Forget the veritas … my rallying cry is, “In Vino Lucrum!”
Or, as the Latin speakers in class know: In Wine, Profits.
Wine, as I wrote last week, is more than a liquid – it is, provably, a liquid asset.
For wine investors, their prized bottles and cases have historically generated annualized returns of roughly 15% a year -- though for some wines and some vintages, the numbers are far larger.
Though prices for fine wine ebb and flow as with any other asset class, this niche market typically increases over time. That’s because ongoing consumption regularly reduces the supply of the wines that consumers and collectors most covet.
That’s an elementary supply-demand truth that investors can take advantage of, as long as you know what you’re doing.
Thus, today we’re going to explore the “5 Rules to Wine Investing.”
I stress the importance here – if you don’t adhere to these rules, you’ll have trouble selling your wine at auction. And you’ll come away thinking wine is a lousy investment – which will have been true for you.
However, if you will take these rules to heart, you can build an investment-worthy collection of wine with as little as a few thousand dollars to start!
Rule #1: Latour and Lafite-Rothschild Are Not the Only Worthy Wines
Relative to all wine that exists, only an exceedingly limited number of wines are considered investment-worthy.
And that universe largely spins around the very top end of the Bordeaux market.
Atop the list are the five Premier Cru (first growth wines) that always have big demand globally: Lafite Rothschild, Margaux, Latour, Haut-Brion and Mouton Rothschild. Chateau d’Yquem is the first growth Sauterne.
For historical reasons I won’t bore you with, several of the most-sought-after, most-expensive, most-collectible Bordeaux are not on the official first-growth list, which dates to 1855. That includes names like Petrus, Ausone and Cheval Blanc. They command big dollars, big respect, and tend to be some of the best investments over time because of the huge demand among oenophiles.
But that doesn’t mean investors must shop only at the top of the pile. Just as Wall Street has Blue Chips and then a bunch of other worthy investments, so, too, does wine.
Many second- through fifth-growth wines make excellent investments. And the reason is practicality.
Restaurant-goers can’t always afford a bottle of Latour or Ausone, but many do afford bottles of Léoville-Las Cases, Calon-Ségur, Troplong Mondot and Lynch-Bages. For investors, those names and others offer excellent profit opportunity.
The 2000 vintage of Ducru-Beaucaillou, a popular second-growth chateau from one the few top-notch vintages of the past 10 years, has generated a 9% annual gain since its release early last decade. Had you grabbed cases of this wine at the height of the global financial panic, you’d be sitting on rebound returns of about 35% annually since November 2008.
Lynch-Bages, perhaps the most-popular fifth growth, has seen a similar trajectory, as has second-growth Pichon-Lalande and many others.
Outside of Bordeaux, numerous Burgundies are investment-worthy. Particularly, prized names such as Domaine Romanée-Conti, or just DRC.
Also worthy are some Italian Super Tuscans (Sassicaia, Gaja, Solaia); Champagnes (certain Dom Perignons, Krugs, Louis Roederers); Spanish reds (Alvaro Palacios L’ermita, Dominio de Pingus) and vintage ports from Portugal (Fonseca, Quinta do Noval Nacional).
California has a selection of über-elite “cult” cabernets and pinot noirs that soar in value. But most are mailing-list wines -- meaning, you can only buy them if you’re on the wineries’ mailing list.
And getting on the mailing list is often a years-long process … and even then you’re typically only allowed to buy between three and six bottles because production is so small and demand so high.
This limits profit opportunities in California cult wines because the wine market wants liquidity, no pun intended.
Rule #2: Buy Great Vintages over Good Vintages
In any given year, some producer in Bordeaux or Burgundy or wherever will produce a stunning wine that earns major plaudits.
But that’s not good enough as an investor.
Consumers of fine wine know little about the 2008 Bordeaux vintage or the Napa Valley cabernets circa 2003 and ‘04. Those vintages were pretty good. But they weren’t great.
Wine lovers know a lot, however, about the 2003 and 2005 Bordeaux, and the 2007 Napa cabs. Burgundy lovers know a great deal about the 2005 vintage, and Champagne fans can rattle off all sorts of information about 1997.
All were classic vintages, some of the greatest in recent history.
As an investor, you want to put your money on the vintages investors and the media know and write about.
That’s where the demand exists.
It’s also where the quality exists. The chateaux in Bordeaux across the board produced amazing wines in 2005, giving investors a greater selection of wines to invest in at all price levels from about $75 a bottle on up past the four-figure mark.
As such, restaurants in 2014 will be clamoring to buy 2005s across the spectrum. But they will consider very few 2004 offerings. They know customers will see “2005” on the menu and will quickly recall what a great vintage that was, and want that wine.
As I mentioned last week, I encourage new wine investors to start their effort with cases of highly rated 2005 Bordeaux, available for between $2,000 and $4,000 a case … names like Ducru-Beaucaillou, Pape Clement, Pavie-Macquin and others.
Based on the historical performance of wines of this caliber, I would expect these cases to fetch between $6,000 at the low end and upward of $12,000 to $16,000 at the high end by the time 2015 rolls around.
That would mark annualized returns of 12% to 15% for the decade from 2005 to 2015, but returns of 20% or more for investors buying now.
The returns won’t come in a static, straight line. Wine prices bounce around … and I would use any meaningful bounces to the downside to grab a few cases here and there at attractive prices.
Rule #3: Where You Buy is as Important as What You Buy
Even if your local mini-mart, through some magic, ends up with a case of Chateau Le Pin, the ultimate Bordeaux cult wine, the resale value at auction will be marred by the “provenance,” or the wine’s history. (More on that in a moment.)
Auction houses and collectors want to see that your wine comes from reputable dealers or, preferably, from the winery directly.
That way they know the wine is authentic. Specifically, they want you to prove the wine’s provenance.
With Bordeaux, you’ll be buying from wine merchants, since the chateaux don’t generally deal directly with consumers.
California’s most collectable/investment-worthy wineries work on a direct-to-consumer model, though you can also find some of the more-sought-after cult wines in high-end wine shops online or in major American cities. Sorry, but the average wine retailer or, worse, grocery store is generally not the place you want to be buying wine for investment purposes.
Rule #4: Keep Meticulous Records and Store Wines Properly
This goes hand-in-hand with provenance and buying from reputable sources.
You absolutely must keep good records on your wine purchases, and you absolutely must keep wine properly stored.
Wine is a living creature. It evolves over time. Indeed, high-end Bordeaux, Burgundy and California cabernet makers build their wines to age. You can drink them early, sure. And they’ll be darn good.
But the best a fine wine can be won’t appear for many years.
Yet you can’t just stick your bottles in a cheap wooden wine-rack on top of the refrigerator or in a bedroom closet and go about your day.
Hot wine matures too rapidly and spoils. And the relatively dry conditions in a typical home cause corks to dry and shrink. That lets oxygen seep into the bottle, oxidizing the wine, or making it “skunky.”
Skunky is bad. No one will buy that wine.
And buyers know when a collector has improperly stored wine. Because a shrunken cork allows some wine to evaporate out of the bottle, the missing wine is obvious when a bottle is held up to a light.
Optimal conditions: A custom-built cellar or a pre-made wine cabinet that keeps bottles around 55° to 58° with a relative humidity of 60% to 75%.
You can buy an environmentally controlled wine cabinet for a couple thousand dollars that will hold 100 or so bottles, though much bigger units also exist. A custom-made, closet-sized cellar starts at about $5,000 if you have someone build it … and can run many thousands more, depending on your wants.
Or, in bigger cities you will increasingly find wine-storage facilities that make a market in maintaining proper cellar conditions for investors/collectors. Google “wine storage” and your city and you’ll likely come up with a few. Heck, I even have one here in South Louisiana, attached to a self-storage center.
As for records, keep receipts on every bottle you buy from wineries or dealers. They are proof of provenance. This is your way of showing a buyer or an auction house where your bottles originated.
That goes a long way in alleviating concerns that a wine is a forgery, which is a big concern with wine collecting/investing.
Plus, it offers greater assurances that the wine has been properly cared for.
Perfect provenance: Proof that you are the wine’s only owner and that the bottles came from the winery directly or through a respected merchant who bought them directly from the winery (generally the case for Bordeaux).
Directors at Sotheby’s auction house have told me that without the proper paperwork – without provenance – a case of wine can lose 20% to 30% of its true value.
Rule #5: High Ratings are a Must! … Though Exceptions Exist
Rightly or wrongly, ratings issued by widely followed wine critics affect the perception of a wine’s value.
That’s because ratings have become the great equalizer and a de facto standard by which investors/collectors trade wines.
No two palates are the same. I might think the 2001 Chateau d’Yquem I mentioned last week is the greatest liquid I’ve ever tasted.
Someone else will say it’s cough syrup unworthy of the price.
But because the wine market puts its faith in the palates of a tiny lot of critics, buyers know what to expect from a 95-point wine … or an 80-point wine. That provides a measure of comparability that lets wine trade like a standardized commodity.
(Coin investors: It’s just like the grades that PCGS and NGC slap on coins that allows investors to trade them sight-unseen.)
For the most part, wines need a rating of 95 or higher from the major wine critics to reach investment-grade status. Below that, the wines might be great to drink, but they’re generally not worthy of your investment dollars.
Critics with the greatest swagger include Robert Parker and his Wine Advocate, particularly on Bordeaux and Napa wines; James Laube, the California wine critic for Wine Spectator; Stephen Tanzer’s International Wine Cellar; and Allen Meadow’s Burghound, the definitive Burgundy/California pinot noir critic.
All that said, not every great winery produces a 95-point wine every single year. Some years, grape quality doesn’t lead to high-scoring wines because of weather or other factors.
Nevertheless, the great names in wine – Latour, DRC, Yquem and others – have restaurant buyers and rabid collectors who want those vintages to fill out a wine list or a collection.
That’s true, too, for wines with slightly less pedigree. Chateau Lynch-Bages, the Bordeaux fifth-growth, is widely desired, year in and year out, because of its perceived value relative to its high quality.
And as I noted earlier, restaurants in particular seek lower-priced, high-quality wines because not every diner shops at the pinnacle of the market.
As such, the best names in fine wine still command a decent premium, even in off years. That gives investors an opportunity to find bargains in good names in off years.
Growing Demand, Fleeting Supply…What’s Not to Like?
Perhaps the best trait about wine is one I’ve already mentioned: ongoing consumption.
Wine is the only asset that naturally depletes each year and cannot be replenished. Oil depletes. Silver depletes. Same with copper and corn. But they all regenerate with new finds and new planting seasons. Not so with wine.
The world only has so much 2005 Chateau Pape Clement, a wine Robert Parker called “probably the greatest Pape Clement ever made.” The chateau cannot go back and build more of that particular vintage to replace what’s now being consumed.
Yet demand doesn’t shrink. Indeed, given the rising wages in the emerging world – particularly China, Brazil and Russia – consumption of the finest wines has more and more buyers chasing an exceedingly limited amount of wine.
As an investor, you just can’t argue those kinds of economics.
All you can do is build or buy a wine cellar, grab the best wines in the best vintages, store them properly, and then one day sell them at auction and collect the big premiums that will accrue.
And, hey, even if you can’t sell every “investment” at a profit, it’s never that bad when you can enjoyably drink your losers!
P.S. Every month I bring Sovereign Society Members my best long-term global investment ideas in their monthly newsletter, The Sovereign Individual.
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