I just finished reading an article that leads with the headline “investing in high end collectible wine beats stocks” regardless of the economy.  The summary article was published in a very well respected wine journal.  The study, conducted by two PhD candidates from the University of Fribourg, is an update of the original first published prior to the recent recession and concludes that investing in investment grade, auction worthy wine, improves on financial returns while reducing risk.  The time interval used covered two bull and two bear markets back to 1996.  At first, I felt uneasy about the concept.  While I enjoy my fair share of nice wine, my philosophy has always been to enjoy the wine, even at the high end of the spectrum.  Somehow, I never thought of it as a part of my investment portfolio.  Nonetheless, the concept does deserve consideration.

First off, let’s define the term investment.  Webster’s dictionary offers two definitions.  The first is “an outlay of money…….for income or profit ” while a second is “ to make use of future benefits or advantages.”  The study described above clearly was referring to the first definition, suggesting that it should add financial returns to your portfolio.  So let me address this first.

As with any financial investment, timing is everything.  That statement ranks up there with the importance of location, location, location when purchasing property.  Yes, if you purchase highly coveted and auction worthy wines during a bear market cycle (such as the spring of 2009), the auction price of the wine will likely appreciate moving forward over time.   Remember, however, that a profit (or loss) in one time frame may not be realized in another.  How many auction hungry collectors invested huge sums of money for coveted wines a few years ago, realized a short term profit, only to see it evaporate into a loss in the one of the worst bear markets in the last century?  However, if you have a very long time horizon (I would argue at least 10 years), then investing in the highest grade, auction worthy wines such as Gran Cru Burgundy, First Growth Bordeaux and Rhone may offer some profit potential.  Why do I say at least 10 years?  Because an extended time frame tends to smooth out bear market losses and bull market gains and hopefully places you on the positive side of the financial ledger.

Think about what’s occurred with the housing market over the last few years as one example.  If you had purchased a home in 2005, all of the gains accrued until 2007 have likely evaporated and become a loss (on paper).  If you sell now or over the next several years, there’s a high probability of sustaining a loss.  However, if you can ride out another decade or two without selling, you’ll probably realize a profit (someday).  As any given wine vintage from a producer yields a finite number of cases, potentially maintaining a floor under the price structure, there’s a reasonable expectation that prices of collectibles purchased even at the peak of the craze will rebound more rapidly than commodities with excess inventory.  While U.S. consumer discretionary funds are tight, the fervor has returned with a vengeance at the Hong Kong auctions rapidly inflating prices.  Clearly, the Chinese are still thirsty for the best.  My point here?  If you plan to invest for profit in fine wine, do it for the long haul and ignore the monthly and yearly perturbations.
  
Keep in mind that investing initially yields paper profits, whether it be through equities, mutual funds, bonds or yes, wine.  It’s always easy to boast of over the top profits in any investment but taking those gains and translating them into hard cash is another.  This is where the process of realizing profits from wine investing diverges from that of, say, equities.  Taking profits in an equity investment is a no brainer these days.  If you’re investing online, it’s as easy as hitting the sell button with nearly instantaneous execution.  Reaping the profits from selling collectible wine can be a very laborious and time consuming process.  With wine fraud and attending legal suits now such a high profile issue (see the book review The Billionaire’s Vinegar) in the high end collectible wine market, auction houses have become very cautious about the authenticity of the bottles and their contents not to mention the seller.  Analysis of these wines has never been so thorough.  Even after the analysis is complete and your wines go to auction, there’s no guarantee that it will sell at the offer price.  And don’t forget about the assessed auction fee taken by the house that ranges between 15-20%, carving off some of your “paper profits.”  Nonetheless, if you have the time, the interest and do your homework diligently, investing in collectible wines can be financially profitable.  You can read more about fine wine collecting in Part I, Part II, Part III and Part IV.

Finally, I want to return to the second definition of investment, the one that refers to “making use of future benefits or advantages.”  While the original study makes it clear that they are taking about financial profitability, the concept of making an investment in wine for personal enjoyment is not lost on me, probably because that’s where I live.  I enjoy wine for the pleasure that it brings to me, my wife, and friends.  I revel in the thought of tasting a First Growth Bordeaux or a Gran Cru Burgundy because those are the rare times in my life when I can sample the best of the best.  Yes, I’m pampering myself when I do this but that’s my investment in me, in what I love, in what makes me tick…………..and it’s clearly making use of future benefits and advantages to me.
 

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Tags: auction, Bordeaux, Burgundy, collectible wine, Hong Kong, Rhone, wine fraud