Octavian Vaults, Fine Wine Storage Periodicals

Love or Money: The Nature of Fine Wine Investing

Elin Mccoy considers whether passion or profits should influence fine wine investors’ buying decisions

A financial investment guru once told me that people shouldn't invest in anything they don't understand because they won’t make money. So wine collectors should have a leg up when it comes to investing in wine - and not just because they can always drink their mistakes.

But it's not quite that simple. For generations, the basic nature of fine wine investing has been divided between two core ideas: love and money, each aspect appealing to, well, different personalities.

· Passion vs Pecuniary ·

For collectors, passion for the grape has been - and still is - the primary motivation to purchase many more bottles than they can personally drink in a lifetime. In the main, those looking for profits have largely been the merchants and brokers who trade wine as a global commodity.

Only recently have collectors started to embrace both ideas when it comes to wine investing. But first, a bit of history on how we got here. Investing in wine surely started with financial gain in mind. We could probably go back to the Republic of Georgia, or ancient Rome, but let’s start in Bordeaux. Many of today’s powerful château owners and négociants are descended from the merchants who made it big in the 19th century through investing - some would say speculating - in a particular vintage. Case in point: Herman Cruse, who arrived in the city from Denmark in the early 1800s and founded négociant house Cruse et Fils. In 1848, a difficult, economically volatile year filled with high-profile revolutions, he took a flyer on enormous quantities of wine from the great 1847 vintage - reportedly enough to fill 16 million bottles - at exceedingly low prices. When Louis Napoleon Bonaparte was eventually firmly established in power as the President of the Second French Republic, and prices rose, Cruse unloaded his wine and made a fortune.

During the same period, wealthy families in England were "investing" in wine for a different purpose: to provide something special for future generations to drink. One of the best examples is the continuing tradition of laying down a pipe of Vintage Port, the equivalent of 733 bottles, when a child or grandchild is born.

The vast majority of wine lovers today start out with the personal passion approach. They buy a case of a wine they love, then another and another and another, and before they know it, dozens of cases are quietly ageing in a corner of the basement. This buy-now-drink-later strategy is an investment in future pleasure, when the wines have reached perfect maturity. The motives to buy are all about discovering your own taste preferences and reflect how you live and drink and entertain. And let's not forget the pleasure of going down into the cellar to pat your bottles from time to time.

Admit it: it’s more impressive to brag to your friends about the Pomerol you snapped up for a bargain price than your latest stock picks.

coins-500.jpgWhen wine enthusiasts (as opposed to merchants) started buying Bordeaux futures about forty or so years ago, their initial aim was less about profits than to save money (and ensure a supply of their favourites) by purchasing wines at the lowest possible price while they were still in the barrel. Another was the chance to feel like a savvy wine insider choosing top bottles from the largest fine wine region in the world. (Admit it: it's more impressive to brag to your friends about the Pomerol you snapped up for a bargain price than your latest stock picks.)

Some buyers quickly realised they could off-load a case or two when the bottled wines sporting higher price tags arrived, and that those profits would cover their passion investment. It was a neat circle. Sadly, that scenario hasn’t worked for most of the past 15 or so vintages.

But in the last two decades, an ever-growing number of collectors have begun to shift their view of the core nature of wine investing, incorporating the potential profit aspect far more than they did in the past. How did this enter the zeitgeist?

First, commercial wine auctions began to offer an easy way to sell your wine. As family collections from great country houses went on the block at Christie's and Sotheby's and started to bring big bucks, wealthy individuals began to see their collections as a valuable financial asset, like the paintings in the dining room, jewellery, Jacobean furniture, etc. that could be disposed of for profit. In New York, wine auctions became legal in 1994; in Hong Kong, the first ones were held in 2008. Add to that the proliferation of online wine auctions in the U.S. and the recent addition of live trading at U.K. merchants.

In the early 21st century several other factors combined to push wine as a serious financial investment to passion investors. One is the rise of wine exchange platforms, such as Liv-ex, the business-to-business electronic trading platform founded in 1999 by two former stockbrokers, and, more recently, platforms accessible by private collectors, such as Wine Owners.

Right alongside Liv-Ex came the rise of fine wine funds, whose sole purpose is to purchase large quantities of certain highly tradable wines, like top Bordeaux, the standard investment commodity, hold stocks for five or so years, then spin them off for big profits. It's not surprising that most of the people who founded these funds had investment backgrounds but happened to be passionate about wine, too.

· Alternative Investments ·

The past decade has also seen the rapid growth of "alternative investments," with personal wealth management advisers touting wine as appropriate for both individual and institutional portfolios. Wine merchants, especially in England, extended their wine advising services to promoting wine as an attractive financial investment, even publishing how-to guides and offering their own investment schemes on how to buy wines you can sell to pay school fees. (Unfortunately, many of these have gone bust.)

All these developments were fed by the explosion of wine prices, first of cru classé Bordeaux, then a handful of top Burgundies. The numbers inspired headlines like "Fine Wine Prices hit Record High," as well as numerous articles in the business sections of newspapers about how to invest in wine and studies by finance and economics professors, who seem to love analyzing the returns on investing in Bordeaux. One study out of Cambridge University, reported in the Financial Times last December, showed that over the past century wine’s financial return beat bonds, gold and artworks.

All these stories have also contributed to the shift in collectors' views of their own wines as a serious source of potential cash. Of course, the frenzy of bidding and selling at the new style of auctions, held over well-irrigated lunches and dinners in top restaurants, started to have a kind of rock-concert appeal.

But for people who love drinking it, wine has distinct problems as a pecuniary investment. As the late Lloyd Flatt, one of the foremost American wine collectors in the 1960s and 1970s once pointed out, "Unlike an art collection, which is permanent, wine ultimately must be consumed." You can enjoy looking at your collection of paintings for years until you sell. With wine, you have to drink it to enjoy it, which makes its financial value vanish in the process.

· What to Purchase ·

The biggest difference in investing to make money or buying for pleasure is in what you purchase. If you want profits, you have to pick specific vintages from blue chip producers that have the capacity to age for decades; that trade regularly and have a track record of appreciating in value. The list is limited to about 20 or so top Bordeaux, and a handful of labels from Burgundy, Champagne, California, and Italy. It doesn't take depth of knowledge or experience to sample these trophy wines of the world; you just have to pay the price of admission.

There are adventurous wine investors who look beyond blue chip labels. U.S. wine fund The Wine Trust hunts down undervalued Bordeaux up-and-comers whose owners have put lots of money into improving the wines' quality. They like to point out that 2009 Smith-Haut-Lafitte appreciated 143 percent from 2010 to 2015.

Wine lovers investing solely for passion, though, can look for potential returns in just the glass. They can indulge personal tastes and experience what makes wine so special - its diversity. Glenn Lowry, director of the Museum of Modern Art in New York, told me that he had a thing for top Spanish wines. These buyers can follow the evolution of their own likes and dislikes, ignoring the scores the wines have received or their current track record at auction.

Drinking wine is not just about taste, it's also an emotional experience. One of the happiest collectors I know restricts his big buys to wines from estates he’s visited personally. When he opens them, he's drinking a memory, too.

· Changing Fashions ·

Sometimes fashion changes, turning a personal wine passion into an unexpectedly canny financial investment. Burgundy wasn’t hot in 1960s America when Wall Street executive Don Stott fell in love with the wines - "the aroma got to me," he says - and he began collecting them in vast quantity, getting to know growers whose wines he respected and scooping up special bottlings. By the time he decided to sell last year, Burgundy was a hot category. Two two-day sales brought $13.5 million.

I love vintage port, but it hasn’t proved to be a very good investment, except in terms of enjoyment. I keep hoping it may become fashionable again but I haven’t seen any Downton Abbey effect so far.

To me, the most important reasons to buy wines are the thrill of the chase in hunting down rare, obscure wines, sharing and enjoying them with friends, and discovering what kind of drinker you are.

To make money with wine, as with anything else, you have to buy at the right time, and sell, as Don Stott did, when the prices are high. And prices do not always go up. Many people learned that during the 2008 financial crisis, when they wanted to blow out their collections for extra cash and discovered wine isn't a liquid investment (no pun intended). I remember a Zachys auction in 2009, where a methusaleh of 1971 Romanee-Conti brought less than half of what it had a couple of years before.

It's also worth remembering that wildly heralded great wines are priced accordingly - and frequently the target of counterfeiters. Wine is a perishable commodity, so unless you have a natural cellar with ideal conditions, the cost of maintaining several thousand bottles at the correct temperature and humidity must be factored in.

To me, the most important reasons to buy wines are the thrill of the chase in hunting down rare, obscure wines, sharing and enjoying them with friends, and discovering what kind of drinker you are. My very unscientific observation is that the more people look to wine for financial gain, the less enjoyment they tend to derive from it.

That supports the idea that wine should be regarded as part of an individual's personal holdings rather than as a separate asset class within their investment portfolio. One recently established wine fund, Luxembourg-based Carpe Vinum Partners' Fine Château Collector, founded in 2013, tries to satisfy the passion side of investing as well as the pecuniary. The founders organised it more like a club, adding Burgundy, Rhone, champagne, and Louis XIII Cognac to the usual top Bordeaux and they permit you to withdraw your investment in actual wine after a year for your personal consumption and sponsor luxury dinners with château owners.

Is this my argument for a "buy what you love" philosophy? Well, yes. My view is that people who collect wine as a financial investment have a duty to cash in and get those prized bottles into the hands of people who would happily pay a premium for the privilege and pleasure of drinking them.

© Octavian Vaults 2014