Amid the news of bank seizures, declining real-estate, and congressional ordered bailouts, fine wine prices are on an absolute tear. Everyone is buying. Asians are buying. Russians are buying. All these new buyers are competing with the old buyers, because while prices are rising the old buyers are still buying. Buy buy buy. Prices of First Growth Bordeaux have been rising for a decade as demand has skyrocketed over the injection of droves of new buyers from Asia and Russia. The per-bottle auction average of 1982 Ch. Latour was $543.27 in 2002. In 2007, the average was $1651.73. (Source: wineprices.com)
Surely, the good times can keep on rolling, right? Some people think so. In the back of the September 2008 issue of Decanter, hidden behind all the gentlemanly and refined five-star wine ratings, was a blurb in the Collectors’ News section that headlined
£10m case of claret, anyone?
Setting the bar high right off the bat, no doubt. The small article in Decanter cites ancient wine retailer Berry Bros & Rudd releasing their “Future of Wine Report.” There are some good nuggets in the report, reasoned predictions, and some bold claims:
Berrys believes, by 2058, global bidding wars will take place for the top wines and the most soughtafter wines will become prohibitively expensive and extremely difficult to obtain.
Okay, sure. Sounds reasonable.
Simon Staples, Fine Wine Sales Director at Berry Bros. & Rudd believes: “If values increase by 15% per annum, as they have been doing recently, a case of 2005 Ch. Lafite-Rothschild, currently available for £9,200, could be worth just shy of £10 million by 2058.”
Without question, a stratospheric projection that is meant more to raise eyebrows than to be a solid prediction of future returns. Mr. Staples qualified his claim. “If values increase by 15% per annum…” he starts. Well, sure, that is a factual statement. If value increases by X%, value will be $Y on date Z. I have a compound interest calculator that can do that too. Here we go.
Gary, Senior Blogger at Vinotrip, believes: “If values increase by 26% per annum, a case of 2005 Ch. Lafite-Rothschild, currently available for £9,200, could be worth just shy of £1 billion by 2058.”
The point of the quote was not to stress low-level accounting. Mr. Staples’ point was to promote the strength of fine wine as an investment vehicle for the long-term future. Decanter has published Wine Investment Guide to this end. The website of The Wine Investment Fund prints front and center “Fine wines can make you money*. It is a fact.” (The asterisk leads to the disclaimer that past performance does not guarantee future returns.) A cool £10,000 gets you into the fund. Liv-Ex, a platform for merchants to trade fine wine, has an index that they publish alongside the numbers for the FTSE 100, S&P500, and the Nikkei 225. Their indices, the Liv-Ex 100 and Liv-Ex 500, have beaten the other markets handily over the last few years. Their Fantasy Cellar has appreciated 16% this year alone.
All of these factors—from Berry, Bros & Rudd handing out rosy speculations of future performance to a fine wine index blowing past traditional investments–sound a lot like those NASDAQ cheerleaders from 1998: just buy, buy anything, it’ll go up over time.
One can look back even farther if bigger returns are necessary to lure you in to buying a case of First Growths. In her book Emperor of Wine, author Elin McCoy writes of wine critic Robert Parker’s motivations for starting The Wine Advocate in the 1970’s. One such motivation that McCoy cites was Parker’s displeasure over a bottle of Ch. Lafite-Rothschild that cost twelve dollars. Picture that for a moment. A First Growth Bordeaux being bought for $12, and the consumer thinking that was too much for what he was getting. It is a staggering thought.
So, it’s a rosy outlook for people who invested in wine ten years ago. When everyone finds out bout it though, it’s time to bail. Let’s take a look at the five year auction result chart for nearly any First Growth Bordeaux. They all look the same.
That’s 1982 Latour on the left and 1982 Petrus on the right. Up up, and up. There is a problem, though, on the far right of each chart. The one-year charts all look the same too: and they’re flat.
More charts can be found on Wineprices.com
The usual culprits can be named in this flattening of wine prices. A huge rise has to stop sometime. Global fear and catastrophic losses in the stock market. China is slowing down. Russia is on the verge of complete collapse.
I’d love to recommend that you move some money out of the market and into fine wine, but I can’t. Stock prices are too juicy right now and it looks like the fine wine market is going to putter around flat or even recede a little bit. To make money in wine, you need homerun-style returns because of the cost of storing the wine and the cost involved with shipping it and selling it. Flat prices don’t mean you break-even with your wine, it means you lose 20%.
I can, though, recommend that being selective about investing in wine can be a healthy add to big investment portfolio. If you have over $10,000 of cash in your portfolio, call in someone who specializes in this sort of thing and see what they have to say about purchasing, storage, and selling. The usual wine cliche applies: even if the value goes to zero, you’ve still got some good wine on your hands.
November 10th, 2008 at 9:38 am
Good read, and interesting perspectives. Here’s a couple thoughts I have, building off of your post:
1) As you mention, consumption probably creates a floor, but how much of a floor does consumption create? I mean, unlike stocks, the total “shares outstanding” will always be decreasing, for every particular vintage. That’s an interesting phenomenon that you won’t see with many other investments. However, there will always be new vintages created (almost) every year, and with technology getting better, the odds are that newer vintages will continue to get better than older ones (I bet that’s not a popular thing to say). So does the floor even exist?
2) Even if there is a bubble, does it matter? I mean, no one “shorts” wines, do they? And will wine investors start to unload their bottles if they think the bubble is popping, or will they be more inclined to say “so what, yummy!” If demand dries up, and so do auction prices, I’m guessing the volumes drop a bunch… Wine margin calls?… I dunno.
I don’t enjoy bubbles in any market, stocks, wines, houses, etc. And it sounds like wine is in one. My guess is that prices will stabilize, but not collapse, as I don’t see any rush to sell materialize. A bubble-burst, however, would probably be seen as a good thing by most people who loves wine. Drive the speculators away, so we can get back to enjoying those $12 first growths, instead of having them rot away in Dick Fuld’s basement.
November 11th, 2008 at 8:25 am
I enjoyed the last bloggers comment about ‘no one shorting wines’. Astonishing to think that what with inflation there could be bottles of wine out there in 2058 worth the same as current values for stately homes. Where is the best investment?
December 27th, 2008 at 2:32 am
First of all, great original post!!
Being someone in the trade, Jamie, I’m sorry to tell you, many, many major collectors are dumping their wines like no tomorrow at all the major auction houses around the world.
You want to know how a “wine margin call” works? Let me illustrate.
The hyperbolic appreciation of wine prices in the past 5 years have given rise to many online traders/flippers. They borrowed their “investors” money to acquire a major collection, say $100K to $500K, and flipped them by selling them retail. Some, I know them personally, were caught at the peak, and needed to pay their debt but the wines were not selling! That’s exactly how it is: bought on borrowed money, and now have to pay for the losses if they can sell at all.
The sell-through rate of wines in auctions has dropped, not plateaued, from 95%+ to a pathetic 70%. Ask Zachy’s for their recent results in November, as lovely as it gets.
Prices of top “fine wines” like 1982 Lafite, has dropped from USD$3000
per bottle, to $1500 to $1600 available on auction blocks.
2005 Lafite, which was hyped so much to upward of $1200 per bottle, now is selling at $750 a bottle, in a matter of few months. And most of them are still in the process of reaching their buyers who bought on futures.
Don’t underestimate how widely this financial crisis has hit.
Many are quoted as “enthusiastic sellers” because they want
money, they don’t want to take the wines back, even if they are
top, top wines.
It is a deflating bubble.