An alternative use involves storing it, so that one can talk about owning it. This sometimes leads to selling it for a profit at some future time, rather than consuming it oneself. This seems to me to be a waste of the wine; but to some other people this is a form of financial investment, just like buying stocks, shares or cryptocurrencies, or apartment buildings and farms for that matter, or even just sticking cash in the bank for a while.
This is apparently called "diversifying your investment portfolio", in which you try to invest your hard-earned cash in places that have a low correlation of financial performance with each other. That is, even if you go bust on Bitcoin, you might make a killing on Tesla. Surely this is called gambling? You might as well just become a poker pro in Vegas! Anyway, there are Fine Wine Markets for helping you invest in wines, such as Liv-Ex; and these days even apps for the same purpose (eg. Vinovest). There is also, of course, some media advice, should you need it (eg. Which California cult wine is the best investment?).
Of relevance here is an article that appeared last year: Parker’s ‘Magical 20’ in 2020. Back in 2011, the infamous Robert M. Parker, Jr, touted 20 Bordeaux wines from the 2009 vintage that he considered to be “under-valued and very smart acquisitions”. I suspect that he was actually thinking of drinking the wines in the future, not selling them. Nonetheless, Liv-Ex did some checking in their marketplace last year, and came to the conclusion that: “Of the twenty wines tasted by Parker, seventeen have risen in value (from as little as 5% to over 170%)”, with an average of more than 40% increase in dollar value over the 9 years. This increase has been interpreted as a smart financial investment (Robert Parker’s ‘Magical 20’ thriving in 2020).
However, we should step back a bit, and have a think, before we rush to invest in wines, for any purpose other than imbibing. There are a number of differences from buying, say, stocks and shares; and even the parts that are the same can have different costs associated with them. Costs, of course, reduce your "gross" profit into a more realistic "net" profit (or loss).
One obvious cost is inflation. If your increase in value does not exceed inflation over the same period of time, then there is no net profit. According to the US Inflation Calculator, inflation from 2011 to 2020 was 15%. So, any suitable wine appreciation must be at least that large, to count as a successful investment. This removes several of Parker's wines from contention as investments.
In all investments, there is also the matter of a capital gains tax on any net profit, which may be the biggest bite taken from any investment income. Taxation authorities take a dim view of any attempt to evade paying these taxes, even if the gains are ill-gotten. (Note: the tax people were the ones who got Alphonse Capone, for not paying his taxes, rather than anyone getting him for his host of other illegal activities.)
We also need to take into account the special out-of-pocket costs associated with wine storage, which differ quite dramatically from most other investment strategies. After all, renting out an apartment brings in yearly income while you wait for an increase in resale value. Wine, on the other hand, just sits there in some sort of temperature- and humidity-controlled wine locker; and probably an expensive commercial one, if you are going to convince the buyer of the wine's provenance — these are of the order of $US1 per bottle per year. The initial purchase price of the wine is just part of the final cost.
Then there is the matter of the seller's commission you need to pay for a middleman, like a wine auction house or some sort of broker, to find a buyer who is willing to pay an acceptable price for your wine. The same is true for other property investments, of course; and there is a fee for selling stocks and shares. However, the actual costs can differ notably among them. Wine auction houses tend to take 10–20% commission, while individual brokers performing introductions between sellers and buyers might get a 1–2% fee.
In addition to these points, we could also make a comparison with the gross increase in value of other investment types (ie. we compare the so-called opportunity costs). There are too many of these to list, of course — this year, oil is looking pretty good but government bonds are not, as the above graph shows. However, even within these types there can be big differences in financial returns. For example, how much money would you have made if you had invested in Apple, Amazon, Netflix or Tesla back in 2011, compared to investing in shares of any other companies? In the same week as the Liv-Ex article about Parker's wines, we had these headlines about the stock market: These stocks have rallied more than 400% this year ; Stocks finish second straight quarter of big gains.
What about investing in Bitcoin? Now there's a roller-coaster ride in price changes since 2011 (Bitcoin price today & history chart). Wine investment is mild by comparison; and you can't drink Bitcoin, while you can “drink your losses” in the wine world! Mind you, Bitcoins do not appear to have a Best-Before date, but your investment wines most certainly do.
One final point here is the ethics of what you invest it. William and Melinda Gates have recently been in the news, as the public has now realized that they own rather a lot of the geographical USA (The controversy over Bill Gates becoming the largest private farmland owner in the US). There is the possibility of a disconnection between the management of these farms and Bill Gates' public statements about climate change. You see, he is an absentee landlord, and does not actually run any of his farms. So, how does he know whether these farms are being run sustainably? If they are not, then his climate-change advocacy counts for little. You might like to think about this idea, with regards to yourself, the next time you decide to invest in some fine wines, for profit.
Much thanks to Bob Henry for help with this post.
I can understand and appreciate your point about wine investing and can argue a similar point for other products such as baseball cards. However, I would argue that a smart investor could still find good values/returns. Looking at a Decanter article if you bought the 2000 EP first growth wines then you are smiling all the way to the bank with returns with returns north of 250% (https://www.decanter.com/learn/bordeaux-wine-investment-20-years-438877/). I would also argue that wine has outperformed both global equities and inflation sensitive investments such as gold at various points according to Barrons (https://www.barrons.com/articles/burgundy-sales-drop-in-2019-after-hitting-all-time-high-last-year-01576007031). While I appreciate your post, I feel it is missing some nuanced views. To me to point to one countries vintage is similar to buying an individual stock in let us say an oil company in 2015 and then watching it drop as the segment fell out of favor. Sure you collected the dividend but the total return lagged the broader market. Again, my two cents only, and if you want to sell me some old DRC wines at the release prices, I am happy to take them off your hands.
ReplyDeleteThe point of the post is simply that investing requires the savvy investor to understand the difference between gross profit and net profit. Any discussion of making money must take place after all costs have been deducted. I rarely see that when people talk about wine.
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