Place Your Bets! (wine as investment)
Health warning! These ominous words underlined and proclaimed in red preface all emails from my investment advisor when he pitches investment products. This is the byproduct of the catastrophic losses suffered by trusting individuals buying financial products which were misleading (Lehman minibonds) and/or impossible to understand (accumulators). This warning is followed by the reminder that one should not invest unless one fully understands and is willing to assume the risks associated with such products. In a more innocent time, these words would have been thought to be superfluous. In face of the recent American budget fiasco and the ongoing Greek tragedy, these words do resonate.
Wine as an investment?
As the present subject matter is wine as an investment, this warning is particularly apt. In the eyes of the English taxmen, wine is a wasting asset and therefore not subject to capital gains tax. A wasting asset means that the asset loses value with the passage of time. Since the United Kingdom has one of the strictest tax regimes in the world, one can safely assume that there is some logic for their view. Even in ideal storage conditions, wine does have a finite life (studies suggest between 50 and 100 years). But wine is fickle and can go bad (oxidized) or become corked even under the best of care. The upshot - your prized bottle of 1900 Margaux may be undrinkable. If so, it should be worthless because it does not serve the purpose for which it was intended. However, with the hype surrounding fine wine, many have forgotten that a great wine is meant to impart a magical drinking experience which invigorates the senses. If it is merely bought as a trophy, which the present stratospheric prices suggest, then it matters not whether it is drinkable or not because the buyer has no intention of drinking it.
Many purists scoffed at those who buy wine purely as an investment. Yours truly do not share these sentiments. The outsized returns for fine wine are rewarding winemakers for making the best wines that they can. Drinkers are undoubtedly benefiting because standards have risen dramatically across all price points. It was no coincidence that the 60s and 70s were barren years for Bordeaux and Burgundy because there was simply no money in fine wine. The legendary Henri Jayer (the King of Burgundy) was never a wealthy man although his wines now command a king’s ransom at auctions. Look at it in another way, if everyone drinks the wine they buy and did not collect for posterity, there would be no legendary wines (such as 1961 Mission Haut Brion) left to drink. Enough said, one can be a connoisseur, a collector or an investor or be all of the above.
To put it bluntly, do not invest in wine unless you can afford it and can live with a total loss (only in the monetary sense because you can always drink your investment). Secondly, don’t abandon commonsense or believe everything you read. Wine critics may have a great palate but picking a great tasting wine is different from picking one that may appreciate in value. Reports in the media of the rosy prospects of wine investment are usually based on information from those who stand the most to gain from touting it, namely, wine auctioneers, merchants and assorted “professionals” in the wine trade.
Connoisseur, Collector, Investor
You can classify buyers of fine wine into 3 types, the connoisseur, the collector or the investor. Although these 3 categories may not be mutually exclusive, there are significant differences between each. The connoisseur drinks his wine. He does not buy for collecting or investment although he may end up doing so incidentally. He is quite knowledgeable about wines and has an interest in a diverse range of wines. He prides himself in finding that little gem that no one else has heard of. For example, he may introduce you to a wine from Israel. In fact, he would have bought and drunk many great wines at bargain rates because the bottles had no label (and you can only identify the wine from the cork) or the level was at mid-shoulder. Collectors and investors would eschew these bottles because it would be damaged goods in their eyes. Since the connoisseur intends to drink the wine that he bought, a 1959 Latour is a 1959 Latour with or without a label. He knows that a wine which Latour made over 50 years ago should be perfectly drinkable even if the level has been reduced to mid-shoulder. If the wine went bad, he would shrug and sigh c’est la vie!
The collector collects wines for many reasons, some of which are only known to him. A particular brand may be his favorite; a particular vintage may have marked a milestone in his life, etc.. He probably likes drinking wine but would not drink from his collection because it would leave a gap in it. He is fastidious with the appearance of a bottle, that is, the label and the level. Since he does not intend to open the bottle, whether it is drinkable is not a factor in his buying decision. The best example is Chateau Mouton Rothschild. Mouton Rothschild commissions a different artist to provide artwork for the top one-third of its label since 1945. Therefore, each label is different and has become an object of pursuit for collectors. Many become obsessed with having a complete vertical (a bottle from every year) of this wine. This would not appeal to a connoisseur because although Mouton Rothschild makes great wine, it does not do so every year. For example, a 1973 Mouton Rothschild has particular significance because the label features art by Picasso and it was the year that the chateau achieved first growth status. However, it would not give much drinking pleasure. The old adage applies: a great wine improves with age whereas a poor one fades before your very eyes.
Investment Grade Wine
The wine investor is a hardnosed realist. He is only concerned with maximizing the return on his investment. He expects his wine not only to appreciate in value but to out-perform other asset classes. He is not constrained by sentimentality and knows that a wine that taste great may not appreciate in value. A recent posting from a website reported that in this September, 200 Chinese attended an auction in Shanghai where 100 lots of Australian wine was offered. One Chinese buyer bid RMB 33,000 for 18 bottles of 2005 Kalleske Johann Georg Shiraz. He explained that he was buying it for his collection and considered it to be a good investment in these times of high inflation. Pausing here, apart from icons such as Penfolds Grange, Henschke Hill of Grace, Clarendon Hills Astralis and a very few others, Aussie wines do not do much for your bottom line. Johann Georg is a top offering from a solid winery, Kalleske. It is a great wine for drinking and it can improve with age. On this basis, it passes the grade for drinking or collecting. Sadly for our novice buyer, it is not much of a hedge against inflation and its value would more likely go down rather than up.
Firstly, over RMB 1,800 (US$280) for this bottle is simply ridiculous. Since the present retail value is about RMB 850, you would need skyrocketing inflation before you reach breakeven. Secondly, Kalleske, as with many Aussie wineries, churn out wine and labels and there is no scarcity. Thirdly, Kalleske has no history or pedigree. There is simply nothing about this wine to be excited about if you were a wine investor. For RMB 33,000, our compatriot from the north could have flown to Australia, visit the winery, buy 18 bottles direct from them and still leave change in his pocket.
For investment, you should only buy investment grade wines. What constitutes investment grade wines? The wine (i) should come from a good vintage; (ii) the winery should have a proven history of producing consistently great wine; and (iii) there must be a proven demand countered by very limited supply. An example? Off the cuff, how about a bottle of 1948 Chateau Petrus? The Chateau is stellar and makes superb wine every year. The production is miniscule, less than 30,000 bottles per annum, and is highly sought after. And for the 1948, it has been scored in the 95+ range by Robert Parker and others at various tastings and there can only be a few hundred bottles left, if at that. Incidentally, a search on the internet shows an average retail price of about RMB 33,000. Surely a better bet than the 18 bottles now taking up space in some closet in Shanghai!