The Grapes of Math

Jeff Opdyke (July 23, 2010)

Uncorking Profits in an Alternative Asset Class

There I was, sitting in a fairly swank New York eatery with a friend, Dave Sokolin, a well-known wine merchant. This was in the spring of 2008. Weeks earlier, I’d finished ghostwriting his book on investing in wine, Investing in Liquid Assets, and we were at this Midtown restaurant to share a celebratory meal with his publisher.

He’d thoughtfully brought a selection of very fine wine for me to taste … In the collection, a half-bottle of the 2001 Chateau d’Yquem – one of the exceedingly few wines that wine critics Robert Parker and the Wine Spectator both rated 100 points. Yquem is a Sauterne, what some people call a dessert wine, though pigeonholing it as such is no more accurate that pigeonholing Wayne Gretzky as a Canadian athlete.

I was, at the end, literally licking the inside of my glass, and running my finger across the bottom of my wife’s glass to get the last precious drops of what is, without question, the finest liquid to ever coat my tongue.

Through Dave, I bought four half-bottles of the stuff at a nice discount. But the current price runs between $275 and $400 for a half-bottle depending on where you find it. Yet, as much as I love this wine, I have no intention of drinking them. (Well, I’ll drink one with my young son when he turns 21.) Instead, they now rest, properly cooled and humidified, in a small cellar I built in my home to house “investment-grade wine”.

I share this story because it speaks to the value of wine – not just the drinkable liquid, but, as the title of Dave’s book announces, the liquid asset (literally) that can juice a portfolio’s returns.

To give you an example of what individual wine prices can do over time, consider the 1961 Chateau Latour. Back in the day, you could have bought a case for £25. Today, 50 years on, that same case fetches, at the low end, £35,000.

A bit of spreadsheet work and you see the return is about 15.6% annually.

Or let’s look at something more recent: the 1990 Cheval Blanc – released at £400 a case and now trading near £9,200 an annualized return of a 37%.

Or even more recent: the 2000 Chateau Lafite-Rothschild – released at $300 a bottle, it now fetches between $1,500 and $4,300 a bottle, depending on where you find it. Either way, you’re looking at annualized returns of between 17% and 31%.

All of those destroy long-term expectations in stocks, bonds and cash.

This Ain’t Your Grandfather’s Mateus

Not many people think of wine as an investment. They see liquid in a bottle, a commodity available by the jug or carton at just about any Piggly-Wiggly or gas-station mini-mart.

That’s true. There’s an ocean of everyday drinking wine that, honestly, is worth probably less than you paid for it.

But at the high-end … well, up there, wine can be sublime. And profitable.

Better still, collectors and aficionados routinely pay very large dollars to own or drink the best wines from the best vintages – and they’ve done so for the last few centuries.

Call it gluttony. Call it a splurge. Call it whatever you want. But where there are people with very big dollars willing to buy a commodity that, by its very nature, grows rarer by the year because of ongoing consumption, that’s an arena I want to play in as an investor seeking exposure to assets that go beyond stocks, bonds, real estate and cash.

But before you run out and grab a case of ripple, you must know what you’re doing.

First, Some Numbers …

Wine as an asset class is real – though it’s not one Wall Street or financial planners will lead you to because they make no money putting your cash to work in wine.

Nevertheless, various registered investment funds exist that focus exclusively on wine. Moreover, Liv-Ex, an online fine-wine exchange based in the U.K., publishes a wine index that Bloomberg now transmits alongside more-standard fare like the S&P 500 or the Dow.

The Liv-Ex Fine Wine 100 Index – built mainly from the most investment-worthy Bordeaux, but which also includes wines from Burgundy, the Rhone, Champagne and Italy – is up about 14.2% a year since the summer of 2001.

Similarly, the U.K.-based Wine Investment Fund, which ran some data for me, finds that investment-grade wines generate returns of about 1.2% a month, or roughly 15% a year.

That’s not to say wine prices never slide. They do. During the global financial crisis, when all assets tanked (save the dollar and Treasuries), the Liv-Ex index lost 22% between June and December of 2008.

But, the index has since rebounded 47% and, at a reading of nearly 305 at the end of June, is about 40 points above its post-crisis high.

This chart below shows the returns of the Liv-Ex 100 index since the summer of 2005. Not too shabby …

And this second chart shows the returns of the Liv-Ex 100 index over the same period, but compared to the Standard & Poor’s 500-stock index. Where would you have rather been?

Celebrating 10 years…

I built my cellar – an environmentally controlled closet-sized space – specifically to house investment-grade wines. The game with fine wine is to buy bottles, generally by the case, years before they’re ready for consumption, keep them properly stored, and then sell them at auction as their 10th birthday rolls around.

Top-flight Bordeaux – the most popular investment wine by a landslide – needs a good decade to mature. (And many of them last for 30 years or longer; Sauternes like the Yquem can last a century or more.)

As a wine’s 10-year anniversary approaches, that’s the point that restaurants around the world begin looking to add the bottles to their wine lists.

That doesn’t mean you have to sit on your wine for decade. Wine has a bit of dead period between ages three and seven, when prices stagnate because for lack of consumer demand. Buy late in that range, and your holding period can be as little as three years before you book profits.

Why Wine Now?

This past spring, the fine-wine world found itself in a happy place.

Bordeaux producers were releasing their 2009 vintage for the first time, while California producers were marketing their 2007 cabernets for the first time. And both vintages rate among the finest for their respective region.

For Bordeaux investors, in particular, that spells opportunity.

Right now interest in the ‘09s overshadows the wines from 2005, widely hailed as one of the greatest Bordeaux vintages in a century.

Because consumers are focused on the newness of the ‘09s, and because wine merchants are trying to free up money to put in their orders for the ‘09s, they’re selling back older vintages at decent prices. Some are even offering discounts to move cases of 2005 Bordeaux out the door. (And you always want to buy by the case. Collectors and restaurants don’t typically want individual bottles. Thus, cases fetch higher premiums at auction.)

In recent weeks, I’ve found cases of high-scoring wines made by well-regarded producers like Pavie-Macquin, Cos d’Estournel and Ducru Beaucaillou for $2,000 to $4,000.

When restaurants and collectors start hitting the auction circuit in a few years looking to snap up the finally-ready-to-drink 2005 Bordeaux, you can bet these wines will sell for $4,000 to $6,000 a case … or more. Indeed, amid the ’09 hype I recently added to my cellar a steal of a deal: the 2005 Pape Clement (rated 98 out of 100, this chateau’s highest rating in many decades). The price: $1,908 a case, or $159 a bottle.

Those bottles would already fetch closer to $230, according to a variety of wine merchants. But I’m willing to bet a case of properly stored Pape Clement will fetch upward of $4,000 as 2015 arrives.

In all, a return you can toast!

Next week, I’ll pick up with the Dos and Don’ts you need to know to succeed as a wine investor … and why you don’t always have to focus on the ultra-high end of the market to make money in fine wine.

Until then …Cheers!

Jeff Opdyke

P.S. Interested in wine investing? Email me at SovereignWineInvestor@gmail.com and let me know. Your feedback lets me know if I should continue to publish information on wine investing.

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Tags: globalinvesting