The Pros and Cons of Fine Wine Investing

Fine wine investing has become popular due to the returns possible whilst investors also being able to enjoy what they own! Wine investment along with other alternatives investments such as coin collecting, stamp collecting and art investing are a way of increasing your wealth, with less volatility than stock markets. 

Takeaways

• What is fine wine investing

• The pros and cons of expensive in wine

• Which is the world's most expensive wine

What is fine wine investing?

Fine wine investing requires paying attention to the details. This means finding the pedigree, age and provenance of the wine. This will also include what the critics say, as some vintages will be abnormally poor or good. You should also be aware that the scarcity of a wine can also drive up its value. A fine wine is also considered 'investment grade wine'. To become investment grade, the value of the wine has to have the possibility of increasing within 5 years.

How does the value of a 'fine wine' increase?

Although quality will always be the most important variable, there are some artificial ways of doing so.

Limit the quantity

Screaming Eagle Cabernet, a US Nappa valley wine maker makes very small quantities of its wine. As a result this creates an artificial demand. It helps, as in this case, that the wine is also well received by wine critiques.

Vineyards are not machines

Vineyards themselves can contribute to the creation of wealth through fine wine. The Domaine de la Romanee-Conti is produced on only 1.8 hectares of vineyards. As a result this limits production, partly because there is a desire to only use the best grapes.

On other occasions, old vines can be replaced. This makes the wine produced by the last of the 'old' vines considerably more valuable than bottles produced with grapes from the 'new' vines.

Experimental fine wine

Fine wine investing can also branch out into some interesting areas. Like with all investment, investing in wine has its quirks. One fine wine, 1951 vintage of Penfolds Grange, was produced on an experimental basis. None were ever commercially released. Although a relatively new Australian wine, it has attracted a great deal of attention because the winemaker kept making it despite being told to cease by senior management.

The elements

The quality of the soil, the grapes and the amount of sunshine will influence the quality of the wine. There are also peculiarities, for example, higher temperatures will give the grapes more flavour. In 1946, an outbreak of Phylloxera destroyed the wines of the Domaine Romanee Conti. As a result they were only able to sell wine again in 1952.

The pros of investing in wine

Wine value is uncorrelated to the stock market

Many investors start with investing in stocks and then look for an asset which will appreciate but without the associated volatility. It also helps that wine has substantially outperformed the S&P 500 over the past decade. Fine wine investment also means you can diversify your assets into an area which will always be in demand. Wine is considered a luxury that many cannot do without.

It is tax free

Countries like the UK, do not charge capital gains tax on profit within the first 50 years of the wine's life. If the wine does last or mature over 50 years then you will be liable for tax if you profit from selling it.

A tangible asset could come in handy

With so much of you wealth tied up digitally, bank accounts, stock holdings, pension, it is good to have some of your wealth in physical form. In times of extreme needs, you should be able to barter it for something more important at the time.

The cons

There is no regulation to protect you

The provenance of a fine wine is not always clear, especially if you have privately bought it. You can rarely check, by drinking the wine, the quality of what you have bought. As a result you are trusting the person who bought the wine. Remember wine investment scams can fool even the rich and famous.

Your wine could be mishandled and broken. One expensive wine was never drunk because a waiter knocked it over in a top hotel.

Beware of the financial cost

The value does not increase indefinitely. At some point the wine wastes away. This is why HMRC terms it a wasting asset. You are also unlikely to store the wine in your home: the insurance will be too expensive or they may simply refuse to insure you. This means placing it in a storage warehouse, which is costly.

It is not a 'liquid' asset

Selling your wine bottles or collection is a time consuming process. You may not get the price you want when you try and sell it. As a result you need to be patient or accept that it may be months after you decide to sell it that you will get the money you want from it.

What is the most expensive fine wine?

In 2018 a bottle of 1945 Romanee-Conti was sold for $558,000 by Sotheby's. This is still the record for a bottle of wine. It was originally estimated to sell for $32,000! Shortly after a bottle of the same vintage was sold for $496,000. This consistency in the high price paid would suggest this wine is likely to stay one of the most expensive. The wine is made using traditional methods and with a perfectionist approach. This means bad grapes are thrown away. With the Burgundy region where it is made, the Domaine de la Romanée Conti is known as the 'the Domaine'.

Conclusion

Like other drinks which require time, such as whisky investment, fine wine investment is for the patient. There are also details to check: the top auction houses are expensive to sell through. They will claim they can reach a global audience  and increase your sale price. (Some buyers want to create a splash). It may be you prefer to sell through a local wine focused auction house. Whichever way you go, as your knowledge increases, so will the maturity of your wine collection and your wealth!