While stocks and bonds are components of a traditional investment portfolio, is it possible to build a profitable wine collection you can occasionally enjoy with dinner as a bonus?
Wine has become an alternate commodity, says Peter Meltzer, auction correspondent at Wine Spectator in New York. “Take the case of Chateau Lafite Rothschild, which sold for $390 per dozen in 1983. It now commands $30,000 on average.”
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Investing in wine is much more involved than simply clicking your mouse to buy an exchange-traded fund through your online brokerage firm. First, you have to identify and buy investment grade wine that will last, store it properly and then sell generally through an auction process, where you will pay a commission.
“Many times people who collect wine are those who got really into wine and they kept it. They never intended to be wine collectors,” says Ben Nelson, president of Hart Davis Hart Wine Co. in Chicago.
Hart Davis Hart is a wine vendor that also conducts auctions. Nelson recalls a notable sale.
“A collector paid $1,200 for six bottles of Richebourg from Henri Jayer in 1989,” he says. “We sold them at our auction for $113,525 in February 2014. It shows that this kind of thing can happen, but it’s not probable.”
The world of wine has changed in recent years. Supply has grown and the market for selling has become more efficient.
The top three major wine growing regions are France, Italy and Spain, which produce almost half the wine in the world, according to Wine Folly. However, every year more countries get in on wine growing. Argentina, Australia, Chile, Russia and China are also notable wine growers.
“The supply has increased dramatically in almost every nation,” says Cai Palmer, owner and wine merchant at Wine at Five in Rye, New York. As a result, he says, is “wine is not as rare as it used to be.”
However, the increased supply is not necessarily driving prices down, at least for the top investment grade wines. “Nobody but Burgundy makes Burgundy,” Palmer says.
The wine market is drawing more global interest.
“These days at an auction there might be 1,000 bidders,” Nelson says. “The internet has changed everything. At our auctions people from China, Europe, South America and the U.S. all participate using apps to bid live during the sale. It really is globalized.”
Wine is a long-term investing play. While there have been cases of wine flipping with some California cult wines such as Screaming Eagle and Harlan Estate, most wine investing is long term from at least three to 10 years and more.
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Not just any old bottle qualifies as a wine collectible, Meltzer says.
“It must possess a heightened level of complexity along with an extended shelf life. Simple Beaujolais, Zinfandels, or Pinot Grigios, and wines from mediocre vintages, however pleasant to serve on an everyday basis, won’t do,” he says.
Nelson says investors should pick wines that will last a long time, like Bordeaux and Burgundy. “Buy things you really want to drink. If it goes to zero at least you have a really good bottle of wine to drink,” Nelson says.
If your primary goal is to achieve a return on your wine investment, the old adage “less is more” applies, Meltzer says.
“If you are contemplating a $10,000 investment, you are generally better off buying four $2,500 cases than diversifying your capital and purchasing 10 $1,000 cases,” Meltzer says. “Wines in the upper echelon of the price spectrum tend to appreciate by a greater factor than those in the lower ranks.”
Proper storage is essential. Wine investors either must build their own wine cellar or pay to have it stored. “You need dark, cold at 55 degrees, and 70 percent humidity. You have to keep it safe from vibrations and water,” Nelson says.
Palmer works with a number of hedge fund clients to help build their personal wine collections.
He breaks wine collections down into a pyramid. The base of the pyramid includes the largest number of bottles.
“These are the wines they want to drink every day,” Palmer says. “The middle portion of the pyramid includes bottles with a one- to three-year maturity. The top of the pyramid includes investment grade wines with three to 10 years of maturity.”
Candidates for the top of the pyramid include first-growth Bordeaux, top-growth Burgundy and top-growth Italian wines like Barolo and Brunello, Palmer says.
The goal is to create a self-funded wine cellar, where the collector sells the wine from the top of the pyramid to continue to replenish their stocks. “My wine cellar is almost 40 years old and any bottle in it now is free,” Palmer says.
When it comes time to sell your investment, provenance is really important. This means “keep all your records,” Nelson says. “Keeping receipts is a big deal. It creates a chain of custody and it absolutely brings more money.”
Other advice? If you buy a case keep it intact in its original wood case. Buyers will pay a premium for that at sale time, Nelson says.
For those interested in embarking on this journey “try to become an expert, make sure you understand what the best wines really are,” Nelson says.
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“It is life enhancing. You get to drink some incredible wines, potentially travel to wine regions, learn about wine and food pairings and get to know a lot of interesting people,” he says. “If you are really into wine and you hold it long enough you probably can make some money. But, when you factor in the costs of storage it is not as simple as holding an index fund.”
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How to Invest in Fine Wine originally appeared on usnews.com
