Fine wines are one of the most sought after goods for those who enjoy the taste and class associated with them. With many wines, aging is one of the ways they continue to taste better and better. That means people are willing to pay more in the future for wines that age well.
This has led to one of the most interesting forms of alternative investing, and even services have been created for collecting pricing data and coordinating the trading and exchange of investment wine. This is a Compounded Daily video. For more videos like this, make sure to subscribe to our channel.
In March 2019, a wine auction at the world famous auction house, Christie’s was held for a variety of wines. During the auction, the most expensive sale was 12 bottles of wine from Burgundy, France for a little over $305,000. That is over $25,000 per bottle of wine.
In 2011, the same case sold for between $97,000 and $116,000 in today’s dollars, marking an increase of over 126% over those 8 years. Overall, the auction seemed to be pretty successful with about 90% of all wines being sold. The rise in popularity of wines being bought from the secondary market has grown intensely from the year 2000 to about $4 billion in 2018.
Although this is pretty insignificant if you compare it to total private equity investment activity of $800bn in 2018, $4Bn is still pretty significant. If you were to invest in wine, it’s not easy to pick the winner if you’re just buying any bottle of wine. Amongst the thousands of individual wineries out there, only around 250 produce wines that could be considered investment grade.
Picking a winner involves knowing where to buy your wine from, and there are a few characteristics that you should know to look for if you want to pick a winning wine. The first is where the wine came from, more specifically, which region in France. Wines from vineyards in the region of Bordeaux account for 60% of all wine investment activity, and wines from Bergundy account for 20%.
If you purchase a wine that’s not from either of these regions, then maybe you should consider just drinking it. Bordeux’s attractiveness to wine comes from its red clay soils that grow the grapes to produce its highly desired red wines. Additionally, the region takes its wine very seriously, designating very specific classifications to the elite among elite wines.
In 1855, Napoleon Bonaparte III requested to make a classification system for France’s best Bordeaux wines to display to the rest of the world. They came up with Crus or “growths” ranked one to five for red wines. A Premiers Crus or “first growth”, for example, would signify the highest classification of wine.
At the time, the law identified these wines based on the vineyard’s reputation and trading price. However, a lot of time has passed and many wineries have shrunk, yet there have only been two changes to the classification system. The first was in 1856 when Cantemerle was added as a fifth growth, and the second in 1973 when Chateu Mouton Rothschild was elevated from a second to first growth with the help of powerful lobbying by Philippe, Baron de Rothschild, who is, you guessed it, a member of the powerful Rothschild family.
Another trait that should be examined when picking wine to invest in is, of course, the kind of wine. Fine champagnes age well for over 60 years, and port and fortified wines age well for over 100 years . Of course, buying a wine that is over 100 years old will be expensive, but buying it today before it is that price will be cheaper.
If you were to buy a cheap white or red wine and hope that it would appreciate in price, much like wine that isnt from Bordeux or Borgundy, you should probably just drink it. Of course location and how well they age are not all that makes for a valuable wine. Having the approval of world renown wine critic Robert Parker would cause the price of wine to rise depending on his rating out of 100.
His word would cause the price of wine to rise and fall, and when he gave a perfect 100 to one of the finest Bordeaux wines, the “Chateau Haut-Brion 1989”, its value increased tremendously. However, since he has stepped out of the picture in 2013, there have been no wine critics who have had this sort of effect. Now that we know what makes for a good investment wine, how does investing in these wines stack up against investing in the stock market?
A good way to measure investment in the U. S. stock market is by looking at the S&P 500 index.
Liv-Ex, a London based wine marketplace, created a variety of Indices to track the performance of wine. Its best performing index is the Liv-ex Fine Wine 1000 index, and it returned around 42% over the past 5 years. This is less than the S&P 500 over the same time period, which returned around 51%.
However, within that index, the Burgundy 150 sub index returned over 93%, smashing the S&P 500. In a similar fashion, the top 1000 crus individually rose 264% over 15 years, beating the S&P 500 which grew 144%. So if you were able to pick the right 1000 wines, you would have been able to beat the market by a pretty good amount.
Of course there are risks to investing in these fine wines. Because of their high value potential, there is a growing number of fraudulent wines that claim they are wines from the Bordeux region, or First Growth when they are not. If wines are something you want to invest into and hope to get a good return, you are going to want to store them somewhere safe and have insurance.
In 2012, Hurricane Sandy flooded WineCare in New York City, destroying much of what the wines that were stored there. To much of a surprise, there was no insurance for the company. So are wines a good investment?
Remember, most wines are not investment grade meaning that you should not go to the grocery store and stack up on wine. Also, expect to stay invested for more than 5 years if you hope to actually see a return on your investment. Unlike stock, you can’t just sell it whenever you need cash and hope to get your return that you were aiming for.
Much like many alternative investments, finding a specific quality of wine might return greater than a stock. However, without Mr Parker around, it may be difficult to determine what that next wine might be.
