The Wine Guy Uncorked

Article NBS March 2009

THE WINE GUY- IS WINE A GOOD INVESTMENT?

During these difficult economic times investment gurus are discussing in economic and trade magazines different ways to make money and recommending wise investments. One direction they are pointing is investing in fine wine.

For the past twenty years I have been asked if acquiring Wine is a good investment. The economic magazines are now beginning to write about the advantages of investing in wine explaining their interest  with statistics that wine has appreciated more than almost anything- - fine art, stocks, bonds,, precious metals,. Decanter.com has reported that fine wine has outperformed stock indexes in Britain and the United States.   

It is apparent this would be a perfect time to explore wine as an investment.

I certainly have invested in wine for my restaurant, Elizabeth’s Café & Winery in Duck.  Our wine list has garnered the most awards of any restaurant in the South East.  However, my investment is for our restaurant wine cellar to give guests a plethora of one of a kind world class wine selections to accompany their dinner.

Decanter, an English Wine Publication reports “In the last 20 years fine wine has also outperformed a number of equity and fixed income indices including the FTSE 1000. For long term investors (as opposed to shorter term speculators) a well chosen and balanced wine portfolio should provide annualized returns of 10-12% per annum. Wine is less volatile than stocks and shares, making it a less risky investment.” Felixsalmon.com quoting Decanter’s wine investment guide. See also, Dave Sokolin’s book INVESTING IN LIQUID ASSETS and the book by Evelyn   Resnick,  WINE BRANDS

PLUSES FOR INVESTMENT

Arguments may certainly be made favoring investment in wine, by citing historic examples of significant appreciation of wine purchases. An example described in www.wineeducation.com  as a best case scenario is the 1961 Chateau Latour, a French wine from Bordeaux. “On release in 1961 dollars, it cost $3.00 to purchase. Currently it is selling at auction for approximately $500… This is a return on investment of just over 15% annually for 35 years!” This is an unusual example. The author uses another example of a Chateau Latour from the 1975 vintage. Released at $20 it would only garner $75 at auction. A ROI of 6.5%.

Last May the London Financial Times featured a special section on Wine Investment. It seems the Chinese in Hong Kong have begun to invest heavily in wine and wine futures. Wine futures involve the purchase of un-released wines based primarily on reviews by wine writers scoring wines based mostly on tasting barrel samples. The Financial Times claimed there had not been a five year period in the past 20 years where fine wine would have yielded a negative return. The Chinese were attempting to corner the fine wine market to artificially increase demand.

Example

Salon 1996 was essentially cornered by “Big Boy” Bob Rosania which artificially increased the price to record levels. A normally very difficult to obtain allocated wine it became almost impossible to obtain. Elizabeth’s always had a sizeable allocation but the price increase was so great that I refused to purchase all my allocated wines. I do have some but the price is obscene- although the Champagne may be the best Salon ever and after awhile the price will catch up to auction prices that people are willing to pay to have the pleasure of drinking this exceptional wine, it was still over-priced at release..

“It is understandable that those who have a passion for wine turn cold at the thought of wine investment, an activity driven by very different values. But even they should reflect on the ever-present need for the financing of long term wines as they mature. A century ago it was the Bordeaux merchants who bought barrels of young wine and aged them in quay-side warehouses to mature, and of course to acquire value. Forty years ago the baton passed t importing merchants to hold large stocks over many years, and to reap the rewards from so doing. In the last two decades individuals have had greater access to fine wines in their youth, in large part because producers choose not to finance the stock themselves. Whether you buy two and sell one, or buy ten and sell ten, you are contributing to this process.”

“The complaint is frequently heard that fine wines are consumed too young. Making mature wine available in the market place is the final outcome of the investment process,”  Hugo Rose Master of Wine Decanter .com

Many became “accidental” wine investors. Those consumers who bought more wine than they planned to consume, with the intention of selling the remaining bottles to help finance their wine purchase.

See also: “Wine as a medium term investment vehicle” Walter C. Labys and Bruce C. Cohen West Virginia University Oxford Journals And, WINE INVESTMENT FOR PORTFOLIO DIVERSIFICATION: HOW COLLECTING FINE WINES CAN YIELD GREATER RETURNS THAN STOCKS AND BONDS by Mahesh Kumar Hardcover July 2005. Professor Kumar asserts that wine prices aren’t influenced by the same sort risks that affect stocks and bonds, recession, inflation, etc., and are far less volatile

I had been a proponent of investing heavily in a chosen wine discovered at a private tasting. I would often buy the entire North Carolina and Virginia allocation of an exceptional limited availability wine. When the selected wine was ready to drink I would make it available to our guests who understood they were drinking a wine generally unavailable in their local wine market.  My investing has changed because of price fluctuations and the variable maturity time for certain wines. We are now seeking reasonably priced wines that are forward and drinkable when placed on our wine list.

We have sufficient investment level wines in our cellar for the serious wine collector or guest. Most guests are like me. When I look at a restaurant wine list I want a reasonably priced wine that will be an excellent example of the varietal. For a very special occasion I want the best wine I can afford at the time.

PROBLEMS

Wine may not increase in value- remember, it is only worth as much as someone is will to buy it from you.

The wine collectibles market is not easy to understand. Who or what is causing a wines value to go up or down.

Wine is for drinking- this is a given.

American Wines are not necessarily priced by value but by the demand for the wine. Demand can be created by high ratings by wine reviewers.

It often takes up to 10 years to determine if a wine is truly exceptional.

There are rules prohibiting the sale of wine by unlicensed individuals.

Currency fluctuations, market conditions and other economic conditions affect the wine price.

There is a sizable cost to properly store and preserve wines.

A FALLING MARKET

On January 15, 2009 The Wine Spectator reported that wine value estimates have been reduced by 30 to 40 percent in the aftermath of the world-wide financial crisis. James Suckling wrote on his Wine Spectator Blog December 19, 2008 how the Bernard Madoff scandal could hit the wine investment industry.  There is tremendous speculation on the 2005 Bordeaux, considered the finest vintage in recent history.  There are wine funds in the United Kingdom that have invested tens of millions of dollars in top Bordeaux wines. There are supposed to be thousands of cases representing the investments. There have been some fraud cases but what if all those wine owners decide to sell their wine back to the French negociants because of the decline of the pound against the euro. Does that wine really exist?   I would rather know I can hold the bottle of wine I purchase and can display it for a guest at Elizabeth’s than be told it is being held for me in Europe

It is now apparent Hong Kong investors now own 15 to 20 percent of the world’s total of fine wines. But did their attempt to corner a share of the worlds market help or hurt wine prices?  Wine prices may not be immune to the world’s financial health as we had been led to believe. In October 0f 2008, Bordeaux took a 25 percent drop on the Liv-ex , the leading fine wine exchange, followed by a 5.5 percent drop in November. However, this was a small drop compared to the 43 percent drop for the Nikkei 225 and the 60 percent drop for the Hang Seng, Hong Kong’s benchmark index.

PROBLEMS AND ADDITIONAL COSTS

Professionally managed storage is of paramount importance for bottles intended for investment, whether the wine is owned by a wine fund or an individual collector. Bottles cellared in a personal storage space may lose potential market value, because verifying their provenance becomes more difficult.  Paul Sullivan, Food and Wine, October 2008.

Other problems:

Counterfeit bottles and labels is an increasing problem. The best most expensive wines are targeted. The Wine Spectator’s article on counterfeit wines featured Chateau Petrus- the most expensive of red wines and almost impossible to obtain. WE buy our Chateau Petrus directly from Christian Moiex, the owner and wine maker.

Corked wine- All bottles that are sealed with corks can be susceptible to corking. Usually that cannot be discovered until the bottle is opened.

Cooked wine- Wine that has been exposed to excessive heat is a continuing problem. Especially when wine restaurants are failing and their improperly stored wine become available on distributors lists or wine shop shelves.

Oxidation- caused by faulty wine making or bad cork- oxygen comes into contact with the wine. Can’t be discovered until the bottle is opened.

No sediment- in older vintages is a clue that the bottle may have been refilled with a lesser wine.

IS WINE a GOOD INVESTMENT- NO if you are purchasing it for re-sale. YES, if you are going to eventually drink it.

IN MY OPINION- although wines that are carefully selected for purchase have a good chance of increasing in value, wines should be purchased for eventual consumption.  Just be happy that you are able to drink a great wine that you purchased at a reasonable cost even if that wine has increased in value. A fifty dollar bottle of wine that has increased in value to two hundred dollars is still, for you, a fifty dollar bottle of wine. Enjoy it and tell your friends who are sharing the wine with you - your story of how astute you were to select that wine and how lucky you all are to be able to drink the two hundred dollar bottle of wine together.

A good goal might be the motto of The Croaker Wine Society, organized by some friends of Elizabeth Café, “I will die with no good wines in my cellar”  Drink up.

THE WINE GUY is Leonard G. Logan, Jr. The proprietor of Elizabeth’s Café & Winery of Duck

Elizabethscafe.com;  elizcafe@charter.net; 

Tags: China, Dave Sokolin, Decanter, FTSE 1000, Hugo Rose, London Financial Times, Salon, wine investment

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