A friend of mine was recently contacted by a fine wine salesman. The pitch was fairly straight forward. In addition to buying wine to drink, individuals can also create investment portfolio of fine vintages. Wine is a finite product for which demand is currently outstripping supply. The great chateaus of the world only produce so many bottles each year and this supply is gradually reduced each year as people drink the vintage. For particularly popular vintages, this creates further supply pressures and subsequent price rises. It sounds straight-forward, but in truth, there’s more to investing in fine wine than just forking over some cash and waiting for the market to rise.
A friend of mine once told me that investing in wine should really be done en primeur – after it’s made, but before it’s bottled. In a good vintage, the initial release prices are usually the lowest at which the wine will ever be sold and consequently provide the great opportunity to make a return. Having said that, the process of bottling the wine is not a straight-forward one. The wine could spoil, ruining the vintage, and further difficulties can occur during shipping and storage.
Previously, I’ve also been advised to buy wines in the original, sealed wooden cases in which they’re originally shipped. Apparently, this reduces the risk of the wine being a fake and increases the value of the bottles – much like having a ’collectors set’ of stamps or cards.
The firm that had contacted me sent over some marketing collateral showing the great annual returns that fine wine collections had generated. In the end, I decided against putting any money into fine wine, as it neither produced cash flow for me (a key component of my investing strategy), nor did it provide exposure to something which I felt had sufficient demand throughout a market cycle.
When interest rates return to historically normal rates (which they’re already starting to do, albeit incredibly slowly), I believe markets of most asset classes are going to begin to be depressed as investors divert cash that would usually have been put into investments into credit cards and mortgages.
I don’t believe fine wine is going to provide any protection against this trend and might actually be more sensitive to it, as holders of the wine sell off their bottles to lock in profits and new buyers dry up as people consolidate their personal balance sheets. As a result, I wouldn’t put any significant cash into fine wine, and would instead concentrate on income generating assets.