Wine: The Liquid Illiquid Asset
by Laurent Harrison
As you get together with friends and family this summer, it’s more likely than not you’ll be enjoying these moments by raising a glass of wine to your lips. Whether to celebrate an important family event or simply to enjoy with a meal, wine consumption in the United States has continued to grow in popularity from the time of Thomas Jefferson, one of the first Americans to appreciate and collect fine French wines.
I decided to explore the subject of collecting and investing in wines and write something of what I discovered because alternative investments have become of increasing interest to the investment community, and in the last several years we at Bell Investment Advisors have received a number of questions about the value and risks associated with investing in wine.
The average wine consumer in the United States tends to buy a few extra bottles of wine for ease of consumption. In fact, storing a case or two of red wine in a basement or other cool area is a great way to enjoy your purchase, since red wine generally improves with age. True collectors and investors build personal wine cellars that are temperature controlled and able to store hundreds or even thousands of bottles of wine. If they are to be successful, they must construct an accurate, verifiable inventory listing each bottle or case of wine separately, noting where it was purchased, how much it cost, and how it has been stored. They go to great lengths to ensure their wines are in pristine condition for when it’s time to pop open a bottle for a special occasion or to sell it to a particular buyer or at auction.
Over the years, many wine collectors and novice collectors have become wine investors in order to make a fine profit, whether or not they truly appreciate fine wines. Like most investments, some are amazingly good, and some are not. Success depends on many factors having to do with the marketplace, the time of purchase, the time of sale, and whether or not the investor’s personal financial situation can stand the test of time. An example of an amazing investment – sure to have attracted both appropriate and inappropriate investors – would be the purchase of a bottle of 1982 Petrus, considered one of the greatest French Bordeaux wines of the last several decades, shortly after its release at a cost of $200 to $300 per bottle. Today it sells for as much as $8,000 a bottle. That would be an appreciation of 40 times the original investment or a profit of 3900%. Not bad . . . but is it typical? Of course not.
Whether you are a serious collector, who is only interested in the nuances of quality and drinkability of the finest wines, or a wannabe collector or investor, here are a few things to consider if you don’t want your passion to leave the taste of vinegar in your mouth. Your return on investment will require that you choose wines carefully and cautiously from the right producer and the right geography. To be able to make intelligent selections, you will have to first invest in some credible education about wine.
I am neither an educator nor collector nor investor in wines at this point, but I am someone with a genuine passion for the substance and subject matter surrounding them. I continue to explore, taste, cook with, take classes in, and continually expand my knowledge of the field. The following could be considered some of the things I have learned about fine wines so far. If I share them with you, maybe you won’t be a complete neophyte; maybe you won’t collect or invest foolishly. As a professional investment advisor and financial planner at Bell Investment Advisors, a registered investment advisory firm, I am a fiduciary, and would not recommend any particular investment—wine included—without knowing your particular financial situation. I approach the concept of investing in wine with interest, but with a somewhat critical and open mind.
Here is a basic orientation to collecting and investing in wine for the beginner.
1. French Bordeaux, French Burgundy, California Cabernet
These wines not only appeal to wine connoisseurs but to investors as well. As investments, they have exceeded all other investments in wine over the past twenty years. Serious investors prefer the five Premier Cru or first growths of the French Bordeaux region, including Haut-Brion, Mouton Rothschild, Lafite Rothschild, Latour, and Margaux. Among Sauternes from France, Chateau Y’quem is considered the top wine for collection.1 Collectors, however, may be better off buying French second-growth through fifth-growth wines, which may be much less expensive but can be greatly enjoyed during one’s lifetime.
In California, cult wines, particularly Cabernets from Napa Valley, have received rave reviews from the wine community, including Screaming Eagle, Harlan Estate, Caymus, Silver Oak, and Opus One to name a few. These wines, if you can get them, have appreciated the best but may not appeal to all palates as they are considered “big wines” and best left in your cellar for a few years of aging before consumption or resale. Many are available only to exclusive mailing lists which take years to qualify for as spots open up.
Finally, there are top collecting wines from Italy such as Super Tuscans (Gaja & Sassicaia), Champagnes from France (Dom Perignon, Louis Roderer), reds and ports from Spain, reds from Australia, Pinots from California and Oregon, and excellent wines from our South American neighbors as well.
2. Investing in wine requires buying the right vintage.
The challenges of growing grapes, including terroir (geography and climate), pests and insects, changes in weather, and growing and harvesting techniques, translate directly into the quality and greatness of wine. A great year can be decimated in an instant if an unexpected hail or rain storm occurs before harvest. For collecting, a great vintage may be more expensive than a good vintage but will often have a greater ability to age well, have greater complexity and character, and exhibit a uniqueness that challenges your taste buds in a very good way! Both collectors and investors have the additional advantage that they can drink the not-so-good years and still enjoy their purchases.
3. Investing in wine requires proper storage.
Proper storage of wine from producer to cellar is critical to both investing and collecting. This is perhaps the greatest challenge for wine. Poor storage for even a day or two at high temperatures can “cook” your wine and leave it worthless, both in value and in taste. Whether you have your own wine cellar or keep your wine at a local chilled storage facility, premium wines should be kept between 55 and 60 degrees with relative humidity of 60% to 75% at all times for best results 1. Fortunately, temperature- controlled portable cellars are increasingly available and can be purchased for a few hundred to a few thousand dollars depending on size. A custom-built wine cellar, however, can cost from $10,000 to $15,000 on up. However you choose to store your wine, cool and consistent temperature is the best environment for your “liquid” investment.
4. Investing in wine requires the proper pedigree – you need to know where it came from, how it has been stored, and how it was transported.
Knowing where your wine has been, how it was stored and how it was transported can affect the value of your collection or investment. The higher the price of the wine, the greater due diligence is required. Make sure you have the complete history of the wine and make your purchase from a reputable dealer or auction house. In addition, make sure you keep your own accurate records for future buyers. Hint: don’t buy it from your local supermarket!
5. Investing in wine generally requires investing early and the ability to hold onto your investment for many years. In this sense, it cannot be considered a fully liquid asset.
Investing or collecting top wines generally requires that you purchase early and hold onto your wines for many years. Whether you intend to sell them at a later date or drink them, most first-growth French Bordeaux wines, French Burgundies, and California Cabs improve with bottle aging. Many great French Bordeaux are still improving or still incredible wines 25 to 50 years after being bottled. Most are intended for the cellar for 10 to 15 years or more before consumption. If you are planning to collect or invest in these wines, it’s best to keep them aging for a number of years and stored properly to insure quality and avoid loss and grave disappointment.
6. Additional factors affecting the value of your collection or investment.
Prices tend to go up and down for a variety of reasons in addition to those mentioned above. The global economy has an effect on wine prices as do trends in Asia and Europe. Demand and supply have changed radically in the last 20 years with the advent of the Asian buyer, and prices are likely to keep trending upward on great vintages due to consumption. Remember this: if you’re investing in wine, it is highly likely that the price has nothing to do with the quality of the wine but reflects more the demand vs. supply as well as the wine’s perceived value and reputation.
In summary, wine can be a risky alternative investment best funded by a small amount of “play money” that won’t have a negative effect on your overall financial or retirement plan should your investment “sour”. However, if you think you might enjoy collecting wine and would like to take the next step by collecting a few bottles from a top producer, here is a tip summary:
- Be familiar with auction houses or where to buy online or direct.
- Only buy the best vintages of French, Italian, Spanish, Champagne, Sauternes, or California Cabs and Pinots.
- Store in a temperature-controlled environment.
- Keep records of your purchases.
- Get professional advice or spend some time on your own research.
- Have a long time horizon in mind.
And last, invest wisely, conduct your due diligence carefully, don’t be greedy, and hopefully you will enjoy a decent return on your investment. Alternatively, if you have stored your fine wine correctly, you can drink your investment and enjoy a return that way.
- Opdyke, Jeff, “The Five Rules of Investing in Wine”, The Sovereign Society, July 29, 2010
- Sokolin, David and Alexandra Bruce, “Investing in Liquid Assets”, Simon & Schuster, 2008 (Intro and Chapters 1-4)