Investment in premium wines has gained popularity in recent years since many within the industry of viticulture have pushed fermented grapes as a means to increase returns and diversify portfolios. An increasing body of economic research supports the raising of the public’s interest. It is the study suggests that it may be unwise to buy wine for investment instead of to drink it. Common stocks can provide higher returns over the long term – and are also less risky.
As you would imagine, the wine industry believes that its product is the best asset. Industry insiders have suggested that wine yields higher than average returns and helps diversify the portfolio of investors (thus decreasing risk). If everything fails, the investor can still enjoy the wine.
Zachy’s, a prominent New York wine retailer and wine auction house, for instance, has claimed that auction prices for top Bordeaux wine have been increasing by 25 percent to 50% per year over the last few years. In 1998, Peter Meltzer of the Wine Spectator, the world’s most popular wine magazine, reported that the market for wine beat that of the Dow Jones Industrial Average through the 1990s.
Any investor looking to invest should be aware that the vast majority of wines aren’t “investment-grade” – a financial term indicating a moderate risk and are not able to benefit from storage for longer than two or three months. Expert wine investors choose only the top growths from Bordeaux and Burgundy, as well as select the best wines of California.
It might be worthwhile letting the bottle become dusty to enhance the flavor, but it’s not a good idea to do this for the ROI or the return you get from investing.
Wine: only marginally better than Treasurys
Even for fine wines, the numbers on investing aren’t favorable. A single of the first economic studies which looked at the return rate for wine storage over a long period was done in the latter part of the 1970s with William Krasker. Based on 137 observations about the red Bordeaux as well as California Cabernet Sauvignon from 1973 to 1977, he concluded that the value of holding the wine was no higher than the safe US Treasury bills – which generally have the lowest yields on the market.
To understand the distinction, it’s important to note that dividends are often paid out in stocks, and wine is a source of capital appreciation. Additionally, investing in wine will incur storage costs and other expenses.
The Liv-Ex Fine Wine 50, made up of the ten most recent vintages from the 5 Bordeaux early growths, did better than the stocks within the Dow Jones Industrial Average during the financial crisis. However, since then, wine prices have plummeted. Liv-Ex, Quandl
Elizabeth Jaeger of the University of Virginia appeared to challenge this poor performance by presenting her study released in 1981. She found that a wine portfolio comparable to Krasker’s had a higher performance than Treasury bills by 16.6 percent. The huge difference is, however, mostly due to the fact that she sampled different periods in duration (1969-1977 in Jaeger’s research) and her decision to use significantly lower storage costs per year than Krasker’s $16.60 per case.
The ‘Bordeaux equation’
In a pivotal study that was based on one calendar year, Princeton economics professor Orley Ashenfelter invented”the “Bordeaux equation,” which helped him to determine how good a wine’s vintage in relation to the temperature of the growing season and winter rainfall in the renowned French wine region with that name.
He concluded that the true value of holding a selection of Bordeaux wines in 1991 was 2.4 percent, which is a minuscule amount when compared to a 30 percent increase on the Dow Jones Industrial Average. Another study conducted by Gregory Jones and me in 2001 found that the returns on Bordeaux Chateaux that were specifically cultivated were considerably lower than the average for the common stocks.
The second study from the same year, conducted and written by Benjamin Burton and Joyce Jacobsen, examined the semi-annual returns from the storage of Bordeaux wines from 1986 until 1996, with a focus on the repeat sales of the wine and analyzing them against various financial assets.
They found that a portfolio comprised of first growths – which is a classification that is considered to be among the top – yielded 6.8 percent throughout, which was just a fraction better than the 5.8 percent gain on Treasury bills but roughly less than that of the Dow Jones benchmark index. Even an investment portfolio made up of William Sokolin’s investment-grade first wines did not fare well, earning, on average, 9.4 percent at auction. This is before you include commissions for sales, insurance, and storage expenses that could cause them to be even more expensive.
Wine doesn’t just outperform equity investments, but it’s also more risky. The standard deviation – which is a measure of variability when analyzing different data points in the portfolio of wines that is comprised of grand cru wines is greater than double the Dow Jones Industrial Average. Portfolios that focus on the first growth as well as the vintage of 1961 display an even greater degree of variation between the highs and lows.
Wine as a hedge
This chart shows nominal annual rates of returns for various portfolios of wine between 1986 and 1996. Burton and Jacobson
Although wine isn’t an ideal investment in and of itself, it can be an alternative to hedge funds as well as an opportunity to diversify your portfolio of assets and provide protection in times of market decline. Researchers studied Bordeaux auction rates prior to the financial crisis struck in 2008 and discovered that the fluctuations in the two investments, such as equities and wine, were not in any way related to one another and shifted independently, which suggests that wine could be an excellent option to hedge or offset risk in the stock market.
In reality, Philippe Masset and Jean-Philippe Weisskopf of the Ecole Hoteliere de Lausanne studied the performance of investing in wine during the past financial crises. They found that incorporating them into the portfolio increased returns and risk. The study did not clarify if this current positive outlook for wine is a constant trend or merely a result of an inflationary bubble according to a study by NYU economist Boyan Jovanovic.
The latter, although an alternative, has proven more precise. Since June 2011, it has been observed that the Dow Jones Industrial Average has increased by over 50%, while the prices for fine wine have fallen by over 40%, in accordance with the London International Vintners Exchange Fine Wine 50 Index.
