Fine wine investments are on average unprofitable. But try telling that to a novice who’s just learnt about an undervalued 2009 St. Estèphe wine that reliable sources are telling him is “certain to appreciate over the next 10 years”. Stimulated by happy-go-lucky alternative investment articles in the Life & Style section of financial newspapers and the new documentary Red Obsession, people increasingly view fine wine as a fail-safe asset class that will let them retire comfortably at 45.
That’s hardly the case.
Let’s start from the top. The greater fool theory proposes that since wine produces no income, any dollar to be made on wine investments is pure speculation on the future desires of others – hype, essentially. These investments require that another person, the greater fool, will come by and value your asset at a higher price than you paid for it. Add to this the costly reality of buying and storing wine, and you’ve got a losing business case in front of you.
What this article wants to hammer in is that for 99.9% of us, wine investments are as unfeasible as having platonic feelings for Véronique Dausse. In the interest of balance, I’ll give you the two best reasons for depositing your savings in fine wine when you have read your way to the end.
Blind Spots and Wishful Thinking
The most common pitfalls about wine investing are cognitive biases and ignoring underlying costs. Those omissions would never be allowed in any other investment setting, but for some reason wine has become a sanctuary for shallow bookkeeping.
The cost of acquiring, storing and selling fine wine, along with the unseen risks involved, such as consumer trends, generally surpasses the pay-off. I say “generally” because, sure, wine investment is not a certain loss. Some research suggests that wine fund investments may reduce your portfolio risk, and some wine funds have indeed shown substantial growth in the past.* Instead, what this editorial wants to drive a stake in the heart of is your ability to foresee the future price development of wine and invest in a way that produces above-market returns.
Let’s work through a realistic example. You might purchase 10 cases of Chateau Ducru-Beaucaillou through wine futures, keep them in your cellar for five years and then run into a wealthy guy at a party who’s more than willing to take them off your hands at 50% above your price. That’d be a neat sum for very little work, right? Well, let’s break it down.
A 50% profit of selling a wine 5 years after its purchase equals an annual return of 8.45%. 8.45% does not merit an investment in the case of a risky asset like wine with little intrinsic value and a price that depends on its hedonistic attractiveness to others. It’s evident that we run in to the greater fool problem, since you’re betting on the chance that the exact region, wine estate and vintage you’ve chosen will appreciate considerably. Secondly, even without added the transaction costs discussed in the following, you’re still looking at a meager payoff in many instances.
The Practical Reality of Investing in Wine
- Purchase: You don’t have access to the floor prices of fine wine – brokers and middlemen do. Even if you lay down money for wine from the first tranche of an en primeur campaign, you’re still writing big paychecks for others before your own gains can begin. You’re basically the dumb money at the poker table whom established wholesalers and retailers hope will keep playing.
- Storage: If you’ve got room for your wine investment in your own temperature-stable cellar, fine. If you need to rent storage, deduct from your return the cost of transport and storage fees.
- Inflation: This should be a given, but in every single conversation about investments, I’ve been the only one to bring up this topic which is simple and central to any investment. They money you put in won’t be worth as much when you unload your stock of wine – how does this not enter your investment decision making?
- Sales process: Pay an auctioneer a commission or sell on your own. The market is illiquid compared to common stock and you have sizeable transaction costs to deal with. Investing in common assets like bonds and shares through online trading platforms is low-cost, easy and liquid. Whether you sell your wine privately, through online auctions, physical auctions or other ways, the costs, potential taxes and time spent must be deducted from your return.
- Quantity: The larger your lot of wine, the more narrow the market and the more time and energy you are forced to spend finding a half-decent deal among very savvy wine wholesalers.
Barriers on a Higher Level
If you’ve weighed the practical issues with your investment and think they don’t present a hurdle to you for whatever reason, consider the faulty methodologies of calculating wine investment returns that nobody speaks of. For instance, many in-depth analyses of wine prices use auctions as their source of data. This skews the results towards regions, vintages and producers that after the fact have turned out to perform better than the average fine wine. It may not be willful omission in all cases, but just know that there are misleading estimates out there about wine investment returns.
Furthermore, hindsight and confirmation bias is found in largely all non-academic articles on wine returns. Yes, we’ve all heard the story of the infamous 1982 Bordeaux vintage, whose wines have appreciated to exorbitant prices after wine critic Robert Parker, amongst his dismissive colleagues, found extraordinary value in the vintage. An enological Warren Buffett, if you will. These stories are statistical anomalies, not waypoints for assembling your own portfolio of prestigious bottles.
And finally, a common saying among amateur wine investors is that “if the investment doesn’t appreciate, we can just toast to our losses”. You can indeed drink whatever you’ve invested in. But by that logic there is no downside to any wine investment. So why not invest every penny you have if drinking to your loss is always an option. In what other asset class would this be an acceptable investment strategy? If your commodity investments don’t pan out, do you suddenly make finger rings out of your gold and cook bulgur from your wheat?**
In summation: Wine investments are most likely not something for you.
The Bottom Line
A few pieces of advice if you’ve got money to burn and just want to invest for the fun of it:
Buy as early as possible of whatever wines and vintages you’re going for. Be an independent importer or you’ll have to pay retail en primeur prices like every other blue-eyed wine investor. Have cheap storage available in a secure location that requires no extra insurance and as little hassle as possible. Be well connected with one-percenters who you can unload your stockpiles of wine on. All this will minimize how royally you screw yourself and will leave you with at least the semblance of a good deal.
Now, as promised, the two real reasons for buying fine wine:
- You will have lots of perfectly aged, quality wine to drink with your loved ones.
- It’s a lot more fun to talk about your 20 original wooden cases of Haut-Bailly 1990 than your shares in a Polish index fund.
* I’ll ignore the numerous failed wine investment companies who have cost investors hundreds of millions of dollars over the past years. I want you to disregard historical returns on wine, so it’s only fair that I ignore historical losses as well. Neither can be used as a reliable predictor of future gains.
** I know, you don’t physically hold gold and wheat when you invest in these, but I like the analogy.
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