Investing in wine: A Complete Guide to Start Wine Investing
This article introduces the basics of wine investing, explains why and how to invest in wine and compares the pros and cons of wine investing.
Wine as a luxury good serves as more than just an alcoholic drink. For some fine wine aficionados, wine is an enjoyable sensorial pleasure as well as an investment asset. Wine has made a remarkable entry into the world of alternative investments in recent years. Fine wine has appreciated 127% over the last decade, outperforming other alternative investment options such as luxury handbags, colored diamonds, blue-chip art, and rare furniture, according to investment consultancy Knight Frank. This emotionally charged asset possesses all of the characteristics required to entice not only amateurs and collectors but also investors. It, in particular, provides appealing returns and intriguing diversification potential. In this article, we will talk about everything that involves wine investing, the pros and the cons of investing in wine, and how to get started, to help you get ready for your journey of wine investment.
Why invest in wine
1. Profitable- proven performance
For the general public, wine may appear to be just an alcoholic beverage. However, due to its luxury nature, fine wine, like other luxury goods - luxury watches, designer handbags, has its investment value. Fine wine has a long track record of providing excellent returns on investment. Over the last 15 years, this non-traditional investment has generated a 13.6 percent annualized return, which means that the money invested in wine would double every six or seven years.
In 2021, Burgundy and Champagne led the rise of the fine wine market. Luxury Champagne bottlings outperformed Bitcoin and the stock of the tech giants like Facebook, Amazon, Google, Microsoft, and Tesla. Champagne Salon le Mesnil's 2002 vintage is the star of the fine wine market, with an increased value of more than 80% in 2021, nearly five times the 18% gain made by the NYFANG+TM stocks index.
2. No correlation with the stock market
Unlike the stock market is susceptible to the economy, or the cryptocurrency market gets influenced by one tweet from Elon Musk, fine wine investment has little to do with the conventional economic factors that normally have huge impacts on other investments. Wine as a relatively independent category has no correlation with the stock market, which makes it a more stable asset especially during the global crisis.
In 2020, the global lockdown forced people to change the way they consume wines. As the bars and restaurants were closed, fine wine sales boosted, against the decline of the global economy. Back in 2008, when the global economy was severely hit by the financial crisis, the fine wine market self-healed after a short crash, as the investors and hedge fund managers liquidated their fine wine portfolio. Buyers and investors from Asia pushed the fine wine price back in late 2018. A substantial boom in the wine market came in 2010, with the Liv-ex 100 index soaring by 3 percent per month. Most recently in late 2021, when the stock market was slammed by the COVID variant Omicron, the fine wine market kept its longest bull run in history.
Liv-ex 100 vs equities from June to Nov. 2021
3. Tangible asset
For more conservative investors, cryptocurrency or NFT seem to be surreal. Wine, on the contrary, is a tangible asset. As physical goods, their value won’t be affected by company bankruptcies or malmanagement. This nature makes wine a good alternative investment to diversify the portfolio. Like real estate, even when the performance is unsatisfying, the wine offers its basic use in any case - there is always an option to open the bottles and consume the wines.
Compared with equities, wine investment provides advantages in terms of associated taxes and fees. Traditional forms of investment frequently necessitate capital gains taxes, trading fees, and other costs. Tariffs associated with trading across international borders, as well as shipping costs, are the only fees commonly associated with buying and selling wine.
4. Increasing demand
The best wines generally improve with age. Not being purely a means of investment, fundamentally, wine is subject to be consumed. As time goes by, those wine enters the drinking windows, the supply decreases and the demand raises.
With the popularization of wine and wine culture, the global demand for wine is increasing. Wine lovers and collectors from emerging economies are becoming the driving forces in the fine wine market. Chinese fine wine buyers have been leading the price of top Bordeaux wines for a decade. Newly affluent investors from India, Brazil, and the middle east have been jumping into the fine wine market as fine wine is a symbol of social status.
5. Limited supply
While the demand is rising, the supply of fine wine is limited. Wine being an agricultural product is only produced in certain regions in the world. For fine wines coming from prestigious wine-producing areas, the total supply is even more limited. Unlike the financial market can be regulated by monetary policies, or a company can issue more stock by making secondary offerings after the initial public offering, wine producers maintain a stable production every year, due to the land size and the limit on yield. Therefore, wine producers normally produce at their full capacity during good years and even less for difficult vintages. Furthermore, with climate change, the extreme weather aggravated the uncertainty of the annual production size of the wineries. Some labels may not be consistently produced every year by the same producer.
What determines the value of a wine
Not all wines are created equal. Wines that come from traditionally prestigious wine regions, famous producers or even legendary winemakers are more valuable. Wine regions like Bordeaux, Burgundy, Champagne, Napa Valley, Barolo are the most favored in the fine wine market. When the region becomes popular among buyers and collectors, the market performance of various producers and labels will become stronger.
The scarcity is a key feature to pushes the price of fine wine to go up. Limited editions are normally more valuable. Unicorn wines, are considered to be “without price limit”. Those Wines are often produced in limited quantities only during specific vintages, from prestigious estates or legendary winemakers, and are difficult to find. For example, all wines from Domaine Romanee-Conti, Henri Jayer, Domaine Leroy, or old vintage Barolo from Cantina Mascarello made by Bartolo Mascarello before he passed away, and certain vintages of Bordeaux first-growth wines such as 1945, 1947, 1949. The list goes on and on, in the market, the demand for these wines far outnumber their scarcity, therefore the rare bottles are oftentimes the record-setter in actions.
Critics' scores have a significant impact on wine prices. Many believed that Robert Parker’s high scores of Bordeaux's top wines have driven the price of the region to an unreasonable level. Parker’s scores correlated with the price of the Medoc Grand Cru Classee, despite the position of the 1855 classification. Moreover, his ratings have a long-term influence on the price in the secondary market for these wines. Other wine critics like James Suckling, Jancis Robinson play an important role in the wine prices as well. Longevity Wines with better aging potential are more likely to be sold at a high price. Some wines enter the drinking window ten years after the initial release, and the price increases as the wine mature. Longevity makes the wine more profitable in the long run.
How to invest in wine
1. Do your research
Although investing in wine has a lot of advantages and wine is a stable alternative choice to diversify the portfolio, wine is a niche category and seems complicated for most people. Behind the hard-to-pronounce French or Italian names on the label, there are other important factors to consider when investing in wine. For instance, the market trend decided which regions and which estates are favored in the upcoming years. As wine investing has no correlation to the stock market, it is impossible to analyze which way the market is heading without insights and knowledge of wine.
A typical example is Bordeaux en primeur. When the top estates released the en primeur, the only information was the vintage report and the barrel tasting scores. However, when the en primeur prices are too high, thanks to the positive reviews and high scores from the wine critics, the profit from the final bottles will be less. On the contrary, when a vintage came out as “ a bad vintage”, for example, the 2011 vintage for left bank Bordeaux, even though after a few years, some critics claimed that it was an underrated vintage, the market did not heat up afterward.
To be a discerning wine investor, doing research on the fine wine market, having knowledge about wine and how the fine wine business operates are indispensable. Those determine what drives the price. Unfortunately, there are multiple subjective factors involved, such as the preference of the buyers, the critic's scores, the taste change, all that make the research work rather complex.
2. Set up your budget
After a though research, the next step for wine investing is setting up the budget. The good thing is in the category of wine, there are plenty of options for different budgets, from the unicorn bottles like Romanee Conti from the 1940s to more affordable choices like new vintage Barolos. It is possible to invest six digits, as well as a few hundred bucks. Remember, wine investing is a longer process than investing in the stock market or in cryptocurrency. As a tangible asset, it involves the whole trading process of buying and selling, not through a few clicks on the phone. It is a stable investment that needs years to get considerable returns. When setting up the budget, it is also important to consider the investment period. It helps you to decide which wines to buy, within the budget and will probably be profitable in a certain period of time.
3. Different ways to buy wines
Once the research is done and the budget is set, it is time to make a purchase. Counterfeit is a rampant problem in the fine wine business. Avoiding fake wine and ensuring the quality of the bottle is the top priority in wine investing. Besides the tips of spotting a counterfeit wine, it is safe to choose trustworthy wine dealers or, if possible, buy directly from the producers. However, many prestigious wineries only sell their bottles by allocation, which makes it more difficult to cut the intermediaries. In this case, always choose the bottles with a solid track record.
Apart from wine brokers and fine wine merchants, the auction is a popular way for collectors to find the bottles they desire. in-person bidding is available at auction houses such as Sotheby's Wine, Christie's, and Acker Merrall. You can also participate in online auctions through websites. Fine wines can be shipped internationally through wine stock exchanges such as Cavex, Liv-Ex, and Berrys' Broking Exchange.
4. Proper storage is essential
Proper storage is critical for preserving the quality and value of your fine wine. To get the most out of your fine wine investment, storing the wines in a dedicated bonded storage facility is a popular choice. This will ensure that the optimal temperature and humidity conditions are met in order to preserve the quality of the wines. Furthermore, a bonded warehouse provides security as well as 'off-shore' tax treatment, which means that VAT or Duty payments will not be triggered unless the wine is removed from the bond. A collector or investor can buy and sell their wine while it is in bonded storage.
Other options can be storing the wines at a wine bank, with storing conditions monitored and managed by wine professionals, or simply storing the bottles at home in the cellar or in the wine fridge. However, building a home cellar may cost a considerable amount of money. The cost for storing the wines needs to be counted into the investment.
5. Sell the wines and make a profit
When you make the decision to sell your wine collection. There are several options for completing the process. Selling your fine wine collection to private wine collectors or wine enthusiasts is the most direct way. Another common way to sell wines is through auctions, either through online auction platforms or through physical auction houses like Christie's and Sotheby's. Online auction platforms usually charge a lower commission than those of a physical auction house. Wine stock exchanges, such as Cavex and Liv-Ex, facilitate person-to-person sales. You must pay a selling commission to the exchange, at a rate less than 10%.
Although wine investing is more stable and less volatile compared with some mainstream investment options like stock, with all the advantages being said, the risks of wine investing are not to be neglected.
First of all, like all investment choices, past performance cannot guarantee the future. The wine industry is constantly changing, and uncertainties come from every aspect of the industry, from the production side to the final market, many of them are nearly impossible to predict. For instance, the anti-corruption policy imposed by the Chinese government in 2012 directly caused a drastic drop in demand for Bordeaux's top wines, therefore had driven the market down for a certain period of time. There is no guarantee that a wine performing strong today will still be profitable in three years.
Moreover, the wine investing market is not regulated. Besides the rampant issues of wine fraud, without regulation of the tax situation of wine investment, the return on investment is unclear in the future. Lastly, the traditional way of wine investing, “buy, hold and sell”, is a huge endeavor. The research alone can be very confusing and intimidating for new investors. Tons of information about wine regions, wine producers, and the market trend may be discouraging. From the purchase to storage, to selling, it seems to have a number of hidden rules which are obscure to outsiders.
Overall, the wine market is distinguished by its complexity, relative opacity, and lack of liquidity. These factors have significant ramifications, particularly for inexperienced investors. They complicate valuation and can make it difficult to sell a wine quickly at a price equal to its estimated value.
In order to make it easier and more fun to invest in wine, Rekolt offers a simple solution - by investing a small portion of the wine. Rekolt is a wine investment platform that allows you to invest in highly sought-after wines in the market which have great potential to add value in the future. Rekolt analyzes the pricing, the performance, the critics' reviews, while you sit back and watch your wine investments grow. In this case, you can invest any amount you want and get familiar with the world of wine without a big commitment, or a comprehensive knowledge about the wine business at first. We track the real-time price performance from Liv-ex, and offer you the expertise in fine wine. Thanks to technology, Rekolt introduces new levels of efficiency and transparency to this traditionally opaque market, making wine investing accessible for every wine lover.
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