How to Invest in Wine

Wine is just plain difficult. The deep, rich colors of reds mesmerize and the gold and jade tints of whites titillate, the aromas are complex and touch every part of your nose, and when you are fortunate enough to taste a wine you like the flavors traipse across your tongue and through your mind like a revelation. To listen to an oenophile explain why they like a particular wine is like being dropped off in Uzbekistan and having to listen to a warlord explain his love of Desperate Housewives. You just feel anxious and your palms get clammy because you know they see right through your dilettantism. Typical words used to describe a wine are meaty, earthy, rounded, supple, brilliant, prickly, and nose. It’s as if only those with synesthesia are able to comprehend wine.

Besides being able to drink your vino, there are financial incentives to buying wine. Wine makes sense as an option for diversifying your overall investment portfolio. High grade wines are less volatile as an investment than the stock market. According to Mahesh Kumar, author of Wine Investment for Portfolio Diversification, "There's a strong correlation between the economy and stock prices, whereas with fine wine prices, prices are uncorrelated with stock prices or bond prices. The only thing going to affect wine prices is a global recession - global being the key word there. We haven't experienced that for years. So we haven't seen a huge downturn in fine wine prices."

A balanced wine portfolio, over the long term, should provide annualized 10-12% returns (based on the performance of the Fine Wine 50 Index - a portfolio of 50 wines). Fine wine has also outperformed, over the last 20 years, a number of equity and fixed income indices, including the FTSE 100.

The London International Vintners Exchange (Liv-Ex), an electronic trading platform for fine wine launched in 2000, has an index called the Liv-Ex 100 that tracks the prices of 100 wines. The index rose 18% in 2005, and 34.9% year-over-year as of May 2007, beating the S&P's, Dow's, and NASDAQ's return over the same period of 20.5%, 22%, and 19.5% respectively.

In Europe and the UK, one can even invest in fine-wine funds, which are similar to mutual funds. An example is the Vintage Wine Fund.

Mahesh Kumar has 5 points to note when considering wine purchases for investments:

1. Provenance - where is the wine from? Seek first growth clarets from the Bordeaux region such as Latour and Lafite. Other regions to strongly consider are Burgundy, Champagne, and the Rhone region.

2. Longevity - how long does a wine keep? Longevity is largely determined by the grape. Reds made from Cabernet Sauvignons, Syrah or Shiraz, and Nebbiolo are prime candidates for long-term aging. Whites made from Riesling and Loire wine made from Chenin Blanc grapes also have good longevity. Roses have poor longevity.

3. Price performance track record - does the wine have a track record of consistent appreciation? A quick glance at the Liv-Ex 100 makes it clear Bordeaux is the region to invest heavily in--along with Latour and Lafite, seek Chateau Margaux and Haut Brion. From Burgundy, look for Domaine de la Romanee-Conti, Coche-Dury, Comtes Lafon, and De Vogue.

4. Liquid secondary market - can you sell it? Obviously, for an investment to mean anything, it has to at some point be able to become "liquid". Venues for selling are at auction, to a merchant or broker, or via online trading such as VWF Trading. Auctions are the preferred choice for many sellers since this can substantially drive up the price of a wine.

5. Correlation to markets - all of the above. And the fact that wine has no correlation to financial markets adds to its diversification value.

 

Following are some guidelines for collecting wine:

 

1. Concentrate your holdings to the top wines from the best vintages. As with any investment, much of a commodity's value is derived from market perception so a wine from a vineyard with a sterling reputation carries greater investment potential than a wine from a less recognized vineyard. "The label is a big part of the glamour," says James Miles, director of the Liv-Ex. As a corollary, the opinions of respected wine critics are a huge determining factor of a wine's price; there are maybe a handful of wine critics to pay attention to, Robert Parker of the Wine Advocate being preeminent.
   
   
2. Only a small percentage of wines taste significantly better with age than they do when they become available on the market. Most wines should be consumed within 12 months of purchase. Wines from the Bordeaux region of France are typically the most enduring, the best of which can be stored from 8-40 years so the bulk of your collection should consist of wines from this region. American and Australian Sauvignon Blancs and Chardonnays are to be avoided; purchase them only to drink within 12 months.
   
   
3. Inspect the bottle. A bottle that looks like it has been abused or improperly handled is usually an indication the wine wasn’t shipped or stored properly. Check that the cork has not risen above the lip of the bottle. A raised cork may be a sign that the bottle was stored in too high a temperature, resulting in expansion of the wine within, thus pushing the cork above the rim.
   
   
4. Avoiding fraud is also an important consideration when buying for the future so if you see no sediment in an older wine (10-15 years old), be circumspect. All Bordeaux growers use lot numbers so be sure to locate the numbers on the label, the number starting with an L and followed by a serial number of 7 or 8 digits.
   
   
5. Bordeaux futures: In the spring following each harvest, the chateaux of Bordeaux offer up a portion of their crop. These are available to consumers through retailers and wholesalers as wine “futures”. This is an opportunity for consumers to purchase wine 2-3 years before its release and at the lowest price at which it will be available. An astute purchase can result in a four or five-fold return within 2-3 years. Look to keep your purchases in bond to avoid paying up front duty and Value Added Tax (VAT).
   
   
6. Be aware that the region where you purchase determines the market value of a wine. A competitive market like Los Angeles, New York, or Dallas will have a low markup, usually between 5-10%. The same wine, however, in a non-competitive market can see a markup of up to 55%. Check national wine publications for a more accurate price range for your purchases.
   
   
7. Purchase in cases. This allows you to track a wine as it matures.
   
   
8. Store your wine properly. Wine should be cellared at an ideal temperature of 55° F. Too low a temperature will mean the wine takes longer to mature. Too high and the wine is in danger of perishing. The storage area should be vibration free, odor free, and dark, with a humidity level of 70-75%. White wines are much more fragile than reds so should be drunk within 12 months of purchase unless you have perfect storage conditions.
   
   
9. Avoid cult wines. Cult wines are wines from California vineyards that are made available to a select few in very limited quantities. The cult labels are Bryant, Harlan, Bond, and Screaming Eagle, among others. These wines are already overvalued so to add them to your collection is just a trophy to be displayed, but not a great investment and not worth the price if you’re going to imbibe them. There are just as worthy wines that cost a fraction the price of these wines.
   
   
10. Most obvious and most important, have a wine merchant you trust. They should understand your taste, budget, and objectives. Especially if you are considering Bordeaux futures, the merchant should be well established and reputable. Several online options for buying wine futures are: Zachy’s, K&L Wine Merchants, and 1855.

 

Many wine lovers find the act of collecting wine for investment purposes abhorrent. However, there’s little reason not to seek monetary gain from a pleasurable pursuit—something painters, writers, musicians, actors, and acrobats have essayed throughout history, with much admiration and awe from the general public. So, drink up today, and save a little for the future.

By: anh ta