One interesting side-affect of all the amazing points earning and burning in this space is that all these first class trips create a whole new group of people with an appreciation for fine wine. Whether it’s the perennial favorite Dom Perignon before take-off, or new champions of the old world like Pontet Canet with that over-cooked steak, or a luscious Icewine to lap up desert with, points flyers have the chance to sample some of the finest wines in the world while relaxing in their cocoon suites at 35,000 feet.
Personally I have had an interest in fine wine that goes back longer than my obsession with miles and points. My wife and I would while away many a weekend back in the UK sipping fine champagne on the balcony of our London apartment, and in the early 2000s a fried of mine introduced me to the delights of Bordeaux and the “en primeur” market of buying wine when it is in the barrel for future delivery a couple of years later when it has finally made it to the bottle. It was back in 2001 when the internet bubble had just popped, and the word from my friend was that the 2000 vintage was being pumped as being “special”. He showed me how wine “futures” as they were also called had gone up in price tremendously in prior years. Sounded great! As I have aged I have become significantly more cynical, but back then I had some money available from some tech funds I had managed to liquidate before the bubble burst, and so I went in and invested several thousand pounds into various Bordeaux Vintage 2000 wines. I did my research and picked my wines, and it turned out to be one of the best investments I ever made. The most expensive wine I bought – the sumptuous Saint-Emillion Chateau Cheval Blanc – I bought for about 150 GBP per bottle (about $225 today) and sold as soon as it was delivered two years later for over double that price. Today that wine will cost you around $700 a bottle. I basically managed to sell around half of what I bought originally to recoup the entire up-front investment and kept the rest in storage. I recently sold most of the remainder resulting in a profit equivalent to around a 12% compounded return over a 10 or so year period. And I still have a few cases left to either sell or eventually have delivered and drink.
I have continued since then to invest periodically in wine, exclusively focused on Bordeaux. Repeating the spectacular success of that 2000 vintage is unlikely but with care and attention it is certainly one of the more interesting alternative assets. So I thought it would be interesting to lay out some of my thoughts in this blog on why I think it can be a good investment, what the potential risks and traps are, and how to go about it.
Why Invest in Wine?
For me the investment thesis behind fine wine is very simple. In any given vintage there is a finite amount of wine produced from any given producer. Taking Cheval Blanc as an example, typically they will release about 6,500 cases per year. Every single year after that some of those cases will be opened and drunk and as time goes by the amount of that wine in supply decreases. As long as you stick to wines with the right level of consistent demand and staying power (more on that later) and is stored correctly (again, more later) then the wine itself is likely improving with age. So there is a natural increase in price both from dwindling supply and increasing scarcity and quality. And best of all, if it really does not work out financially – you can always drink it! That’s more than can be said for a worthless stock certificate of a bankrupt company!
My example above of the 2000 Bordeaux vintage looks at a good success story, but take note that what goes up can and must come down. The chart below show the Liv-Ex 100 index over the last five years (the Liv-Ex index represents the composite price of 100 of the most actively traded wines on the Liv-Ex wine exchange). While there are some impressive gains, things have tapered off significantly. Just be aware that prices can go down as well as up, especially in the short to mid-term.
Which Wines Make the Best Investments?
This is a somewhat complex question to answer. I am going to focus on the areas I know well – Bordeaux and, to a lesser extent, Champagne. There are plenty of other regions with investable wines. The Burgundy region of France in particular has a well developed market, but it is far more complex with many multiples of producers often with tiny lots and tiny production levels, that make this more of an experts-only field. There are wines of Italy, California and Australia that can be prized possessions in many collectors cellars. But the top wines of Bordeaux have the longest and most established histories and a rigid classification system that ranks wines in a relatively clear hierarchy. The wines at the top of this hierarchy are the true blue chips of wine investing. While they can be extremely expensive (over $1k per bottle) they have the most consistent predictability in terms of pricing.
To narrow it down further, Bordeaux is generally broken into various regions each of which has it’s own hierarchy system. The two most important are the Medoc region’s 1855 Classification (yes the wines were ranked in 1855 and have not been changed since) and the Saint-Emillion region’s classification, which is updated every 10 years. The details of each, along with the other less important classifications, can be found here at the web-site of the excellent British retailer Berry, Bros & Rudd. The peak of the two main classification systems – the 1855 First Growths and the Saint-Emilion Grand Cru Classes A – are in my view the safest investments in the wine space. They may start off as quite expensive – a case of 2010 Cheval Blanc will set you back around $13,500 wholesale – but their place at the peak of the global wine hierarchy ensure there will be long term demand unlikely to be phased by fashion trends. They remind me of Buffet’s philosophy of investing in businesses with high barriers to entry – it is really, really hard for any wine producer to come up with a new product to compete with these superstars.
As you go further down the classification the system things get a little more interesting. Some second growths sometimes price as high as first growths (Leoville Las-Cases is a great example) but these to me are risky bets, similar to buying the most expensive house on a cheaper street when the real expensive houses are around the block. But where it gets really interesting is in the very lower end of the classification system where some of the wines are produced at standards today that have them pushing the wines at the top. A couple of great examples of this are Chateau Lynch Bages – a fifth growth you will typically find is served in First Class on Cathay Pacific flights – regularly competes with the second growth wines and sometimes even at a first growth level. Lynch Bages 2000 was one of my other stellar investment performers and this is a wine that consistently prices lower on initial release compared to where it may trade with 10 years of maturity. A more recent but similar story is Pontet-Canet which I’ve seen make the list of wines on Emirates first class product. I think these investments are a little riskier, in particular because a big part of the price appreciation comes down to critic reviews (see later for risk factors) but the upside on these kind of producers can be very large. These are also more accessible price-wise, with even the most highly rated wines selling for maybe a quarter or less of the price of the first growths.
Outside of Bordeaux as I say I think Burgundy makes sense for experts only and Champagne I remain to be convinced about. The market for fine Champagne is relatively straight-forward. First of all you would only invest in vintage Champagne. So that means vintage Krug, not the multi-vintage blend they serve on Cathay and Singapore Airlines. Dom Perignon is certainly on the list, but production is so high and I am not convinced there is such high demand for really old Champagne. A few names like Louis Roederer Cristal, Salon le Mesnil might make a list, but I’d see these as speculative and I am not entirely convinced they are great investment products. But with that said, you are never going to be unpopular on New Year’s Eve or Christmas if you have some fine Champagne in your collection.
How to Invest
The best way to invest in my view is buying directly through large brokers/distributors and then having the wine stored professionally. Wine I buy for investment I typically never see expect on a paper statement. In the UK the biggest broker/distributor is Farr Vintners and their very transparent web-site provides a reference point that is useful globally. I have bought and sold through FV and they are a great outfit. Even from here in the USA, I can buy through FV, have the wine delivered to a professional storage service (for example FV’s service with Octavian) and then years later have them sell the wine. The wine won’t have even entered the USA.
I personally prefer to buy wines en-primeur when investing. Sometimes prices can be pushed high by producers testing the market, but on the flip side you will own the wines “from new” and if you hold over the long term, having that strong provenance enhances resale value. On that note always ensure you buy wine in full cases and keep them in the original wood case (you will see the OWC label used sometimes in sales). Owning a wine from the day it was delivered and having proof of it being stored for years or decades in professional storage will ensure when it comes time to sell – or even take delivery – the wine will be in the best possible condition. Resist the temptation to have it all delivered to your home cellar as it will be harder to convince the market later your wine hasn’t been kept in a regular refrigerator for a decade.
Over the years wine investing has become a serious business. Some of the big players like Berry Bros Rudd have offered “cellar club” type investments which if you pull apart are almost akin to wine mutual funds. I know of at least two hedge funds in the US that are dedicated to investing in wines. Given the returns that have been possible I understand the rationale, but for me handing over my money to let someone else do all the buying takes all the fun out it. Plus if it goes wrong that option to just drink it goes out the window!
After your upfront investment, expect to pay around $10-20 per case per year for professional storage. As such there is some additional benefit in investing in the higher end of the spectrum as the servicing cost is a smaller percentage of your investment.
Investing in wine can be a very risky business. My best advice is to take time to learn about what you are investing in, and go into only with money you can afford to drink away! While not comprehensive at all, I think some of the key risks are:
Correlation to global economies
Wine prices go up when economies do well, generating wealth that stokes demand. My 2000 Bordeaux wine was pumped up by the long bull market of the 2000s. More recent growth has come out of the explosive growth in China. A set-back in any of these economies can and does have an adverse impact on wine prices.
Complex Foreign Exchange Risk
Given demand is global, the price of wines can swing based on swings in currency exchange rates. In simple terms back in 2001 when I bought say Montrose 2000 in GBP the exchange rate was around 2:1. If I sold 10 years later the exchange rate was 1.5:1. So if I’d invested $2,000 and after 10 years sold the wine for what I paid for it, I’d only get back $1,500 because of the fall in the value of currency. Given demand is global, and factors influencing exchange rates are hugely complex, this is a risk you simply have to accept – no way to predict or hedge it.
Wine Critic Ratings
A huge factor in wine pricing is the ratings bestowed upon any given bottle by famous critics. In particular the US critic Robert Parker has immense influence on price. He is the champion of the 100 point ranking system, with 100 being the perfect wine. I have worked in a trading environment and for a trader it’s key to understand the risk you are exposed to if a key variable that influences the price of your assets moves up or down. So in bond trading, traders track a number call “DV01” which is basically how much the trader makes or loses if interest rates move by 1/100th of a percent. Well for wine investors you should track “RP01” – the amount you will win or lose if Robert Parker changes your wine score by 1 point. I read a blog post very recently that highlights just how stark this can be – read and compare the pricing of the 100 point wine versus the 99 point from the very same producer. Literally twice the price!
Of all the risks though this one is the one you can research the best. One important point to note is scores change over time as the critics re-taste the wine as it develops. This has worked for me – where I bought a wine rated say 95/100 and then got marked up to say 99/100 – and against me where the wine was initially rated say 99+/100 (indicating it would be on it’s way to the magic 100) but then a few years later see the demand collapse as it got re-rated 95/100. What I have learned is there is possible upside in wines rated below the high 90s, and very little upside on wines rated close to the 100 mark. So the best wines from an investment perspective are those that are scoring in the mid 90s particularly where they are indicating long aging potential and upside opportunity.
Beware of Scams
Wine is just one of those products that invites the scam artists. Make sure you deal only with large, well established dealers with easily verifiable presence.
Don’t Be Fooled by Retail Prices
Spend a few minutes comparing wine prices from wholesaler Farr Vintners and retailer Berry Bros Rudd and you might be fooled into thinking you can buy Chateau Lafite 2000 for 1200 GBP per bottle and sell it straight away for 1800 GBP per bottle. In fact you can buy for 1200 GBP but would have to take a 10-15% discount in selling it unless you happen to be a highly respected global retailer with a couple of centuries of history. Never mind what wine sells for at your local wine stores, wine investment is about wholesale prices. The best sources of wholesale prices are brokers like Farr Vintners or trading exchanges such as Liv-Ex.
There is an obvious irony in pointing out that wine is not a hugely liquid investment. It’s not like owning stocks where if you need to raise money you can just log on to etrade.com and sell right away. The sales process can take several months and if you are in a period of low demand you may not be able to sell certain wines at all. Brokers may be willing to buy your wine for cash but at a substantial discount. More likely they will agree to try and sell your wine and take a commission. So do not invest any money that you need access to in the short or medium term.
Note on Taxes
The main note is get a professional tax advisor!
With that said it appears here in the US there is a specific flat rate of 28% for capital gains on collectibles which wine falls into. That is not a particularly attractive tax rate versus dividend or regular long term capital gains, but is better than ordinary bond income if you are a higher rate tax payer.
In the UK there is something of a myth that the gains are tax free due to wine being a “wasting asset”. The Inland Revenue issued guidance on this saying if the wine had an expected shelf life of less than 50 years then yes it would qualify as a wasting asset with no taxable gain. One might be able to argue some of the lower end wines or Champagne does not have such a long life, but if you are going for the first growths, that’s going to be a tough argument to make.
Investing in wine can be fun, rewarding and lucrative. I’ve had fun on flights where I have gotten to try for the first time wines I may actually own several cases of sitting in some cave somewhere in England! And I have made some very respectable gains in my portfolio. But if you are going to jump in, take time to learn about the industry and what drives it. Only invest in assets that are within your circle of competence – if you don’t know what you are doing, you will get burned! But let’s face it, it’s hard to think of many assets classes that are as much fun to learn about as fine wine!
Links and Resources
Farr Vintners is one of the largest wine brokers in the world, best source for accurate investing prices (all in GBP)
Fine and Rare Wines is another large UK wine broker with good info
Liv-ex is a well developed trading exchange for fine wine with excellent price history and info for members
Cellar Watch is a subsidiary of Liv-ex for individual investors to track their holdings and get price history information
eRobertParker.com is the bible for wine ratings
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