22.11.2023
Everything you need to know about Investing in Wine
Everything you need to know about Investing in Wine
Everything you need to know about Investing in Wine
With interest rates near record lows for over the past decade finally rising, the ever-present search for investment yield continues. Where should the prudent investor put their money in a rising interest rate environment, with the added pressure of increased inflation?
If you automatically are thinking of alternative investments, you are on the right path.
What do you need to know about Investing in Wine
In a rising interest rate environment with added inflationary pressure, the bond market is not where you want to invest your hard-earned money. If you’ve watched the stock market at all in 2022, you already know how volatile the markets have been. The market rarely likes it when the Federal Reserve raises interest rates, even when the rate hikes are already priced into the market. The anticipation of rising rates turns the markets quite choppy, which brings us back to alternative investments.
When investors typically think of inflationary environments, they seek places to hedge against inflation. Investors immediately think of rotating to stocks from bonds, or investing in commodities such as precious metals, or oil and natural gas, or possibly Treasury inflation-protection securities (TIPS), or maybe even real estate.
However, most investors often overlook an import asset class, not only as a hedge against inflation, but in the search for alpha in all market environments: investing in wine.
What is investing in wine?
The wine investment market is a $5 billion global market. The market is in constant flux, with limited production each year and current inventories being depleted every year by consumption.
There are several ways an investor can invest in wine. An investor can purchase the stock of a publicly traded winery, such as Willamette Valley Vineyards. Another option would be to invest in a wine distributor like Brown-Forman Corporation. Investors can also turn to Exchange-Traded Funds ETFs to invest in wine.
While there currently is not a specific wine ETF, there are consumer staple ETFs that have wine related investments in them. Investors can also purchase futures in wine. Futures are a derivative investment contract based on wine aging in barrels before it is even in bottle. However, none of these are the type of wine investments we will focus on in this article.
The type of wine investing we are talking about is investing in investment grade wine. What does that mean, investing in investment grade wine? It means that you buy the physical bottles of wine and store them in your wine cellar, or rented wine cellar space, intending to sell the wine at a later date.
Buying the physical bottles of wine is still the best and safest way to invest in wine.
Why invest in wine?
Investing in investment grade wine is an excellent source of diversification. Wine does not swing up and down with the volatility of the stock market or with interest rates. There is little correlation between wine and traditional investment markets. Sometimes, there might even be a negative correlation. For example, if the markets are going down, the value of wine will be rising. The value of wine is not driven by the economy.
Wine derives its value from the many things that go into each vintage and consumer trends. Weather patterns, rain near harvests or droughts, yields at harvest, and terroir—the environmental factors that affect wine, all affect the value of wine. Not to mention the reputation of the winemaker or chateau and positive reviews and ratings also help.
In the early 2000s, the Liv-ex Fine Wine 100 index was created, and it has outperformed global equities and ETFs in recent years. Since its inception, the Liv-ex has risen 270%. The index also aids wine buyers in tracking wine prices year over year.
Over the past 40 years, returns on investing in wine have outpaced the S&P 500 11.6% to 10.9%. An additional data point to consider is, in aggregate, an investment made in 2004 in stocks would have returned up to 371% by 2022. Not too shabby.
However, making the same investment in Champagne over the same period would have yielded a 534% return. Move that investment to Burgundy, a world-renown wine-growing region for Pinot Noir in France, and it would have returned a whopping 652%.
Mostly, fine wines are an appreciating asset. As they age, they become rarer because inevitably some bottles are consumed, fewer remain, and prices increase. Each vintage is unique unto itself. Wineries cannot go back and make more wine of past vintages no matter how successful they were for the winery.
Once it’s gone, it’s gone. Wine is a true testament to supply and demand. Of course, market trends will also play a role, and at some point, the wine will turn have passed its prime and will depreciate rapidly.
What is an investment grade wine?
Investment grade wines are wines that have the ability to age well. Factors such as higher acidity, firmer tannins typically aid in the ageability of wine. Given these characteristics, it is no surprise most of the long-aged wines are from “Old-World” European wine-growing regions of France, Italy, Spain, and German.
They typically come from famous wine-growing regions like Champagne and Burgundy mentioned above, also Bordeaux and the Rhone Valley, both in France. As well as, Barolo and Tuscany in Italy, and increasing from Napa Valley in California. Do not be fooled to think all investment grade wine is red. Thirty-year-old German Rieslings are a special treat to savor. Chardonnays from Burgundy in France will also drink well for decades and surprise your pallet and provide a healthy return on investment.
A few producers to look for are all the Premier Crus of Bordeaux Château Haut-Brion, Château Lafite-Rothschild, Château Latour, Château Margaux, Château Mouton Rothschild and some of the Deuxièmes Cru (2nd Crus) Château Cos-d’Estournel, Château, Ducru-Beaucaillou, Château Gruaud-Larose to name a few. In Burgundy seek the Grand Crus of Vosne-Romanée, especially those by Romanée Conte.
Considerations before investing in wine
The time horizon of your investment can easily reach a decade or more, so plan accordingly. Many investment grade wines can easily drink well for half a century. In 2022, you will still see wines from some of the best vintages of the 1900s, like 1945, 1947, and 1961, at auction.
Be ready to have a proper wine cellar built. You wouldn’t leave your Ferrari La Ferrari parked on the street and you don’t want your wine investment stashed in a cupboard. At the very least, rent space in a proper wine cellar to store your investment. You don’t want to risk your investment to potential environmental risks while it ages.
Auctions typically sell investment grade wine in lots of 3 or 6 bottles, or a full case of 12 bottles. Plan accordingly when you purchase your wine and never buy less than 3 bottles of any one wine. An exception to this rule of thumb would be Napa Valley cult Cabernets.
With extremely limited production from makers like Bryant Family, Harlan Estate, Screaming Eagle and others, it will prove difficult to purchase 3 or more bottles.
Speaking of these California cult wine producers, they offer a unique opportunity to flip wine. The production of many of these wines is so limited, they are sold only through a subscription. Many of the mailing lists to get on these subscriptions have over a ten year wait list.
However, if you are lucky enough to find your name on one of these subscriptions, you can purchase your allotment of wine directly from the winery around the time of harvest. When the wine is bottle in about two years, the winery will ship you your wine and upon receipt you can immediately flip your allotment for a profit. By the time you receive your allotment, the retail price will have been marketed up with a 50% premium over what you paid for the wine.
There is also the risk of buying counterfeit wines. There are many well-documented cases of fraud in wine auctions, so buy from reputable sources and do your own due diligence or hire a professional.
Don’t forget insurance. You never know what mother nature will throw at you and you don’t want nature to cost you your investment.
How to invest in wine?
There are platforms out there that are like the stock market and allow you to invest in wine. These platforms truly make investing in wine easy.
Spiritory is one such marketplace. At Spiritory, we democratize trading and investing into high demand wine and sparkling wine. Our platform provides unparalleled access into blue chip assets at the true market price, with investors, collectors, and epicureans from all over the planet. Every user will have full transparency about other prices and the stock market like model allows to buy and sell in seconds, while our authentication process makes sure you buy a guaranteed original.
See yourself why wine has achieved significant returns over the last decade or just drink what you love. With our free Portfolio function, you can add all your bottles and watch them grow in value. Or you add products to your Wishlist and act when your price point is reached. Our key metrics will provide an overview with performance related data, breakdowns, and overviews.
The first step would be education. Educate yourself on the “bigger” names in the wine world that age well, have ageablility, sell well on the secondary markets, those wine producers that have a cult following, and those with ratings over 95 points. 95 points by Robert Parker holds more value that 95 points from an unknown wine critic.
Follow wine auctions and get a sense of how much different vintages and producers are selling for. Get a sense of what is trendy and what might slip out of fashion. Take this with a grain of salt, as investing in fine wine is a long-term investment and rarely a flipping opportunity accept that already mentioned above.
Plan your exit, as best you can without a crystal ball, before making your first wine investment. If you are looking to purchase a 1982 Château Lafite-Rothschild Bordeaux from an auction, know how much longer you think the wine will hold up and you should hold on to it before sending it back to auction. Speak to other investors.
Wine people are very social and love talking about wine. More than likely, other wine investors will share some information so long as you’re not asking for advice as you're bidding against them.
Diversify your wine portfolio just as you do your other investments. Seek wines from different vintages, different producers, and different regions.
I know a wine collector who loves Burgundy’s and Champagne. He only invests in Burgundy’s and Champagne. While his collection was purely for his enjoyment, this would be a terrible strategy for investing in fine wine. A couple of bad vintages or a swing in trends to full-bodied reds and his collection would take a serious hit.
Last, consider the risks associated with investing in investment grade wines. The early you invest in a vintage; the less information and data you have on the wine, and the more inherent risk you are taking. Talk to your financial advisor for more information.
Conclusion
There are many ways to diversify your portfolio, but wine investment seems to be a lucrative and stable option, retail investors should consider nowadays.