Investing In Fine Wine: The Do’s And Don’ts—Part I
Emotional investment or financial investment? The ins and outs are very different, explains Lewis Chester DipWSET.
© Brice Braastad
I am a fine wine collector, not a fine wine investor. What’s the difference? A fine wine collector is someone who has become dedicated to owning more fine wine than he or she can ever possibly drink. A fine wine investor might have little or no interest in the underlying product but thinks there is money to be made by owning it.
Both the collector and investor might end up making money, but the portfolio each might construct will likely be very different. For starters, the collector would likely only buy fine wines they actually like, whereas the investor might very well have no idea or interest in what the fine wine tastes like. Fine wine investors always intend to cash in on their returns, whereas, as a collector, I have no intention of ever selling my most prized bottles and expect my children to inherit the collection (assuming I haven’t drunk it all during my lifetime).
I am a firm believer that for esoteric, illiquid asset classes like fine wine, watches, jewelry, art, and supercars, the best collectors are geeks with money who buy into the asset class not out of a motivation to make money but because they can’t help themselves. As a result, they develop real expertise, understanding, an intelligence network around the product, and the most efficient methodologies to purchase their must-have collectibles.
The fine wine investor, on the other hand, is likely to follow the path of least resistance, buying stuff that did well in the past or is easy to accumulate at scale. The fine wine collector’s quest is to buy up his favorite wines; the fine wine investor’s quest is to put money to work to earn an economic return. The two paths are very different and can lead to vastly different outcomes.
The author, in his home cellar
Many friends (and friends of friends) have called me over the years to get advice on how to invest in fine wine. My advice is invariably the same: unless you’re prepared to invest a lot of time and effort learning about the market, refining your tastebuds and losing money as you make the inevitable mistakes that all fine wine collectors and investors make, forget it; go buy an S&P 500 tracker fund and improve your golf game.
The fine wine market is not regulated. If you’re considering investing in it, you need to think of it as the Wild West. Market participants are free to manipulate prices, corner markets, disseminate false or misleading statements without any consequences from a regulatory authority. Only if there is criminality, such as fraud or theft, can you seek recourse through a government body such as the police or the FBI (as was the case with the infamous fraudster of fake fine wines, Rudy Kurniawan, an Indonesian convicted criminal who was found by the courts to be offering more magnums of 1947 Château Lafleur than had ever been produced).
So, key question: what is a fine wine? Answer: there is no accepted definition. However, we know the characteristics: terroir-based wines from one of the historically revered wine regions, estates and/or vineyards, for which there is a secondary market price that generally goes up in value over time (that is, it pays to hold the fine wine over the long term).
In economic terminology, fine wines are those that are regarded as a store of value. In short, as an investor, you can have confidence that other potential buyers will want to buy this wine from you at a higher price when you come to sell it. According to Liv-ex, the leading B2B fine wine exchange, the number of producers trading on the secondary market hit 4,581 (selling 12,063 individual wines) in 2021, indicating a deep marketplace of fine wines (albeit with most trading focused on a smaller subset of producers and individual wines). (Note: each new vintage is effectively an IPO, which is why the potential trading set of fine wines increases over time.)
The vault at Château Cos d’Estournel, Bordeaux
The concept of investing in fine wine is fairly modern, whereas there have been wine collectors for millennia. The real beginnings of fine wine investing can be traced to 1966. Famed art auction house Christie’s acquisition of W & T Restell, a small specialist wine auctioneer, and the recruitment of Michael Broadbent to run a new London-based fine wine auction department was the starting point for interest in investing in fine wines.
Broadbent’s acumen and ability to ferret out incredible collections of old wines brought broader interest in the fine wine category as these older wines began to change hands at very high prices, which in turn made younger, top-quality wines seemingly more valuable as long-term investments. As the saying goes: “The rest is history…”
So how can you start actually investing in fine wines? There are a number of options available. Firstly, you can go to a well-known wine merchant in your country of residence, open an account, ask for advice and start buying fine wines. In most cases, this will lead to disappointment. The wine merchant will not have access to all the great fine wines that you might want, will be keen to sell you stuff that he can’t get rid of, and until you earn his respect with your wine knowledge, he’ll likely treat you as an ‘easy-come, easy-go’ customer.
If you split the amount of money you want to invest between two or more wine merchants, then your spending power will be more limited at any one merchant and you’ll likely either not get the attention or access to the best allocations you want (more on which later).
Château Margaux, in the Margaux-Cantenac region of Bordeaux | © Johana Loubet
An alternative strategy would be to attend one or more big wine auctions and start bidding on the top-rated wines. Once again, this is likely to result in disappointment. Auction houses can be very expensive places to acquire wines and there’s a reason why all of the known world-record prices for any given fine wine are achieved at auction (sometimes even before you include the buyers’ premium of around 15-25 percent). It’s also worth noting that people can transact privately as well, and there is no way of knowing what prices were achieved on these transactions.
Auction houses are places that only really specialize in selling older wines – or back-vintage – rather than new vintage. The issue with older (or really old) wines is the condition of the bottles, the history of how they have been stored and the numerous well-documented instances of wine auction houses having sold fake wines: watch the excellent 2016 documentary Sour Grapes for an insightful and entertaining lesson in fraud in the wine auction market.
This is definitely not to say that you should not trust auction houses. Most of the leading houses, like Christie’s, Sotheby’s and Zachys, are extremely reputable and do a great job. But fraud (and/or poorly stored wine) is much more likely to be encountered with older wines sold at auction than with new vintage purchases through a wine merchant.
Domaine Jean-Yves Bizot, in Vosne-Romanée, Burgundy
Another alternative is buying ‘En Primeur’ wine futures. These basically involve a promise from your fine wine merchant to deliver, in approximately two years’ time, the latest new vintage wine that has yet to be bottled. Bordeaux futures have been around since the 19th Century as a way of getting cash flow to the Chateaux ahead of the time they could actually sell the finished product. Bordeaux still leads the way, although there are examples of en primeur campaigns in other regions, depending on the country where the wines are sold.
I actually started my own fine wine collection by buying Bordeaux En Primeur futures, as did many of my collector friends. So, it’s a well-trodden route to getting on to the ladder. However, you need to understand that, if your merchant or broker goes bankrupt or merely fails to deliver, there is not much you can do to get your wine, other than litigate. The promise to deliver is with the merchant, not the winery.
The other problem with the En Primeur futures is that, whereas you would rightly expect a discount on the future price for putting an entry on a balance sheet today for a final product you have not tasted and will not even be delivered for a couple of years, it turns out that many of the Chateaux have increasingly been taking all the money off the table. Therefore, you might end up in the position where you could have ended up buying the final product two years later at the same or a cheaper price. In which case, why would anyone buy a Bordeaux future.
Domaine Leflaive, Burgundy | © Serge DETALLE
Another route you might consider is to invest in a wine investment fund. Yes, they do exist. Indeed, there was a heyday of wine investment funds on both sides of the Atlantic from the mid-2000s until around the mid-2010s, as respected newspapers began to write more and more about the strength of the fine wine market (which, in those days, meant Bordeaux).
Most of these funds went out of business, either at the time of the 2008 financial crisis (as investors inundated the funds with redemption requests in a desperate search for liquidity) or following the end of the China-driven bull run in the mid-2010s. The latter happened thanks to President Xi’s edicts on barring officials gifting high-valued wines and spirits, as well as the disastrous returns posted in the aftermath of the Bordeaux 2009 and 2010 vintage En Primeur campaigns, where hugely inflated prices from the Chateaux resulted in a period of frustration, followed by anger, as investors saw their prized wines continuously fall in price once the wines went physical.
Indeed, it has only been in the last year or so that some of 2009 and 2010 vintage top Bordeaux wines have climbed back to their par price or above. That experience turned a lot of new entrants off the fine wine market, and impacted fine wines across the board, but especially Bordeaux wines.
Wine investment funds have a big limitation. They need to put money – often a lot of it – to work. And, they also need transparent pricing and the ability to liquidate their holdings to satisfy redemptions if investors vote with their feet. By definition, therefore, they have to put a significant part of their portfolio into Bordeaux wines. Bordeaux makes a lot of fine wine, so pricing is more transparent and the spreads are tighter than in other markets such as Burgundy, Piedmont (Barolo and Barbaresco) or the Rhône Valley.
Domaine Georges Mugneret-Gibourg in the heart of Burgundy’s “Climats de Bourgogne”
The investment fund can load up on Bordeaux wines fairly quickly and dispose of them equally quickly if needs must. By contrast, it’s just not possible to do this with the top Burgundy wines as they are made in minute quantities and the liquidity (for buying and selling) isn’t guaranteed. If – as has been the case – the Bordeaux fine wine market is not on a roll, then your wine fund investment isn’t going to perform.
If you do consider investing in a wine investment fund, you need to remember that the fine wine market is not regulated; in effect, the wine funds can mark-to-market their portfolios in any way they choose. Most self-administer their funds, and even those who use a third-party administrator dictate to the administrator the rules for monthly marks on the portfolio. This means that the degree of confidence you can have in the fund’s posted returns is questionable until you actually get your net proceeds back and calculate your real returns.
Lewis Chester DipWSET is a London-based wine collector, member of the Académie du Champagne and Chevaliers du Tastevin, co-founder of Liquid Icons and, along with Sasha Lushnikov, co-founder of the Golden Vines® Awards. He is also Honorary President and Head of Fundraising at the Gérard Basset Foundation, which funds diversity & inclusivity education programs globally in the wine, spirits & hospitality sectors.
Read an original version of this article at The Robb Report’s official website here.