Invesgting in Wines

If there is one thing people feel they know about wine, it is that some bottles, especially very old bottles, are quite valuable. What is it about the transformation of a simple fruit, such as grapes, into an alcoholic beverage, that warrants such value? What makes one wine worth a small fortune, while another, perhaps even one of comparable quality, worth so much less? Can any wine really be worth $1000 or more?

Wine is a simple product of the fermentation of mashed grapes. Its quality may vary greatly due to climate, soil, age of the vines, genetics of the vines, and most importantly, the skill of the winemaker. Every year the climate changes, bringing variations to the final product that are classified as vintages. The soil and genetics of the vines tend to remain the same; however the vines continue to age, yielding less, but more intense fruit, with every passing year. Winemakers come and go, often leaving their mark on each successive vintage. As in any profession, some winemakers exhibit greater skills than others. All of these factors are combined to produce the final test of the wine, its quality.

Each of the wine producing countries of Europe have tried to qualify this ethereal concept of quality by defining procedures and yields to be followed for specific regions. Certain vineyards and regions have been recognized as being an historic factor in the quality of the wines, and as such are rewarded in some way. This classification system allows for instant recognition of quality, just by glancing at the label. At least that is the premise, and like so many labors of man, it tends to suffer from human error and inflexibility.

The wines of the New World are not straddled with any such classification systems. For better or worse it is up to the consumer to decide which producers, vineyards, or regions, have historically yielded quality wines.

However quality is determined, it is price that is considered the final indicator of quality. Quality is not the only factor in price. Scarcity, as it does with any product, can drive a price up. As wines age, they may increase in quality, and in scarcity, thus increasing in value.

Not all wines improve with age. Those that do have an upper limit of age. It requires constant monitoring of the aging potential of wines to determine at which stage of maturity they are at at any given time. This monitoring can only be done by actually tasting the wines. The results of these wine tastings are closely followed by the wine press, and in turn by the wine investors, who use the data collected to determine in their own minds, the relative value of the wine.

Most investment grade wine is sold at auction. In the US these auctions are almost exclusively held in Chicago. For the rest of the world it is the auctions in London that are used as bellwether marks for setting prices. Any serious wine collector or appraiser must have the results of these auctions, as well as the current retail pricing of the most popular wines, in order to determine the value of a wine at any given moment. The collection of these figures is a daunting task, that fortunately is now done by someone else. William Edgerton has under taken the role as collector of wine prices in a regularly published document, entitled Wine Price File. Many auctions are in fact charity affairs, where the price of the wine may be exaggerated by the desire to donate more than the value of the wine to the charity.

Just how much does a wine increase in value over time? Lets take a look at a 1961 Ch. Latour. On release in 1961 dollars, it cost $3 to purchase. Currently it is selling at auction for approximately $500. This is a return on investment of just over 15% annually for 35 years ¹ .

I picked 1961 Latour because it is a best case scenario. For our second case, let us pick something less illustrious: 1975 Ch. Cissac. A lesser Bordeaux wine from a lesser vintage. Ch. Cissac was released for about $4 a bottle, it currently fetches $15 at auction. That is a ROI² of only 6.5%. Clearly not all wines make great investments. Let us return to Ch. Latour for our 3rd example, but from 1975. Great wine, moderate year. Released at $20 it would now bring $75 at auction. Again our ROI is only 6.5%.

Not considered in the above examples of ROI are the costs involved in storing the wine (condition of the wine at at the time of the auction can vary the value as much as 100%). If you have a passive cellar with existing racking than these costs may not enter the equation. If you use a plug in device to moderate the temperature of the aging wine then you need to add as much as $10 a month³ for the cost of utilities (much more in Europe and other countries where electricity is more expensive than the US). In the above best possible scenario, the 61 Latour, this reduces the ROI from 15% to around 12%. In the other scenarios it brings the 6.5% down to a loss of over 200%.

While great wines in great years constitute above average investments, almost any other combination yields, at best, below average returns. There is much speculation about the quality of a vintage as early as harvest; however only truly bad years can be predicted at such an early date. It is one of the precarious truths of investing in wine that the quality of a vintage is only told after 5 to 10 years have passed. By this time the wine has already begun to appreciate, and if purchased at this point the ROI will be considerably less once the wine has matured.

One of the most common ways to invest in wines, especially Bordeaux⁴ , is by buying the wines before they are even bottled. This is referred to as Futures, and is itself an entirely separate type of gamble. Not only must the vintage and demand for the wine be favorable, but chances are that currency fluctuations will also play a role in the value of the wine. All too often the demand is low, and the currency fluctuations are high, and the delivered wine is worth less than you paid for it.

This scenario is exactly what happened in the 1970/71 vintages. Wine speculation became trendy, and huge amounts of wine were bought and sold at auction, long before the wine was ever released. The wine press, too often the sheep rather than the shepards, took this volume of trading, and its consequential rise in prices, to be an indication of the quality of the vintage, and started to declare the 70 and 71 vintages as equals to the famed 61 and 59 vintages. Eventually the wine was bottled and delivered. With great fan fare and expectation the wine was tasted and declared.. mediocre. The prices started to plunge and the entire market collapsed. The wines are still traded at prices that are too high for the quality, and any knowledgeable collector avoids both vintages.

Wine, like all art, has an intrinsic value above that it fetches at auction. Unlike most investments, when you liquidate wine, you can do it through the actual depletion of stocks, that is, you can drink it. The joy that comes from sharing a well aged wine with friends can not be quantified, and this is doubly true for a wine that has spent its entire life in your cellar waiting for this very moment.

Are wines with outrageous price tags worth it? Again, there is no way to judge the answer to this. Let me instead relate an analogy. I have a client that makes over $20,000,000 a year. If this person works the usual 240 days a year, 8 hours a day (he of course works much more), his hourly rate is $10,416.67 an hour. For this person to pay for a $1,000 bottle of wine, he only has to work about 6 minutes. If you make $20 an hour, you have to work 50 hours to afford the same bottle of wine. For those of us in the $20 an hour range, $1,000 bottle of wine is the ultimate extravagance. For those in the $10,000 an hour range, it is no more a stretch of the budget than a $2 bottle of wine would be to us. In fact since there are so few good $2 bottles of wine, the millionaire is actually getting a bargain.

The cost of the wine may well not be an indicator of the quality of the wine. This is especially true in New World wines where the main factor⁵ in the pricing of the wine is the demand. Many wines become chic, propelled by the press who are too afraid or ill informed to speak a dissenting opinion. These wines often sport huge price tags that place them in the highest leagues of World Class wines, without the wine itself being that good. Since money is no guarantee of taste, these wines sell briskly, increasing their value out of proportion to their quality. In fact I would go so far as to say this is the case for the majority of New World wines that find themselves selling at the highest prices. The cost of advertising and promotion (especially if the producer maintains lavish grounds or houses) can necessitate a retail price far above a wine of similar quality with less overhead. Simple touches, such as gold embossed labels may add several dollars to the wine, before any wine is even added to the bottle. It requires an well trained palate and great deal of confidence to weed out the pretenders from the truly great wines. Time often tells, and those chic and trendy wines rarely keep their value over the long haul.

The bottom line is that wine as an investment is so risky as to only make it worth while for those that would be as content drinking the wine at maturity, as selling it. To make matters worse almost all localities have stringent laws relating to the commerce of alcoholic beverages that may make selling a collection all but impossible.

Footnotes:

1 Investment grade wines, such as Bordeaux are released several years after the vintage, so the investment in this case would not have been made until 1963.

2 ROI = Return on Investment

3 Utility costs are averaged for the period of return

4 Since Bordeaux are the most universally traded wines for investment, they will be used for examples throughout.

5 Quality wines cost more to make than simpler wines, and will always have a higher price tag. This is true even for wines where the resulting quality is not as great as the price would tend to warrant.