Cuban cigars are expensive. A Cohiba robusto will set you back more than $25 in London or Madrid. You can buy them in Florida for $5 to $10 apiece. And lots of people do. Trouble is, they are fake.

People who have been smoking Cohibas for 20 years say it’s easy to tell the difference between a genuine and a counterfeit. The printing on the label may be a bit off – the wrong size or the wrong shade of yellow. Sometimes the size of the label is irregular. Or the quality of the paper is inferior. If you can’t spot a fake by examining the external evidence, you should notice the difference when you light up. The fakes don’t have the flavor – not nearly.

It used to be easy to spot fake Rolexes. Like Cohiba wrappers, their faces bore minor typographical irregularities. They weighed less than the genuine watches. And they stopped working within a year.

But that’s changing now. The use of sophisticated computer technology by modern counterfeiters is resulting in a new class of fake watches. Ones that are so close to the original that watchmakers can’t tell the difference unless they put them under a microscope. And even then, some of them “pass.”

“The counterfeit world has traditionally been a world of the shabby and shoddy,” says Frederick W. Mostert, an intellectual property lawyer who has made a career of spotting bogus luxury merchandise and prosecuting those who make them. Writing in a recent issue of Cigar Aficionado, he says:

“In the last 18 months I have witnessed a paradigm shift in the manufacturing of fakes. It is still only a ripple – but it is set to become a tsunami. The next wave will change the face of manufacturing and retailing and it is fueled by a quantum leap in technological engineering.”

Mostert tells of a car manufacturing facility in central Thailand that is producing near-perfect replicas of Ferraris, Lamborghinis, and Lotuses. And of Chinese plants that are making fake watches that look identical to the real ones, both inside and out:

“I was so fascinated by this ingenious use of technology,” he says, “that I visited Minolta’s laser scanner labs after my return home. I will never forget the moment I was invited to remove my watch from my wrist and place it on the laser scanner turnstile. Within five minutes – eerily – a picture perfect 3-D digital version of the outside contours of my watch was produced: the ultimate, undetectable copy.”

The digital technology used by Chinese counterfeiters reverse-engineers highly complicated watch parts. And this information can be stored in discs and sold to other counterfeiters around the world.

Digital technology is helping counterfeiters replicate all sorts of valuable merchandise, from vintage wines to expensive Italian suits to first-edition books to fine art. “Gone,” Mostert says, “are the mom and pop operations of yesterday in which impoverished families constructed fakes in their garages.”

And it’s not just luxury goods. “Every product known to mankind can be, and is being, perfectly copied. This is sure to have profound implications for the future of global retail.”

During a recent trip to New York, Irene and I were walking down Fifth Avenue on our way to meet K and Evan (Irene’s husband). We passed some Nigerians selling knockoff designer leather goods. Irene stopped to look.

“Boy, look at the quality of this stuff,” she said to me.

I examined the Gucci bag. The leather was supple. The stitching was neat. Everything looked perfect.

“Looks good,” I said.

“In the old days, the fakes were so inferior,” she said. “It was easy to tell the difference. But now…” She was silent for a moment. “I hate it,” she said.

We continued to walk. She seemed vexed.

“What do you hate?” I wanted to know.

“I hate that you can’t tell the difference anymore.”

“And why does that bother you?”

She stopped walking and turned to me. “Why?” She lifted her Prada bag to my face and said, “Do you know how much money I spent on this? And those guys are selling these bags for 50 bucks apiece.”

“Yeah,” I said, pretending not to understand her. “I guess you wish you had bought a knockoff.”

“I would never be happy with a fake,” she said.

“Oh, really?”

“It would make me feel terrible. Like I myself was a fake.”

Later on, at lunch, we talked about this trend toward quality counterfeiting. Evan pointed out that buying fake merchandise is, in effect, supporting theft.

“Luxury manufacturers spend millions of dollars on designers, manufacturing, and advertising. They create more than just good products. They create a mystique that has value beyond the quality of the materials or the workmanship. That mystique has a marketable value that belongs to the businesses that paid for it. When these guys sell knockoffs, they are selling something – prestige – that they haven’t paid for and don’t own. It’s stealing. Just like stealing money. It shouldn’t be tolerated.”

I could see the logic of Evan’s argument. And I could understand Irene’s ire. Mostert agrees with my friends. He wants police agencies around the world to link up and use computer technology to detect and apprehend counterfeiters. “The U.S. Chamber of Commerce,” he points out, “estimates that counterfeiting cost Americans $250 billion in lost tax revenues and contributed to a loss of 750,000 jobs last year and led to smaller companies going under.”

I have no doubt that counterfeiting affects the economy, but I’m not sure whether the overall effect is good or bad. The Chamber of Commerce has a vested interest in supporting its members, including those big companies whose brands are being pillaged. It makes sense that the Chamber would find data to support the industry view. But when it talks about tax losses, for example, I have to wonder: Is the Chamber assuming that the people who buy the fake merchandise would buy genuine merchandise if the fakes weren’t available?

I don’t think so. I’m guessing 90 percent of the people who buy merchandise from curbside vendors know exactly what they are doing. They are happy to spend $20 on a cheap Rolex because they can afford $20. And they are happy to wear that watch, hoping they can fake out all those who see it and think, “Wow! Pretty impressive!”

There is a social value to counterfeiting. It allows ordinary people to enjoy the status of luxury goods. And now that counterfeit luxury goods are close in quality as well as appearance, those same people can also enjoy the superior functioning of the originals.

“From a purely economic perspective,” I told Evan, “there is no reason ever to buy high-priced luxury goods.”

“What do you mean?” he wanted to know.

“Well, let me ask you this: What is the benefit of this brand mystique you have so correctly identified as a value?”

“Prestige,” he answered immediately. “Like it or not, prestige is something most people are happy to pay money for.”

“Granted,” I said. “So let me ask you this: If you saw a gas station attendant wearing a top of the line Rolex, what would you think?”

“That it was a knockoff.”

“And if you had that thought – that it was a fake – what feeling would you have toward the man wearing it?”

“Pity. Or something like pity,” Evan said.

“Right. And wouldn’t you agree that pity is pretty much the opposite emotion that prestige is meant to curry?”

“I’ll grant you that,” he said.

“Now let me ask you this: Let’s say you saw a very rich man – someone you knew to be rich – wearing a Rolex. Would you assume it was genuine… or would you suspect it was a fake?”

“I’d assume it was real.”

“And what feelings would you have toward that man?”

“That he was successful. That he had a rich life.”

“In other words, you would always assume that the rich man’s belongings were genuine and the working man’s were fakes – even though you couldn’t tell the difference.”

“I guess that’s so,” he said.

“Which means it never pays to own the genuine thing. If you are rich, you can wear fakes and everyone will believe they are real. If you are not rich, people will assume you are wearing a fake even if it is real.”

I wasn’t being entirely serious, but I was getting at a fundamental problem with the status of luxury goods. In the old days, wealthy people were willing to pay a lot more for high-end items because they were better made and conveyed prestige. Nowadays, the knockoffs are nearly as well made and the omnipresence of luxury fakes makes all luxury goods suspect.

I can understand why my friends – and the manufacturers of luxury goods – want to put an end to all this counterfeiting. It is robbery. And a free market cannot survive, we have been told, if robbery is allowed to prevail.

Yet, you can’t deny that the increase in high-quality knockoffs is democratizing luxury. Millions of Americans who would otherwise have to settle for something less now have access to luxury brands, albeit via stolen images.

In a perfect world, we would have both: ever-deflating costs for quality goods and a robust trade in luxury. In fact, that is exactly what I think we will get.

The counterfeiters will continue to improve the quality of their fakes, and the manufacturers they steal from will continue to pay people like Mostert to identify the culprits and send them to jail. The technology the counterfeiters use will spread quickly through underground networks, making it easier for all quality-oriented manufacturers to improve their products. At the same time, the rigorous prosecution of counterfeiters will allow the companies that produce luxury goods to stay profitable and service the wealthy fraction of the marketplace that is not only willing but wanting to spend much more money for basically the same thing.

So where does this lead us? I can see two trends developing:

1. The proliferation of high-quality counterfeit merchandise will force brand-name manufacturers to increase the complexity of their designs and increase the speed at which they are marketed.

2. Driven by the illegal digital revolution in counterfeiting, high-quality products will become more and more available. Some of them will be fakes. And some will be from small manufacturers that can take advantage of the technology without feeling compelled to steal and sell the prestige.

You can benefit from these trends by resisting the urge to spend extra money on prestigious brand names. Instead, learn to recognize quality, and then use that knowledge to purchase high-quality merchandise that doesn’t carry a designer label.

This will demonstrate to others that you have two things more valuable than money: (1) the discrimination to appreciate high-quality merchandise, and (2) the good judgment not to pay extra for it simply because it comes with a “name.”

[Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]

 

Mark Morgan Ford

Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Wealth Builders Club. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.