Is wine a good investment? The liquid illiquid asset
Endowus Insights

Is wine a good investment? The liquid illiquid asset

April 13, 2018
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Michael Caine: “You can’t drink them, Freddy. They’re far too valuable.”
Steve Martin: “So you sell them?”
Michael Caine: “I’d never sell them, they mean too much to me.”
  • Dirty Rotten Scoundrels (1988)

There’s no need to feel guilty - It’s been scientifically proven that wine chemically boosts your mood like an antidepressant. So what if wine was not only pleasurable to consume, but also a lucrative investment? It’s a rather tempting proposition - after all, if the bottom falls out of the market, you can always get out your corkscrew, open up the bottle, and drown your sorrows.

Wine as an alternative investment has seen growing interest. There are various ways to invest in wine during and after its production. In fact, thousands of wine merchants and critics from around the world have descended on Bordeaux this week for ‘en primeur’, a system by which wine is sold two years in advance while still maturing in barrels - in essence, wine futures. You can also invest by buying physical bottles of wine on the secondary market, or invest in a wine fund.

So, is wine a good investment? Let’s examine whether DRC and Le Pin have a place in your investment portfolio:

  1. Liquidity: There is a limited selection of investible wines. Only 1% of the world’s supply of wine production is deemed “investment-grade”. Besides, you can’t just knock on the door of Domaine de la Romanee-Conti and buy a case or even a bottle of 1990 Romanee-Conti (which if you are lucky would cost you about US$18,000 for a single 750ml bottle). You will likely have to play the auction market: buying wine at an auction will incur 15-25% buyer’s premium, and you’ll pay another premium when you sell. This means you’d need at least 30% in capital appreciation before you see daylight - plus it could take weeks or months to sell the wine.
  2. Fair market: There is no fair market price for wine. It is an opaque and markedly inefficient market where you can’t see where the bid/offer prices are at any time. Most transactions are not reported so the insiders will win, which means most of us will likely lose.
  3. Authenticity: Making fake wine is an extremely profitable business. Sour Grapes is an incredible documentary on one forger who is responsible for $550 million worth of counterfeit wine still circulating in the market today. Insiders say Las Vegas restaurants serve more Petrus 1982 in a year than the Pomerol estate ever made. (In case you’re wondering if you should add this to your collection - a 6 liter Imperial Petrus 1982 sold for US$64,200 this past March at Sotheby’s London)
  4. Time: Wine has a sweet spot in terms of age for consumption, and it changes with certain vintages and different wines. Hold on to your investment too long and you may end up with an expensive bottle of vinegar.
  5. Cost: Wine requires physical attention. Temperature, humidity and light (or lack thereof) need to be maintained. As a result, expect to incur hefty storage and insurance costs. Wine needs to be in perfect condition for resell - the auction world has a standardized set of measurements for the distance between the bottom of the cork and the top of the liquid in the bottle. If you hold an MSCI World ETF, you will receive a dividend yield of ~ 2.4% p.a. If you hold wine, you get no yield and you’re out on insurance and storage costs.

Wine makes more sense as something to savour, rather than as an investment. In the long run, equities have outperformed fine wines, with a global annualized real return of 5.2% since 1900 vs wines at 3.7% before costs (Source: Credit Suisse).

chart of average annual returns for various commdities
Source: The Economist

Our advice:

Find wines you like at a price point you are comfortable consuming. If your taste aligns with the market and it runs up in value to a point where you would prefer the cash, sell some and feel good about yourself. In the case that you don’t sell it, just drink it and feel good about yourself. Either way, you win.

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