Do Not Invest in Wine

Now I know many people out there are going to throw stones at me for telling them not to buy wine investments. The truth is, there are more articles out there touting how wines can be a good form of investment but it is pretty rare to find articles which actually tell people not to invest in wine! I am pretty sceptical about the returns that investing in wine can bring, and I just thought I should offer an alternative view to the recent hype that wine investments bring in good money. Like what other investors say, if an investment sounds too good to be true, it usually it. In addition, you might have heard from famous legendary investor Warren Buffet and he said that he does not invest in things which he doesn’t understand. So some advise to those who are looking at investing in wine to make a quick buck. If you know nothing about wine investment, it is best not to do any investing in this area.

Then again, please do not let me stop you from investing in wine if you are a wine connoisseur and know absolutely what you are doing. My hub here is to all those beginner investors, looking for the best investment vehicle and they chanced upon wine investing and figured that the profit margins seemed to be very high, with some wines increasing in value 2 fold 3 fold or even 5 fold over the years. Let me first start by telling you why if you do know how to invest in wine, it can be used as a good investment vehicle. Fine wine investing is a good form of alternative investment. It can be used to diversity your portfolio of bonds, stocks, commodities and property. The value of wine correlates lowly with all other forms of investments. Other than the point stated above on how wine can increase greatly in value over time and as what experts say wine has over performed stock indexes over the years, wine is a sort of real physical asset like commodities and even if currency starts to go down, the wine can still command good prices. 

However, fine wine investment is more than an art and not as simple as you think. If you are a beginner to wine investing, think about some of these questions. Do you know which investment wines to pick and buy? What about the origin of the fine wine? French wines? Australian wines? Which year and from which vineyard? What is a good price to buy the wine? You can also escape taxes on the profits gained by selling your wine (in comparison to profits gained on the US stock market which are taxed) but you would need a very good network to sell your wines. Then the question comes again on when is the best time to sell the wine and at what price. What about storage? You would need to find a good place to store those wines. If you decide to store it in your own wine cellar, you may need to pay customs taxes on the alcoholic content. If you store it at a bonded warehouse, you would need to pay storage fees. You might also want to consider getting some insurance for your home cellar or at the warehouse if it is not purchased already.

If you want to save all the above trouble, you can always look for a fine wine broker to help you source for the best investment wine. They would also sell your wine through a global network of auction houses. The wine would be stored in a bonded warehouse engaged by the company and insurance would most likely be included as part of the pricing. The big problem about investing wine through brokers is that you may need to get some good references before you plonk down hugh amounts of money with a company, which may be just a shell operating a ponzi scheme. Imagine them taking your money but not really buying any wine and when you ask them to sell your wine, they just sell it to another customer to get back the money to pay you! If you get my drift, you would understand that these companies may just amass a large sum of money and then run away with it. Of course it may be good to ask the company to show you your wine in the warehouse. But who knows if that bottle of wine really is the bottle of wine which you have purchased! Maybe it is just water inside a bottle! Do not let me scare you but there have been wine brokering companies all over the world which has been exposed as ponzi schemes.

If you are thinking of investing in wine investment funds and think that these are safe, then think again! These funds require high initial amounts of investments and also charge higher sales charge and maintenance fees. They are not your normal kind of mutual funds or unit trusts and thus may be regulated by your government in a different way given that they are alternative investment funds. The advantages of investing wine using such funds is that experienced wine professionals are in charge of buying and storing the wines, similar to the broker example above but for this case you own a portion of the portfolio of wines which the company has chosen, you do not have a say on what are the wines that you want to buy through the broker. There are two basic types of funds, those investing in mature wines and those speculating on the en primeur market. En primeur is something like "wine futures", whereby you purchase your wines early while a vintage is still in a barrel, thus you are investing in a particular wine before it is even bottled. 

Wine investment funds are also riskier. In January 09, Singapore based wine investment fund, World Growth Fund, suspended redemptions. WGF aims to achieve ‘high capital growth by buying and selling Investment Grade Bordeaux Wines’. Performance in 2009 has been poor though returns in 2008 were very good. Liv-ex’s 2009 February report looked at wine investment funds and raised the question of how these funds are valued and called for more transparency. Liv-Ex stands for the London International Vintners Exchange which is the leading exchange for fine wine.  It was founded in 1999 and provides a trading and settlement platform for fine wine merchants as well as valuation services to both professional traders and wine collectors. The report stated, ‘With investors in general asking for ever-greater standards of transparency and accountability - understandably, given recent events in the financial world - it is important, even crucial, that the wine fund sector meets these standards. The adoption of a common and transparent valuation methodology would be one positive move - enabling investors to better choose between the different options available and to accurately compare their performance.’ 

While I am talking about valuation of wine investment funds, one should also take note that the value of wine or wine futures are not guaranteed to go up. Like they say for stocks, past performance is never indicative of future performance! This is the case for the 2007 Bordeaux futures which was pretty bad. Unseasonable weather and mildew throughout Bordeaux in 2007 has led to a poor vintage. The economy also was not doing too good and with lousy reviews and a weak U.S. dollar, consumer demand for the wine dropped. Wine futures or en primeurs give consumers the chance to make advance purchases of Bordeaux while the wine is still aging in barrels and usually 18 to 24 months before it is bottled. For great vintages, fine wine futures allow the producers to make money while the wine is still in the cellar and give consumers a chance to buy the wines at a price lower than the eventual release prices. That was the case for the 2005 vintage, which has soared in price since they first went on the market as futures. Other vintages don't do so well. Many from 2004 ended up selling for about the same price on release as they did as futures. Even the 2008 Bordeaux futures was priced pretty low. And when this happens, stock from the earlier vintages would have to be sold even cheaper.

I guess my article would give you a good idea that is it not easy for someone to invest wine, and hence the title why you should not be investing in wine. Buying wine as an investment is not as easy as you would think, neither is trading in a wine investment fund going to bring you a mass of profits. Most important thing to note is to know what you are doing and don’t just chase profits. Understand your desired investment before you plough money into them and when you do, the profits will follow. Before I end, perhaps you would want to take a look at two books which I have selected. One is a guide to alternative investments. If you do not think wine is your type of investment but would prefer to invest in an alternative investment which correlates purely with stocks and shares, this is the best book to have. If you still would want to invest in wine, the book Investing in En Primeur Wine by Samuel Blankson would be the most ideal to have and study. Wish that I wish you all the best in your investment journey!