“Investing” in fine wine is a fool’s errand.
As in, “greater fools” – for it is certainly a fool who hopes to sell his/her speculation to greater fools for a profit.
The term greater fool is actually a pseudo-technical financial one, probably best explained in William J. Bernstein’s amazing book The Four Pillars of Investing (emphasis mine):
“The acquisition of a rare coin or fine painting for purely financial purposes is clearly a speculation: these assets produce no income, and your return is dependent on someone else paying yet a higher price for them later. (This is known as the “greater fool” theory of investing; when you purchase a rapidly appreciating asset with little intrinsic value and no capability to create income on its own, you are dependent on convincing someone else to take it off your hands later at a higher price.) There’s nothing wrong with purchasing any of these things for the future pleasure they may provide, of course, but
this is not the same thing as a financial investment.”
Substitute “coin” with “red Burgundy” and “painting” with “First Growth Bordeaux” and the quote would remain apt, cogent and frighteningly applicable. The bottom line is that holding onto fine wine for any reason other than to eventually drink it (or pass it on to someone else who might) is stupid.
This is because wine does not conform in any way to the modern paradigm of investing, which is built upon lower-risk (and thus lower-returning) loans or higher risk (and thus higher-returning) valuation of something’s (usually a company’s) ability to make profit. At best, it’s a hedge that someone (the greater fool) will want the object badly enough to take it off your hands at a price higher than what you paid for it…
The problem is, those greater fools don’t usually pay enough to make the effort of obtaining, storing and selling the wine worthwhile.
If you don’t believe me, consider “Fine Wine, Poor Returns,” an article by publishing hotshot and big-time wine collector Thomas O. Ryder, published on Barrons.com in September of 2012 (thanks to Alder Yarrow of Vinography.com for finding this nugget, which I hit on after reading The Four Pillars of Investing).
In that article, Ryder details the results of his decision to purge some of the finest wines in his extensive collection (the result of a convergence of two realizations: first, that he had amassed more fine wine wine than he could realistically consume in his remaining years; and second, that he might be able to sell some of his collection to benefit the victims of Hurricane Katrina, which had devastated his home state of Louisiana). The result is… sobering…
Sotheby’s took several thousand bottles from my cellar. They sold for $1.7 million at a rare single-cellar sale in September 2007… Our gains looked impressive until the taxes were paid and the gains were measured over the years that our capital had been employed. In the end, I estimate at best we earned a single-digit net return. Let’s just say my efforts financed a lavish drinking habit, but I would not have made the mutual-fund manager’s hall of fame.
A single-digit percentage return. Think about that for just a moment (the result of your pondering, if you are at all financially literate, ought to be “that f*cking sucks!”).
It means that Ryder earned 9% or less on that investment, which after inflation year-on-year and the costs of maintaining the collection in good health is probably more like break-even (in fact, depending on the years and the inflation rates, it might even be negative – in other words, a loss). One could argue that the return was much higher, since he had to pay exorbitant taxes on the sale of the wines; to which I’d counter that thinking is fundamentally flawed, and that excluding the taxes is actually the “fake” version of the returns, since not paying those taxes effectively makes you a criminal (in financial terms, you’re talking nominal and not real returns there – and no one talks about nominal dollars unless they’re trying to sell you something!).
Add to all of this the delay in pleasure of not drinking your tasty investment, and even at a generous 9% you’ve still got quite the pyrrhic victory on your hands. Personally, I’d rather drink great wine with great friends than watch it grow old for the sake of a 9% return.
Ryder’s example is an important one aspirationally, because there are few collectors who’ve amassed what would widely be considered more (currently) valuable vino: Bordeaux and Burgundy wines from the most storied producers and the most acclaimed vintages. Ryder actually warns us against following any similar path, hoping to somehow game the system now that the Asian markets are going insanely ga-ga over French wines:
“It is all too irrational to be sustainable. Collectors who buy at these prices are unlikely to make money on their purchases, even as the private bankers hail wine as its own investment class… I am glad I stopped buying Bordeaux, especially First Growths, before the 2005 vintage came along, because I am sure there will ultimately be a diminishing supply of greater fools.”
Aaaannnnd there’s the greater fools reference for you, just for good measure.
We are unlikely to see vast increases in number of greater fools, because in our increasingly interconnected global world, with information moving between cultures faster than ever before, it’s just not a safe bet to bank on the probability that people will willingly part with their hard-earned cash without having information to back up their purchase. The greater fool is less and less a fool every calendar year, and 1000% increases in Bordeaux price increases simply isn’t sustainable long-term (witness how quickly the nascent Chinese fine wine market is ditching the not-really-so-rare Bordeaux for the actually-pretty-rare Burgundy, as evidenced in the steep price drops for high-end Bordeaux between the 2010 and 2011 vintages).
Yes, I know that some very wines (such as the DRC releases that I’ll be talking about later this week) will likely explode in price no matter what. But they are the Warren-Buffet-performers of the wine world; rare, for all reasonable purposes unattainable by 99.9% of us, and best explained as statistical anomalies. Most of us have got a better chance of being hit by lightening than buying those wines and storing them properly enough to sell them for a few hundred percentage points profit.
What we should conclude, I think, is this: If wine gives you pleasure, and that’s why you collect it, then great – getting some of that money back later is then just some icing on your enjoyment cake. But don’t be fooled that you can make real, substantial returns from that collection. Here’s a real wine-related investment for you: invest in your wine as if it’s an investment in your future education, pleasure, and joy. Because that’s actually what it is.
And that’s worth a crap-ton more than a single-digit fiduciary return, the pursuit of which you can happily leave to the “greater fools” out there.
14 thoughts on “Investing In Fine Wine Is For Fools”
Great post as always Joe. I have bought some wine that certainly some would deem "collectible" at some rather good prices. In the past, I even turned some of them around and sold them for a profit. More recently, though, I have been holding on to the good finds with every intention to drink them at some point. The (modest) profits I made selling those earlier wines pale in comparison to the desire to still have them. For as you succinctly state–I would have received a far greater "profit" from the pleasure and education they would have provided upon drinking them.
Fine wine investment is a game to be played by those that have plenty of other lucrative investments that are boring as hell, and can afford lower returns on wine bottles, in return for the entertainment value and bragging rights. Hell, Bill Koch was spending crazy money buying up extravagantly priced old bottles at auction, which he was pretty sure were fake, so that he could have fun riding a high horse over a trail of subsequent lawsuits against the seller and the auction houses.
For the rest of us, the real value propositions in cellaring wine now, are the education provided by opening them at a later time, and the dollar differential on what it would cost to purchase that wine years down the road from a retailer who has stored it, or more likely from a wine list in a restaurant where a significant markup can be expected. Hence why I never refer to the bottles downstairs as my "collection"…it's inventory.
FWIW I'll bet you a lot that Ryder's returns were a lot lower than 9%, which is actually a pretty healthy return given that it is the average return of the S&P historically. I think being on the DRC mailing list is really the only MAJOR source of investment returns in the wine business (since the wines triple and even quadruple in price almost immediately on release, and keep going up from there). But since they track every bottle now, they tend to drop people who immediately flip their bottles from their list, so you have to think long term with them, too.
Thanks, Alder. And also thanks for turning me on to that story in the first place. interestingly, I just had a very similar conversation with someone at the NYC DRC 2010 tasting, that those wines were about the only ones that could turn rusty kind of profit, but then as you point out it would likely be your first and last time doing it! Cheers!
Thank you for your detailed post about investing in fine wine.
I would add some points to have a chance to make a profit!
first of all, note that fine wine is made for drinker. this is why it is not that easy to compare with a financial product.
Here are some rules to get a profit (according to me):
– buy exclusively futures (en-primeur) to make sure you will pay the lowest price. be careful to select the right wine merchant to guarantee the delivery…
– buy exclusively wines which has a high score from several wine critics (R.Parker, J.Robinson, etc …)
– buy exclusively fine wines in their original wooden case (OWC)
– age your wines in the best condition in their OWC (wine storage facilities)
– ideally is to use an In-bound warehouse (you won't pay any duties)
– follow the "wine life" by using tools to get the price trend (liv-ex). that way you will know when is the best time to sell your stock.
finally, even if you follow those rules without making a dime, you will have great wines to share with friends and family.
@bluewine – thanks. Personally, I'd not count on building any serious wealth that way.
So you are saying I shouldn't convert my 401K into a wine collection?
Nate -only if I’m the beneficiary…
Where I live, it's not even legal to sell wine privately, so buying wine that neither you nor anyone else you personally know would drink would be especially foolish. Mind you, it does seem rather unlikely that the police would stage a raid at a residence where they might come across lawyers, judges, politicians, and rich business-people and heirs. It might cut short a couple "promising" law enforcement careers, if you know what I mean.
MG – no doubt :-)
two things i never buy with the intent to resell – wine and records.
if you want to make money, start a savings account.
if you want to spend money, buy some wine
Gabe – I think you meant, spend *a lot* of money? :-)
i wish 8-)
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