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Todays post is the first in a series I’m planning on things that you definitely shouldn’t invest in, but maybe you will anyway! While I am a huge advocate of keeping your investments simple, some investors love quirky alternative investments that have the potential to appreciate and also have some sort of personal allure. The focus of this first article is investing in wine, which appears to have become more mainstream around the mid 1980’s, when prices of wine began to rise quickly and substantially.

The two ways to invest in wine

There are two reasonable ways to “invest” in wine: en primeur and by buying and holding.

En primeur is the wine version of a futures market. French producers (“Chateaus”) will give buyers a chance to acquire wine approximately two years before the product is bottled. This primarily occurs in Bordeaux, although other regions in France (and indeed other producers outside of France altogether) have begun offering similar programs. The wine is typically delivered 24 months afer it is offered en primeur, although this can vary substantially.

En primeur has been a popular way to access well regarded vintages at discounts to eventual retail selling prices, given the sustained upward pricing trends of high end French wine. This was the case until mid 2011, when high end wine demand faded and wine vintages were viewed as less desirable. This led to investors (speculators!) making commitments to buy which resulted in capital losses on their purchases.

Of course, you don’t have to buy en primeur. Stories abound of people who begin collecting wine, only to realise that they have more wine than they could possibly ever drink. Upon looking in their cellar, low and behold, some cases have appreciated from 30 dollars a bottle to thousands per bottle! This leads to quotes like:

Bleifer says he wishes he knew then what he knows now: that the best investment wines are better than most stocks. “I would only have bought the finest wines of the finest years, stored and aged them properly, and sold them,” he says. “I’d be way ahead of where the stock market is today.”

Of course, proponents of investing in wine rarely discuss those who cellar wine for 10+ years, only to realise that the wine has spoiled or the wine simply hasn’t developed desirable characteristics. For those who wish to avoid the en primeur lottery but also think wine is a nice way to diversify their other investments, a number of wine exchanges have developed to meet this need.

There are three reputable wine exchanges, all of which exist in the UK – Berry Bros and Rudd, London International Vintners Exchange (Liv-ex) and Cavex. Of these, Liv-ex is the most well known. Liv-ex is made up primarily of top Bordeaux wines since 1990, and has risen at a compound annual rate of approximately 5%. Not bad for something you can also drink! As with everything, wine from Bordeaux’s premier cru – the high quality stocks of the wine world – have outperformed other assets. Also important is the bonded nature of these investments – bonded wines do not suffer from excise tax and remain in a bonded warehouse (well stored) until the tax is paid. It is possible for wines to be sold and traded without ever leaving the warehouse, just as it is possible to buy and sell stocks on an exchange.

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A sample chart of government budget showing total receipts and total expenditures

Tips for “Successful” Wine Investment:

I put “successful” in brackets because all of the return data excludes storage costs and other costs involved in investing in what is essentially a perishable luxury. Nonetheless, successful wine investing seems to be predicated on some common themes:

1)      Start with a large amount of money

  • Two reasons for this one. Firstly, investment grade wine tends to be reasonably expensive! Secondly, investment in fine wine is usually done by the case (that is, per 12 bottles). When some of these wines are costing upwards of 600 Euro per bottle, you can start getting pretty expenisve pretty quickly without much diversification to show for it.

2)      Invest only what you can justify losing

  • In connection with the first point, this means that you should probably have a substantial portfolio of more traditional assets prior to considering investment in fine wine. The common figure bandied about seems to be 10,000 pounds ($16.6k Australian). That’s a lot of cash. Its also important that you should take a long term view (7-10 years) and use cash that is not required over a similar time frame.
  • Worst case scenario? At least you can drink it.

3)      Purchase the highest quality you can afford.

  • Most investments in wine seem to focus on the notable chateaux of Bordeaux, and these wines account for approximately 75% of the investment grade market. Choose producers with strong track records of price growth. Names often bandied about include Château Lafite Rothschild, Mouton Rothschild, Margaux, Latour, Haut-Brion, although I fully confess that I have no idea how difficult it may be to get your hands on this sort of stuff.
  • Top champagnes in good years have also apparently performed well, and recently, strong results can be seen for “important” Super Tuscan wines from Italy and various cult producers in California
  • In Australia, Langton’s produces a Classification of Australian wine, which specifically ranks the country’s best performing wines based on secondary market performance over time. You will find staples such as Penfolds Grange, Henschke Hill of Grace and Wendouree/Leeuwin/Rockford.
  • Smaller amounts of higher quality wine can also lower the amount of storage fees you pay, given these are charged on a per case basis.

4)      Confirm prices and provenance

  • Prices can vary dramatically for fine wines, depending on your relationship with your broker, purchase history and support of the rest of a brokers portfolio. Provenance is also important – secondary wine buying can be difficult without a way to ensure that the wine is genuine and has been well stored.

5)      Long term view

  • Wine brokers will tell you that over every 7 year rolling period, Liv-ex has delivered positive growth. Which is true (as far as I can tell), but disregards holding costs. Nonetheless, a long term view is important for one particularly, and that is that not all investment grade wines are epurchased for investment purposes. Some are bought for drinking!
  • A small total output, for example, 20k cases per, are quickly sold. Some measure of these wines will be consumed over the next 10 years. The amount of wine available at the end of the ten year period is likely to be smaller, which should drive prices up. Chris Smith at the Wine Investment Fund mostly accumulates the older, longer lived vintages, which can last for decades while consumers slowly drink away the available supply.
  • The fact that some of this wine is both of limited supply and bought for drinking can lead to step changes in prices; wine won’t increase in linear fashion but rather in large steps.Invest in Wine

6)      Store it properly.

  • Ensure your wine is stored professionally and properly ensured. This is reasonably costly but is necessary to prevent any disasters or thefts destroying your investment.

Are there any wine investors I can learn more from?

Not that I can tell! A lot of unsubstantiated stories of vast wealth accumulated from what primarily appears to be lucky accumulation, but very little data on investors consistently making money out of wine investment. There are huge amounts of substantial wine collectors, but all of them have made significant money from business ventures before starting to collect wine. All the evidence I have points to wine investing being something that extremely wealthy people do with small aprts of their portfolio, rather than a way of growing wealth from a small start.