Fine wines- asset class worth investing?

Although this question has been posed to me multiple times in the last couple of years, what really triggered this post was a short piece done by Bloomberg on the back of a wine auction in which the presenters debated the prices of a wine auction where wines worth $2.8m from Chateau Margaux were sold. First to just clear the misconception of the presenters- no the $2.8m was not the price of a single bottle of a 2009 vintage from Bordeaux or a case but that of a total of 238 lots of Chateau Margaux from 1900-2010. The highest price fetched was by a balthazar (that's equivalent to 16 bottles) of a 2009 Chateau Margaux of $98,000. While extraordinary, one must remember the price reflects rarity of a balthazar of a top Chateau (Margaux is one of the top 5 as per 1855 classification of Bordeaux) for an extraordinary vintage (2000, 2005, 2009 and 2010 are Vintage of the century). This translates to roughly $6k equivalent for a standard bottle. While high compared to the wine pricing in the market, it certainly isn't very far out of the ordinary.

In most years, a bottle of Chateau Margaux will still sell for $300-$500 irrespective of a vintage while the price can be three to four times in case of a great vintage.

In terms of price of a wine, the bigger the bottle size, the more is the price relatively speaking (It's to do with the amount of oxygen compared to the volume of wine in the bottle). Thus a bigger bottle ages better and can last much longer. So a magnum (1.5L)  would be more expensive than a standard Bordeaux bottle and a Jeroboam (3L-Burgundy, 4.5L Bordeaux) would be more expensive than a magnum). Also, wines sold directly from the cellar of the producer would always fetch a better price than those sold by a wine merchant (it is to do with how little the wine has moved from its natural ageing environment in that time).

Looking at the number of lots sold and the vintage on offer, the total net price for the auction was hardly one that would raise eye brows to a significant stretch. The problem in that news piece stemmed from asking someone who rarely buys and drinks an expensive bottle (at least not with their own money).  It is no different from the perception of a normal flyer who flies budget or economy on why fly a first class suite when a business class offers you flat beds or buy a Patek Philippe when it just shows the time or why a Jason Pollock fetches millions when he/she thinks even a child can paint like that.

To understand why someone would be happy to spend a $6k on a bottle one needs to get the person who regularly buys that kind of wine or getting someone who charters a flight when a business class ticket could offer the same utility so much more cheaply. It's to do with exclusivity and experience and a personal preference or willingness to enjoy the experience. Not to mention the bragging rights of having owned such rare masterpieces.

Investing in fine wines is thus, first and foremost to do with exclusivity and uniqueness. Producers who make a tiny amount and who are well rated obviously sell for multiples compared to someone who is not equally rated. ​

It's to do with the terroir or the location. So a Grand Cru from Burgundy or a higher rated Chateau (a First growth or second growth from Bordeaux) in general would fetch more than a premier cru which will fetch more than a village wine. And while a Grand Cru could age for decades, the premier cru may not have the lasting power.

It's to do with the producer. Great producers who own great, exclusive vineyards and who have a reputation of a severe, conscientious selection, reputed wine makers, cellar practices, etc could be rated much higher than their next door neighbour, with their wines out selling and out pricing their neighbours in multiples of five or ten.

It's to do with Vintage. The better rated the vintage, the better rated the wine. So a 2005 or a 2009 or 2010  from Bordeaux would sell in multiples of what a 2011 or 2012 would fetch for the same producer​​​.

It's do with storage. So a wine that has been stored at the cellars of the producer would sell for more compared to the same wine stored in a recognized commercial storage. This in turn would sell for a lot more compared to a wine stored in average commercial storage or stored at home.

It's do with age. An older aged bottle of a great vintage obviously with life left will sell for a lot more than a recent great vintage​. Not to mention the fact, over the years, as that vintage is drunk, there would be less and less peers of the same wine and vintage.

A degree of luck. If a region has had a bad run of vintages, then the last great vintage would obviously continue climbing up in pricing. E.g. a 2009 or 2010 from Bordeaux. However, if a region has had a string of fantastic vintages, then until mother nature establishes the rarity of a great vintage, the price of the recent great vintage may not truly reflect the potential.

​Investment horizon: While I am convinced over a longer term (10-20 year period) the great 2000, 2009 or 2010 from Bordeaux would offer significant upside compared to today's pricing, one must be prepared to hold the wine for that much longer and in case of an adverse scenario longer than that. It's like holding a blue chip stock. While the short term equity markets may offer some returns, the markets may also be choppy which, by the way is no reflection of the underlying quality of the equity.

In summary, if you want to invest in fine wines, here are some thoughts for you to consider:
1. Look to invest in underlying asset than investing in the index- worst case scenario you an actually drink that amazing stuff someday (and you have a choice to hold only the very best not all the components of an index)

2. invest in high quality bottles that have ageing potential of a few decades. This would mean extraordinary vintages of wines which are either first growth, second growth or super seconds from Bordeaux, some extraordinary Grand Crus from Burgundy from named producers or outstanding premier crus or other similar traditional (in some cases a bit eccentric but passionate) producers from regions such as Tuscany, Piedmont, California, etc.
(​I am personally, also a big believer in the second wines of these great names. It would amaze you to know how fast the prices of their second wine shoots up (most of the time these remain under the radar although for a number of big Chateau, these second wines are a big driver of the yearly cash flows))

3. Be prepared to hold these wines for a minimum of 10-15 yr horizon

4. Ensure proper, recognized commercial storage. The cost of recognized commercial storage over the investment horizon is a fraction of the overall cost.

4.Like any other asset class, take time to educate yourself. This learning journey, I guarantee is an absolute joy.​​

You see, unlike blue chip stocks ​that, in rare instances, can go bankrupt and disappoint, a fine wine properly sourced, and cellared, will always be there to please.
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