven’t already watched "28 Days Later,” you need to absolutely put down whatever it is you’re doing and get on it right this moment!]

The good news is that we have geniuses, like @AllTheWatches, who will put together phenomenal analyses like the following to illustrate precisely how ridiculous is this notion of “investing in watches”…

https://www.watchcrunch.com/AllTheWatches/posts/friendly-reminder-watches-are-not-a-sound-investment-strategy-211099

One thing that @AllTheWatches doesn’t EXPLICITLY point out in his analysis is that he’s being overly generous and diplomatic.  He’s comparing the performance of the BEST PERFORMING mass luxury watch against the big cap stock market AVERAGE!  Even when you pit the ABSOLUTE BEST PERFORMING AND MOST FAMOUS MODEL WATCH OF THE BEST PERFORMING AND MOST FAMOUS MASS LUXURY WATCH BRAND against the market average, the stock market average still outperforms in every way!   

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[Imagine if we cherry-picked the best performing stock to go up against the Daytona, like Apple in 2001!  If you’d put the $6,000 you’d have otherwise paid for the Daytona into Apple stock on 1/1/2001, you’d have $2,913,230.77 today!]

The only reason the Daytona has done so well as a collectible is precisely because the watch was so incredibly unpopular when it was launched!  Sure, it’s popular today, but, as they say, “Past performance is not a guarantee of future results.”  

“But, you’re wrong, @Mr.Dee.Bater!  I know precisely how to pick exactly the right watch that will outperform the S&P 500!”

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You have the ability to see the future?  To know precisely where the market inefficiencies are, and to then capitalize upon all the other market participants who are too ignorant to act as boldly as you?  Then WTF are you doing messing about with watches?  Why aren’t you one of the richest men in the world?  These 2 identified market inefficiencies and exploited them accordingly...  

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Milken made $550M in 1987 alone due to his insight that a portfolio of high yield bonds would perform much better on a risk-adjusted basis that a portfolio of investment-grade bonds.  And, well, this was back when $550M was real money! 

The other guy, he doesn’t need any introduction, does he?  As a student of Graham and Dodd, he figured that the best way to beat the market was to be better at identifying companies that could generate excess free cash flows for whatever idiosyncratic reasons, and would CONTINUE TO generate those excess free cash flows due to the management team’s laser-like focus on efficient operations and the bottom line.  So, no sexy stuff, like new technology or new paradigms - too many conmen in those areas - but instead boring stuff, like See’s Candies and Heinz Ketchup, etc., etc.  When you read about him approaching the owners of such companies, to buy them, invariably the owners would sell to him and no one else, because these were salt-of-the-earth people who didn’t want to sell to slick Wall Street types, but instead wanted to carry on their legacy and autonomy by selling to a folksy Omaha, Nebraska native with whom they could do a deal on the back of a paper napkin.  Exploiting that market inefficiency has resulted in him having a net worth of something like $121B.  

So, again, I ask you, what are you doing faffing about with watches when you have the ability to exploit market inefficiencies like these 2?  That would be like if you were the God of Thunder…

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… and you decided to use your powers to work for AAA.  “It’s really rewarding to use my control over lightning and electricity to jump people’s car batteries, and see the smile on their faces when their automobiles start right up.”

https://www.youtube.com/watch?v=bPNBKT6JLSU

[Like this genius short…  before the MCU turned to utter poop]

At this point, the diehard might retreat to a more defensible position, like:  “But, everyone wants a Daytona (a Rolex, more generally) and because there’s more demand than supply, Rolexes will always be a good investment!” 

“Well, Mr. Straw-man-I-just-made-up, I’m glad you bring up supply and demand,” I would respond.  “Because supply and demand is a key concept in explaining why luxury watches are just durable consumer goods, and why they are not investments.”  

Supply…  there are a TON of Rolexes out there in the world

See, the fundamental value of a financial asset depends upon the stream of free cash flows that financial asset can produce.  Let’s take a share in Microsoft, for example.  A share is nothing more than a contractual right to a % of the profits that Microsoft generates as a company, based on the % of the company you own.  Here is the equation that shows how to derive the value of Microsoft…

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Just figure out how much free cash flow Microsoft will generate, and discount that over time, and you get the market cap of the company.  The good news is that the super computer known as the stock market does this for you, via “price discovery,” and the super computer says that as of Tuesday, December 5, 2023, the net present value of all the discounted free cash flows that Microsoft will generate over the infinite future is ~$2.767 trillion.

Does supply and demand show up anywhere in that equation?  No.  Why?  Well, there’s supply and demand for shares in Microsoft, but the reason some people sell and some people buy is because they each have differing opinions on whether the net present value of the free cash flows will go up or down.  If you think “down,” then you will sell.  If you think, “up,” then you will buy.  But, again, fundamentally, the value of the financial asset, the share in Microsoft, has nothing to do with supply and demand - it has to do with the stream of free cash flows that the financial asset can produce.

Your Rolex?  Not so much.  Your Rolex does not generate free cash flows!  

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Your Rolex is worth less when there are more Rolexes out there (supply).  Your Rolex is worth less when people want them less (demand).  Will supply go down?  Hell, no!  Every year, Rolex manufactures something on the order of 1M watches!  And that number grows each and every year!  

Again, think back to @AllTheWatches’s post about the Paul Newman Daytona.  How many were produced?  You pay $70k for one on Chrono24, because there were very, very, very few of them produced.  Only 14,000 Rolex Paul Newman Daytona ref. 6239 were produced.  In totality!!!  Certainly there are more Daytonas being produced in any given year today than that!

Demand…  there are plenty of substitute products and Rolex is actively directing consumers to those substitutes

“But, @Mr.Dee.Bater, you’re wrong, because EVERYONE wants a Rolex!  And demand for them keeps going up!”  

“Well, Mr. Straw-man-I-just-made-up,” I might respond, “everyone wants one today, but past performance is no guarantee of future results.”  

On the demand side of the equation, Rolex is making a huge mistake that is eroding their long-term market dominance.  In order to understand how and why Rolex is eroding their market position, we have to go back 40 years, to… THE CONSOLE WARS

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[Just imagine that previous line in the YouTube channel Honest Trailers’s epic narrator voice, with John Williams score in the background]

See, back in the 80’s, Nintendo held a near monopoly on the incredibly lucrative video game console market.  Right here, this bad boy, sold ~64 million units during its lifetime!

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Nintendo absolutely dominated the video game console market, such that by the late 80’s, Nintendo boasted something like 90% market share!  And, what happens when you become that dominant?  You fall, due to... 

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Nintendo ended up alienating EVERYONE

  • They kept raising prices on consumers, by leaps and bounds, and were slow to upgrade and provide new features - consumers were already locked into the NES, so why bother giving consumers better graphics or performance?

  • They restricted the supply of games available to consumers, by charging game developers higher and higher fees to get onto the NES console.  See, the NES had a special "10NES lockout system” that prevented any developer from creating “unauthorized” cartridges being published for the system.  In order to get “authorized” you had to pay Nintendo through the nose!!!  As you can imagine, fewer and fewer games were becoming available on the NES - games that consumers wanted to play!

  • But, since they were realistically the only game in town (pun intended), with 90% market share, Nintendo could do whatever they wanted!

Hmmmm…  Constantly raising prices on your consumers?  Beating up your partners?  Limiting supply in order to grow your margins above and beyond the market segment growth rate?  Does any of that sound familiar?

When you behave that way, consumers and partners eventually begin looking for substitutes, and you pave the way for new market entrants, who begin chipping away at your market share.  And, invariably, as the dominant player, a great deal of your competitive advantage comes from scale economies, and when those begin to give way, they give way fast.  That’s why we no longer talk about Nintendo consoles, but instead everyone has owned this (or some generation thereof) for the past 30 years…

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Rolex is making the same type of mistake that cost Nintendo their overwhelming dominance in the console market:  They’re focusing on squeezing every last penny out of their current dominance, in order to grow margins at a rate above and beyond the market segment growth rate, which is ultimately working to erode their long-term economies of scale advantage.  

Every time Rolex raises prices on ADs, limits supply to ADs, imposes limits on ADs’ behaviors, and then competes directly with their ADs by buying up Bucherer…  well, they’re alienating their channel partners, just like how Nintendo alienated all their game publisher partners.

Every time Rolex raises prices on consumers, every time they make consumers come into the store and grovel and beg to be put on some fictitious “wait list,” and grill those consumers about what they do for a living (!), and force consumers to bring in home-cured prosciutto…

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… to get a... watch.. you alienate consumers.  

[Like, listen, if you have monopoly control over the world’s supply of childhood leukemia medication, and I need that medication to save my child’s life, yes, I will bring you home-cured prosciutto every week for at least the rest of my life if you grant me some of that medication.  But, for a watch?  WTF???]

Anyway, all of this can’t help but alienate Rolex's consumers.  Just ask @TimeJunkie, who bought his first Rolex as a high schooler, about his recent experiences with the brand!  Even if you aren’t pissing them off, well, some portion of those folks just accidentally wander into other boutiques because Rolex won’t sell them a watch, and these consumers end up buying other watches, and accidentally become fans of those other brands!  Rolex is actively directing consumers to their competitors, through their own short-term margin expansion campaign, much in the same way Nintendo did in the 80’s.

Demand for Nintendo’s consoles was not a given.  See, ultimately, a console is just a console.  The NES?  Great product.  Dominant product.  But, it turns out that there ain’t nothing special about it.  You may have the iconic Mario, but Sega can always come along with its Genesis console, and they can always bundle in this guy…

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Conversely, demand for Rolex watches is not a given.  See, ultimately, a luxury watch is just a watch.  The Rolex watch?  Great product.  Dominant product.  But, it turns out that there ain’t nothing special about it.  You may have the iconic Daytona, but…  anyway, you get the idea. 

The more that a company squeezes extra margin out of its consumer product without providing additional consumer benefit, the more they erode their long-term scale advantages.

“But, @Mr.Dee.Bater, Rolexes hold their value!  And that’s what I was talking about in my post,” that one guy might say.

“No, they don’t hold their value.  Durable consumer goods do not hold their value,” I would respond, politely and calmly, like this…

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"I’m reasonable.  I don’t expect to buy a car and drive it for years and then sell it for a profit.  But, I do expect to at least break even when I sell it, and definitely not lose any money!  See?  I’m reasonable!"

Now, if I made the above statement, you would probably tell me to go get my head checked out.  And, yet, when people make this kind of statement on WC about watches, why don’t we tell them to consult a therapist?  Maybe because we’re all just so darned nice here on WC?

But, a few years ago, when I frequented car forums, every other post would be about precisely that.  Which brands and which models held their value?  Which car could I go buy today, drive for several thousand miles, and then sell at breakeven.  Ridiculous, right?  Sure, car forum members have far lower IQ than watch forum members…

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Nonetheless, they weren’t all troglodytes.  No, the reason they made these kinds of statements is because there was a supply constraint which drove used car prices up, and these forum members had deluded themselves into thinking that BMW had cracked the code on value retention!  Look at that ridiculous peak starting in March of 2022!

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Oh, here’s the chart for watches…

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Weird…  the time period on the peaks of those two curves is almost identical!  Could that be more than just coincidence?  

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In the end, durable consumer goods get consumed.  They don’t go up in value!  When you buy and use your Samsung microwave, it depreciates over time, due to consumption - just like your watch does.  

“But, my watch is a luxury good that I will hand off to my children as an heirloom!”  Well, just take a look at what vintage luxury watches sell for these days.  Sure, you can hand them off to your children as heirlooms, in the same way I can hand off to my children the beloved Scooby Doo lunch pail from my childhood.  But, I ain't gonna delude myself into thinking that the Scooby Doo lunch pail is worth anything!  No, by the time I die (statistically ~30 years from now), if my kids inherit my luxury watches, they’ll effectively be inheriting worthless knickknacks that might retain some sentimental value for them (but probably not).  Let me say that again, I’ve paid ungodly sums of money for my 13 GS’es, and over their useful life, they will effectively become worthless.  So, I guess my answer to the original post that set off this rant is:   “I am willing to lose 100% of what I paid for my luxury watches.”

In the end, the only credible signal is a costly signal

“But, that’s insane!  Why would anyone in their right mind waste thousands or tens of thousands of dollars on something that is going to end up being worth less than a Beanie Baby?”

“Well, Mr. Straw-man-I-just-made-up, luxury watches are nothing more than tools for signaling, and as human beings we love to signal, so we’ll pay good money for stuff that helps us to signal!"

And here’s the key thing about signaling:  The only credible signal is a costly one, because costly signals are difficult to fake!

Here, for example, are gazelles stotting…

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Some gazelles stot when lions and other predators begin approaching.  Now why in the holy name of god would you start jumping up and down and clicking your heels like a ballerina when a lion is coming up to eat you???  Because you’re signaling to the lion, “Look, dude, I am so fast, so strong, so agile that I can and will easily leave you in the dust.  But, I don’t want to do it.  I don’t want to waste all that valuable energy sprinting.  And, buddy, neither do you!  So, look, don’t waste your time on me.”  

And, more times than not, the lion will heed the signal and choose to chase another gazelle that isn’t stotting!

Only costly signals are credible.  It is costly for a gazelle to stot, because the gazelle is allowing the lion to get closer and closer and closer while stotting!  And, this costly signal is difficult to fake.  If you’re an old, weak, and sickly gazelle, you can’t afford to stot and let a lion get closer and closer to you.  You gotta bolt immediately if you’re to have any chance whatsoever of outrunning the predator.  If you do try to fake it, here’s what happens to you…

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So, what is all this “value retention” talk really about then?

Finally, we get to what I really wanted to post in that original thread that almost gave me an aneurysm.  @UnholiestJedi wrote one of the most mind-blowing and insightful things I’ve ever read in some post some time ago where OP was asking “which watch will hold its value better?”  He said something like...

“If I have to worry about my luxury watch holding value, that’s precisely how I know that I don’t have enough money to buy a luxury watch.”

I did not post that brilliant comment in that thread, because unlike @Aurelian, I don’t like getting banned from forums.  But if I had guts like @Aurelian, that is precisely what I would have said.  

Furthermore, I would have said, “If you don’t have the money for luxury watches, why in the world are you buying luxury watches???”

@Edge168n advises people on money and investing as a professional, and his reaction to people spending money they don’t have on luxury watches, and then posting about it here on WC is…

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He’s just too polite to say it, except when he’s had 2 or 3 drinks and then blurts it out when we’re both slightly blitzed at the bar.

Luxury watches are about nothing more than signaling.  And, remember, signaling is nothing more than outwardly communicating characteristics that are hidden.  The gazelle stots, to explicitly show its inherent characteristics to the lion, because the lion can’t immediately know, just by looking at it, whether the gazelle is strong and healthy and will outrun it or not.  It’s the same with luxury watches.  Rich people wear them, along with jewelry and designer clothing, etc., to signal their wealth to onlookers, because in the absence of such displays, onlookers can’t immediately know, just by looking, what the person’s inherent characteristics are.

But, think about this for a moment:  Even if you successfully fake a costly signal, your inherent characteristics remain unchanged!  

Just because you end up owning a luxury watch doesn’t mean that your inherent characteristics have changed one iota!  If you’re not rich, owning a luxury watch will not make you so.  

It all reminds me of the more-than-slightly pitiful Pick Up Artist movement that became a thing when journalist Neil Strauss published this book in 2005...

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I remember seeing all these articles afterward, breathlessly covering the movement, and all the techniques that these pick up artists would use, like “negging” and improving one’s “outer game” and whatnot.  And all I could think was…

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I mean, sure, you can use all these “techniques” and “tips and tricks,” but ultimately they don’t change a person’s underlying characteristics one iota.  If you’re a loser, you’re a loser.  Learning how to “neg” someone isn’t going to change the fact that you’re a loser!

So, are you saying that if you can’t afford a Vacheron Constantin Fifty-Six Perpetual Calendar, you’re a loser?

No, absolutely not.  

I am saying the following:

  • I am saying that luxury watches are inherently ridiculous

  • I am saying that it is ridiculous to want a luxury watch for signaling purposes

  • I am saying that if you have the money, and it ain’t gonna affect you one bit whether you drop thousands upon thousands of dollars on a useless trinket - a durable consumer good that will ultimately end up worth exactly $0.00 over time due to depreciation - but it would make you happy to do so, then absolutely do it.  In fact, if that’s the case, here’s Shia to tell you…

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  • I am saying that if it will cause any, even the very slightest, financial hardship, then ABSOLUTELY DO NOT DO IT

  • I am saying that one way to know whether it will cause you even the very slightest financial hardship is if it ever crosses your mind to ask, “which watch is a better investment?” or “which watch will hold its value better?”

What’s the best way out of this mess?

Notice how EVERYTHING in this 8,000 word diatribe has been about LUXURY WATCHES?  Well, there’s a reason for that.  Luxury watches are dumb, if one is stretching oneself financially to acquire them, as their only purpose is to signal wealth.

But, you know what isn’t dumb?  Watches.  Regular watches.  Regular, ol’ cool, fun watches.  Affordable watches.

You know what is the opposite of dumb?  The absolute coolest thing in the universe?  This…

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I’ve been seeing these watches on the wrists of more and more people out and about these days.  And every single time I see one on someone’s wrist, my immediate reaction is…

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Why?  Because affordable watches rock.  They signal to others that you are a connoisseur of the cooler things in life.  That you are a watch nerd and you’re refined and you’re fun and you don’t take things too seriously.  And it signals that you have one of the most vital human characteristics:  The understanding that financial security is one of the most important things in modern life and the discipline to be working hard toward that goal.

When I see that signal, my reaction every time...

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Reply
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I missed those posts, I'm a cheapskate and the 'biggest' brand I own watches from are Casio or Citizen.

Investment? Nah, not in a watch because it's people like us that define the market LOL.

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Chairman_Bored

I missed those posts, I'm a cheapskate and the 'biggest' brand I own watches from are Casio or Citizen.

Investment? Nah, not in a watch because it's people like us that define the market LOL.

Awesome! For this, you get the following...

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Dude. That was alot. Needed but alot.

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Let me say that again, I’ve paid ungodly sums of money for my 13 GS’es, and over their useful life, they will effectively become worthless. So, I guess my answer to the original post that set off this rant is: “I am willing to lose 100% of what I paid for my luxury watches.”

Come now. You're being way too optimistic. If you include servicing (especially those delicious proprietary Spring Drives), you're definitely going to lose much much more than 100% of the value of your watches over their useful life.

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Anytime I hear someone trying to tell me "a luxury watch is an investment." 🙄

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Tacomawv

Dude. That was alot. Needed but alot.

There's a term for the condition I have: logorrhea.

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Edge168n

Let me say that again, I’ve paid ungodly sums of money for my 13 GS’es, and over their useful life, they will effectively become worthless. So, I guess my answer to the original post that set off this rant is: “I am willing to lose 100% of what I paid for my luxury watches.”

Come now. You're being way too optimistic. If you include servicing (especially those delicious proprietary Spring Drives), you're definitely going to lose much much more than 100% of the value of your watches over their useful life.

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Too good! Too clever!

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Mack37

Anytime I hear someone trying to tell me "a luxury watch is an investment." 🙄

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I keep getting stuff in the mail telling me to "invest" in myself, by improving my wardrobe!

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What a loooong read but deserved

I dislike the ethos/people who buy watches to make more money…..

I have a simple ethos to my watch buying, if I like it and can afford it I buy it……… to keep 👍🏻

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Is there a test we can take? When is the graduation ceremony?

Seriously: excellent essay. Thought provoking. Thank you.