Investing In Fine Wine Is (Still) For Fools

Vinted on June 19, 2014 binned in commentary, wine news

We have (rather strong) anecdotal evidence that purchasing fine wines as investment vehicles is, for most people, an absurdly bad idea.

Those examples, as strong as they are, could be criticized as falling under the “fallacy of small numbers” category, however, which might lead the hopelessly duped eternal optimists out there to conclude that in their cases, investing in fine wine for profit will somehow be different.

A recent article in the Wall Street Journal, however, should dispel that myth for all but the most hopelessly duped. The bottom line is that the WSJ dug into what might be the most comprehensive scientific study yet performed on the returns of the fine wine investment market, going back over historical selling prices of the last one hundred years or so, and its conclusions are sobering (see what I did there?):

“After mining historical price data for top clarets going back to 1899, including the prices fetched in auctions before World War I, the researchers calculated that over the entire period, the prices of these wines beat inflation by an average of 5.3 percentage points a year.”

While that might sound encouraging, it’s not. Any such returns and performance have to be adjusted for expenses in order to show the actual rate of return. When that was done, the results looked a lot less profitable, particularly when compared to good old fashioned, boring stock index funds…

To the tape (emphasis mine):

“The professors also estimate storage and insurance costs of around 1.2% a year, reducing their estimated net after-inflation returns to 4.1%—substantially below that of stocks. And unlike stocks, bonds and real estate, wine can’t be valued in the standard manner—that is, by comparing the price of an investment to its expected cash flows. Wine, like gold, commodities and other collectible assets such as art and luxury cars, generates no cash flow. So to some extent investing involves a lot of guesswork. Furthermore, wine hardly offers the rich a store of value. One of the major drivers of higher wine prices has been the rising prosperity of the superwealthy. A worsening of economic conditions may hit the value of their cellars along with their stocks and other investments.”

What this means:

  • By any reasonable measure, after accounting for the expenses involved in properly storing wine and then selling it in the auction or “grey” markets, fine wine as an investment returns less than the stock market would have over the same periods of time.
  • The professors behind the study have concluded that the market for buying older fine wines (the “greater fools” in that transaction) is likely to constrict over time.
  • If you’d have put the money poured into purchasing, storing and selling fine wine into a simple set-it-and-forget-it S&P 500 index fund, you’d have come out way ahead, been able to buy more of your favorite wines, and made a much stronger investment  purchase as a result: an investment in your future drinking pleasure.

[ Editor’s note: you may, at this point, want to roll your eyes and wonder what the hell a wine blogging guy knows about investing in the market and comparing the returns of investment vehicles, pontificating on commodities, and droning on about investment theory; the counter argument is that I know a lot more about it than you probably think I do, so the opinion is at least a semi-educated one. ]

If you’re contemplating any substantial move into the fine wine investment market, I’ve got three words for you: Don’t do it. And here, for good measure, are four more; remember that the four most dangerous words in any investment sphere are “this time it’s different…”

Cheers!

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    Comments

  • The Drunken Cyclist


    So you are saying you think it might be time to drink that '86 Mouton-Cadet instead of trying to sell it at an auction in Topeka?

  • Austin Beeman


    Everything you've said is completely right from an economic perspective, but I've recently tasted a lot of 20+ year wines with great provenance. I can tell you that the value of those tastes is …priceless!

    • 1WineDude


      Austin – well played, my friend, well played.

  • Bob Henry


    Joe,

    A short supplemental reading list on the subject.

    ~~ Bob

    From The Wall Street Journal "Money & Investing" Section
    (February 24-25, 2007, Page B1ff):

    "Fine Wines No Longer Just Tempt Collectors;
    Investors Sniff Around Some Prime Vintages;
    'Drink Your Losses'"

    Link: http://online.wsj.com/article/SB11722763973451787

    By Jeff D. Opdyke
    Staff Reporter

    — AND —

    From The Wall Street Journal “Opinion” Section
    (June 18, 2014, Page Unknown):

    “The Money Is All Bottled Up”

    Link: http://online.wsj.com/news/articles/SB12137468910

    Book review by Jonathan Karl

    . . . is (was?) a senior national security correspondent for ABC News

    Investing in Liquid Assets
    By David Sokolin
    (Simon & Schuster, 288 pages, $26)

    — AND —

    From The Wall Street Journal “Money & Investing” Section
    (April 25, 2011, Page C10):

    “Drink to That? Acquiring a Taste for Wine Investment”

    Link: http://online.wsj.com/article/SB10001424052748703

    [See online edition for accompanying exhibit]

    By John Jannarone
    “Heard on the Street” Column

    • 1WineDude


      Bob, we just need to be careful that the stories aren’t the equivalent of the investment porn that dominates the media about money. 99 percent of that stuff is completely useless. Give me data every time, a guys study trumps all the financial junk media combined.

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