Liquid Investments

$100 BillsAccording to some recent news, wine has outperformed the stock market over the last decade – to the tune of an 11% average annual return.  Additionally, the market has matured greatly over the last few years and it has its own index, the Liv-Ex 100.  Unfortunately, despite the claims of the Liv-Ex, it is heavily biased towards French wine (in Jan ’09 – Bordeaux – Red = 91.33%; Bordeaux – White = 1.04%; Burgundy = 3.49%; Champagne = 3.32%; Rhone = 0.19%; and Italy = 0.63%) and does not deal with en primeur prices.  Therefore, it only includes the most expensive and widely held wines (plus, the focus on France means that it deals mainly with established wineries that have established followings of dealers and collectors).  Finally, to access the data, you have to pay and it is not cheap … lowest level of membership for management of a cellar is £49.95 per year.

Then again, investing in liquid assets (not just wine, but also whisky) is not as easy as investing in many other forms.  It has some drawbacks:

  • The past is not the future – Don’t depend on the historical trends to hold steady.  There is no guarantee that it will continue to beat the financial markets.  Following the basic principles of economics, its recent performance means one of two things: 1) it was previously undervalued, or 2) it is currently overvalued.  Personally, I think that the second is likely the current reality, especially with some of the en primeur prices demanded of late by the top Bordeaux vineyards.
  • Collectible, Not Investment – No matter the collectible (and that is exactly what wine actually is, it is not an investment), it is as likely to increase in value as decrease in value because of fashion.  Think of Beanie Babies or, even, baseball cards … yes, a limited number of them retain some value but for collectibles, even ones that you use (aka furniture), there is a ceiling to the price that is generally paid for them.
  • Shrinkage – You can put a huge dent in your ‘investment’ with a single large dinner party.  At £250 for a bottle of wine, a large investment can disappear fast!  (For example, £10,000 is only 40 bottles at that price.)
  • Storage – Wine is not like stocks.  Stocks don’t require a cellar for proper aging.  Stocks don’t take up space.  Holding wine for 10/15/20 years is not a cheap option.  Even at the Wine Society, where member storage runs £7.92 per dozen, a decent cellar (200-300 bottles) would cost about £160 per year for storage.  After that, you will still need to think about shipping costs to get it to the cellar and then back to you!
  • Knowledge is power – Buying wine, like dealing with any commodity, takes knowledge to do it well.  Smart and experienced wine buyers will always beat ‘dumb’ buyers.  Additionally, because of the nature of the beverage industry (not just wine but also whisky), established buyers will have an advantage since they developed relationships that give them access to stocks not always available on the open market.
  • Questionable value – Wine is not gold and does not have a ‘real’ value.  In blind tastings, cheap wines regularly beat the most expensive wines.  So, if you are going to drink the investment, buying the most expensive will not guarantee that you get the best!  This leads to a paradox: if the most expensive is not the best, then what are you paying the high price for?  Exclusivity?  Prestige?  Or, nothing?

Personally, I don’t think there is much value in collecting liquid assets, whether it is wine or whisky, because these are products that are made to be consumed.  Therefore, for me, their value lies in the value that I place on their consumption.  This means that I will rarely spend more than say £60 for a bottle of anything!  And, then, I would not spend that much on a bottle of wine … maybe £30 for a really nice bottle of sparkling.  I can understand the attraction of buying wine to age and the attraction of making money off that wine when it has reached drinking age … but, then again, why deal with the hassles of storage and aging because there are simpler and, arguably, more effective ways to make money!