Whiskey Investing

The Knight Frank Luxury Investment Index in 2020 estimated that rare whiskey had seen its asset value grow by a staggering 582 percent over the last 10 years. This means whiskey investing has easily outperformed other luxury goods investments like fine wine, watches, and vintage wine. Perhaps rare single malts really were “liquid gold” and a safe haven for investors.
But that was 2020, and more recent times have shown whiskey to be just as volatile an asset as any other. By the end of 2020, the Knight Frank Whiskey Index (KFWI) showed Rare Whiskey dropping momentum at a rate of 3.5%. This is more than coins, colored diamonds, and jewelry.

What Is Whiskey Investing?

Whiskey originated in Scotland and dates back to over 1,000 years ago. According to the Whiskey Investment Club, the art of distillation was introduced in Scotland by traveling monks from Europe around 1000 AD. Because grapes could not be cultivated in Scotland, monks started to ferment grain, which produced Scotch whiskey.

A malt tax introduced in 1725 led to the closure of Scottish distilleries, which created vast underground operations. Then, in 1831, new laws allowed for cheaper and more efficient whiskey production on an industrial scale. U.S. prohibition laws bought the whiskey industry to a standstill in 1920 because United States had been the biggest importer of Scotch Whiskey. Alcohol sales resumed in 1933, and the whiskey market ballooned.

Investors have turned to whiskey because, like other luxury and alternative asset—diamonds, gold, or crypto, for example—it is considered a safe haven investment that doesn’t correlate with the financial markets. Whiskey is an interesting way to diversify a stock portfolio during uncertain economic times, certainly more titillating for the taste buds than U.S. Treasury bonds.

One attraction for whiskey investors is favorable tax implications for cask whiskey investments. Exits are exempt from capital gains tax and excise duty. Whiskey enthusiasts are obsessed with the fiery, peaty, or smokey flavors that excite the palate. This is in a way that only a top-notch Scotch, Irish, Japanese, Canadian, or U.S. whiskey can do.

Scotch Whiskey

Scotch is the most traded whiskey in the world and accounts for 20% of all the U.K.’s food and drink exports. Scotland’s damp, cool climate lends itself to whiskey production. Exports of Scotch whiskey amounted to £5 billion in 2019, and all of that was from a meager 134 operating distilleries.

There are distilleries on the Borders in the south of Scotland up to the islands of Orkney. Blends combining malt and grain whiskeys compose most of the market, but single malts – small-batch whiskeys produced at one distillery using only barley, water, and yeast – are the most well-known. Blended malts are a mix of two or more single malts while single-grain whiskeys come from a named grain distillery.

Irish Whiskey

Irish whiskey outsold its Scottish cousins in the late nineteenth century until blended Scotch left a path of destruction over the sea for Irish Distillers. However, they clung on, and distilleries are now going strong from the city of Dublin to remote coastal locations such as Dingle. Ireland’s unique style uses unmalted barley, and the nation is producing new takes on single malt and peated whiskeys.

Japan

Japan’s whiskey industry was spurred by a trip by Masataka Taketsuru to Scottish distilleries. This led to the opening of the first Japanese distillery, Yamazaki, in 1924. Thus, Japanese whiskey is more similar to Scotch whiskey than any other style. Suntory and Nikka are the two most well-known whiskey companies in Japan, and both produce single malts and blends. Japanese whiskey has become world-renowned, boosted in recent years by the sky-high auction prices fetched by the so-called “lost” distilleries Karuizawa and Hanyu.

U.S. Whiskey

Whiskey in the United States is dominated by the well-known brands Jack Daniel’s and Jim Beam. But there is a growing craft distilling movement bringing diversity and originality to the domestic whiskey market. America produces bourbon, rye, rye malt, malt, wheat, Tennessee, and corn whiskey. All are produced from mashes with at least 51% named grains. Blended, straight, grain, and spirit whiskeys are all blends without a specified dominant grain.

Canadian Whiskey

Canadian whiskey is characterized by its rye grain. Most Canadian whiskeys are blends with a large percentage of corn spirits. They are typically lighter and smoother than other whiskey styles. Canadian distillers began adding small amounts of highly flavorful rye grain to their mashes, and the market then demanded this new rye-flavored whisk called “rye”. The terms “rye whiskey” and “Canadian whiskey” are used interchangeably in Canada. They refer to the same product made with only a small amount of rye grain.

What Is the Attraction of Whiskey Investing?

Whether you are investing in cask whiskey or bottles, the attractions are broadly the same. It is the tangibility of the product itself and the return, whether it be in the form of a smokey tang on your taste buds or a sizeable profit in your investment portfolio.

Proponents of cask whiskey argue its viability as a long-term investment because the good stuff improves with age. So, even if the value on the market is not where you would like it to be, the whiskey itself is. The longer it stays in the barrel, the richer and smoother it becomes, and the more money whiskey fans will pay to enjoy it. However, naysayers claim little data support cask whiskey investment as a guaranteed earner.

Whiskey is more accessible than alternative assets like art, diamonds, and vintage cars, where many investors are priced out of the market by dramatic auction-house deals. While there are anomalies—a 60-year-old Macallan Valerio Adami 1926 sold for more than US$1 million in 2020— whiskey is an affordable asset with the possibility of good returns.

Let’s take a closer look at the advantages of whiskey over stocks.

What Are the Pros and Cons of Investing in Whiskey vs. Stocks?

One disadvantage is the need for expertise in the whiskey market. Another is the real risk of falling prey to fraudsters, and the fact that there is so little data on whiskey investing. Here’s a quick summary of the pros and cons.

Pros

Returns – If you find the right one, a whiskey’s value increases with age

Demand – The economics are right, and there is an active and buoyant market.

Liquidity – Whiskey is more liquid (no pun intended) than other luxury assets like diamonds or watches.

Supply – There is a finite supply of very rare whiskeys, so prices will continue to rise for these items

Taxes – U.K. tax rules usually treat whiskey as a wasting asset, so it is not subject to capital gains tax. In the United States, you will pay tax on any profits that you earn.

Cons

Returns – Many whiskeys will not appreciate over time, and expertise is required to know which to buy.

Data – Whiskey investing is an emerging strategy, and there is limited data to source from.

Fraud – The market is full of over-priced bottles, fake goods, and confidence schemes.

Hype – Cask whiskey investing is being hyped as the next wave of whiskey investing, but it is an unproven market.

How Can Novice Investors Start Whiskey Investing?

If you don’t have a passion for whiskey investing, you won’t have the heart to do the work that is required to learn the business. In addition to passion, the main focus of novice investors should be education.

Learn About Trends

Do you know the difference between collecting vintage versus modern bottles? And what a modern release is? Do you understand the different whiskey indexes?

Learn as much as you can about the trends in whiskey investing and set yourself up for success. Read about trends in listed company annual reports such as Diageo and Pernod Ricard. Read books, engage in webinars if they are worthwhile and offered by regarded experts, engage in discussion forums, and learn from fellow investors. However, watch out for fake gurus on social media and YouTube and use your judgment regarding their advice. Seek out experts and try to get a second and third opinion before you part with your money.

Choose Your Investment Strategy

There are three main options for investing in whiskey: investing in bottles of valuable whiskey, investing in whiskey maturation, and investing in a distillery. Choose your strategy or a combination thereof, and understand the risks involved.

Investing in Bottles: Consider the bottle’s collectibility. Rare bottles, sought-after brands (Macallan, Highland Park, The Balvenie, Glenmorangie, Ardbeg, and Bowmore), limited edition runs, or bottles from “silent distilleries” have a better chance of increasing in value. Serious investors visit trade shows and build relationships with collectors and distillery owners.

Visit providers of rare whiskeys, including The Whiskey Exchange, Old and Rare Whiskey, or the Rare Malt Whiskey Company. These companies have direct relationships with wholesalers and provide a trading platform for buying and selling whiskey.

Investing in Whiskey Maturation: This type of investing requires investors to buy recently distilled whiskey at a wholesale price. They then pay to have the whiskey stored in a cask at a distillery’s bonded warehouse. Whiskey improves the longer it is in the barrel, and investors can choose how long they want to store their casks before selling them to a distillery or bottling their own whiskey.

Investing in a Whiskey Company: Whiskey companies are listed on the London and U.S. Stock Exchanges. An exchange-traded fund (ETF) buys and sells companies that own distilleries. This form of investing allows you to leave many of the difficult decisions to the experts, such as which bottle to buy or where to store it, and reduces your risk.

What Are the Risks With Whiskey Investing?

Of course, there are risks associate with whiskey investing. Three of them include the difficulties of buying and selling the product, storage, and the threat of recession.

Ease of Buying and Selling

• To avoid buying products that will not increase in value, you will need to be extremely knowledgeable about what you are purchasing.
• Because you may lack industry knowledge, you may buy bottles that are difficult to resell at a profitable price later.
• Forgeries of expensive bottles of whiskey are uncommon, but it is possible that as a novice, you might buy one.
• Some rare whiskeys may be difficult to resell because there is a limited market.

Insurance and Storage

• There are risks associated with storage. The ideal environment for whiskey is dark, cool, and temperature controlled.
• Whiskey can be destroyed by fire, a natural disaster, or it can be stolen. It is also difficult to insure your asset at a desirable value.
• If you invest in casks, you may be subject to bonded warehouse fees on the imported whiskey.

The Threat of Recession

• Market forces might conspire to cause a collapse in prices if there is too much supply or consumer tastes change.
• Whiskey is a premium drink, and expensive whiskeys are a luxury product. If there is a recession, consumption may go down.
• If you invest in casks, and the distillery you have invested in goes bankrupt, your casks could be lost to a liquidator.

Tax Treatment of Whiskey

U.K. tax rules usually treat whiskey as a wasting asset, so for private investors, it is not subject to capital gains tax. Investors who buy into distillery funds are also exempt from capital gains.

In the United States, tangible assets passed to beneficiaries as part of an estate receive a step-up in basis, allowing beneficiaries to avoid capital gains on those assets. Otherwise, taxes are due on any investment gains.

Bonded Warehouses

Whiskey casks are stored in bonded warehouses with licenses so that they can be exempt from duty. If you buy or sell a cask, you must know in which warehouse it is stored and the access the warehouse allows.

For example, when you buy a cask, you will want to know where it will be stored if you want to visit to draw samples and bottles.

What Is the Criticism With Whiskey Investing?

The biggest criticism of whiskey investing is that it is just another fad. As with other alternative investments, it is subject to volatility and fraud.

The Pattison Crash caused a massive contraction in the whiskey industry in the late 19th and early 20th centuries that persisted for decades. In the late 1800s, keen investors were taking out huge loans to buy up Scotch whiskey stocks. But times got hard for northern distillers and bottlers, and independent bottlers resorted to shady and brazen financial dealings. One such firm was Pattison, Elder & Company, which inflated the value of its assets.

In 1896, the firm along with 10 other businesses they had connections with filed for bankruptcy, triggering a cascade of closures, contractions, and output reductions throughout the Scottish whiskey industry. In 1906, production dropped below 24 million gallons, a reduction of nearly one-third in just nine years.

The good news is that the industry survived the contraction, the ensuing World War I, U.S. Prohibition, and then World War II.

Volatility? Yes. Fad? No.

5 Tips for Profiting From Whiskey Investing

Buy Good Brands

If you are starting or adding to your collection, consider good brands like Ardbeg, Macallan, Brora, and Laphroaig.

Follow Whiskey Forums and Read Company Annual Reports

Popular forums with reliable news and advice are Whiskey Magazine and WhiskeyWhiskeyWhiskey.

Buy Limited Editions

Look out for demolished distilleries; the casks will run out quicker, and the prices are more likely to go up. Also, buy limited-edition whiskeys and those produced for special occasions, for example, the Queen’s Diamond Jubilee or royal weddings.

Stick to Scottish, Irish, and American Whiskies

Some Irish whiskeys will do well, and top-brand American bourbon and high-age whiskies are in demand. There is little history or data to show other whiskeys with investment quality just yet.

Be Patient

You may have to wait some time before you auction away your whiskey at a sizeable profit—possibly ten or twenty years, but the rewards can be huge. A pure malt scotch whiskey from 1926 went for €8,500 in 2016. It was vintage, matured for 50 years, and bottled at cask strength.

Whiskey Investing: General Terminology

Cask Strength: Whiskey bottled at the (high) proof at which it came out of the barrel.

Chill Filtration: A cloudiness in whiskey that occurs when it gets cold and fatty acids congeal.

Column Still: A steam injection process to strip the beer of alcohol and produce a cleaner spirit than a pot still. Column-still whiskeys have less depth of grain flavor.

Congeners: Chemical compounds other than ethanol or water that come through the still, such as fatty acids, esters, and aldehydes.

Cooperage: The art of producing the barrels a whiskey is aged in. The barrels affect the flavor of the whiskey through extraction and oxidation.

Dram: A shot of whiskey

Expression: A new version of an existing whiskey achieved through changes in proof, age, cooperage or other factors.

Extraction: Whiskey extracts flavor compounds from the barrel in which it ages.

Malt: A sprouted grain (which converts starch in the grain into sugar) toasted to prevent it from growing into a plant and used to make whiskey.

Mash Bill: The ratio of grains used to make a distiller’s beer.

Oxidation: The process by which congeners in whiskey slowly react with the air that gets in through the barrel.

Peaty: When sprouted grain (usually barley) is toasted over a peat fire to make malt and absorbs the smoke.

Pot Still: Pot-still whiskeys, like moonshine, are usually pungent and spiky. After years in a barrel, they develop rich flavors and texture.

Conclusion

There are plenty of pundits that would like you to invest in whiskey, particularly casks of whiskey. Bottled vintage and popular brand whiskeys have outperformed stocks in the past 10 years. Yet there is no guarantee that they will do so on a consistent basis. Indeed there is even less data to support the profitability of cask investing.

Whiskey will always be a popular drink, but the market could fall out of any industry, and consumer tastes could change. Rare whiskeys will likely increase in value, but these are mostly out of reach for the average investor.

If you have a passion for whiskey and would like to diversify your portfolio, whiskey can both give you pleasure as a tangible investment and add value to your assets. But only if you educate yourself on whiskey investing and choose your investments wisely, preferably with a clear, grain-free head.

FAQs

Can you invest in whiskey?

Anyone can invest in whiskey either by investing bottles or casks of whiskey. Finding the right bottles can be difficult, and unless you are buying a rare vintage whiskey, you will need a lot of them to make it worth your while. For casks, no duty is levied while they remain in bond, but there is no guarantee of a return the older the whiskey gets.

Is whiskey investment tax-free?

In the United Kingdom, whiskey is considered a wasting asset, so it is not subject to capital gains tax. In the United States, taxes are due on any investment gains.

What is the difference between U.S. and Scottish whiskey?

The basic ingredient of Scottish whiskey is malted barley, which is mashed with warm water and then strained off. In the United States, a mix of grains are cooked at a higher temperature and are not filtered off but go into the still.

“Straight” whiskey, made in the United States must be aged a minimum of two years in a new, charred barrel. Scottish whiskey made from malt scotch has to be aged at least three years. This is usually in bourbon barrels imported from the States for European oak casks. The barrels give whiskey its distinctive flavor and color.

Can whiskey be a good investment against inflation?

If you invest in bottles of high-end and vintage whiskeys like The Macallan, you can hedge against inflation and market volatility. However, these whiskeys are expensive and difficult to source.

How long does it take to make a return?

The time it takes to make a return is indefinable. It depends on the market and the whiskey itself. A limited edition or rare whiskey may show a significant return in a matter of months. For other whiskeys, it can take decades.