Grape Minds Drink Alike: What to Look For When Making a Wine Investment
Wine investing may seem vine and dandy, but you'll get shiraz kicked when sip hits the fan. Read this carefully before making a pour decision.
Updated Feb 25, 2022
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With everyone hedging against the market during these uncertain times, investors must adopt a slightly out-of-the-box approach so that their portfolios will outperform in the long term. With high inflation and interest rates on the horizon, the need for portfolio diversification rises along with it.
The basement of fine wine investing is two foundational principles: quality and scarcity.
Fighting against the ebb and flow of the economy may seem futile, but some industries are built on their market resistance. That's what makes a fine wine investment so ideal right now.
You don't need to be an expert or even a consumer to learn how to invest in wine. Wine investing doesn't require a trip to the liquor store or a drive out to wine country but rather demands an understanding of the different aspects of wine that give it quality, longevity, and, ultimately, desirability.
As one of the best collectibles to invest in for 2022, fine wine is more than just a tasty consumer good. Get ready to learn some French because here's what you need to know to make a good wine investment.
Why invest in wine?
Why invest in wine?
Wine is a consumer good as well as a luxury item, but some bottles may be more profitable than other allocations in your investment portfolio. Fine wine has outperformed the S&P 500 and continues to do so by an increasing margin. With 10% to 13% annualized returns and less volatility than gold or real estate, investing in the fine wine market is historically an excellent way to diversify and hedge against the market.
Quality plus scarcity equals desirability
Quality plus scarcity equals desirability
The basement of fine wine investing is two foundational principles: quality and scarcity. Every decision a wine investor makes operates on how these attributes will impact the desirability and, ultimately, the value of a certain bottle. From an outsider's perspective, it may seem like all you need to do is buy, store, and sell wine, but there's a lot more to consider when determining if a wine investment will even be profitable.
For most commodities, scarcity is the sum of supply and demand. While this remains fundamentally true even for fine wine, the difference between buying wine and investing in wine is all the nuanced factors being taken into account. For instance, wines from a bigger winery that produces in large quantities will be less scarce and, therefore, less valuable over time.
Likewise, if smaller wineries produce fewer bottles per year, then the value of those bottles is more likely to appreciate.
Investing in limited edition fine wines
The size of the winery and how much they produce should always be considered, especially when it comes to wines marked as limited. While this is no more than an effective marketing strategy, limited edition bottles of fine wine are often the best investments purely because of their scarcity. However, this is not the case for every limited bottling because limited is a relative term.
What a large-scale winery considers a limited batch could exceed what a small-time winery produces in a year. Generally, the number of limited wine bottles produced shouldn't exceed three figures, but the smaller the better. Another way to invest is by purchasing fine wine futures contracts, which basically means buying wine before it's bottled or even matured.
While wine futures can manufacture scarcity, they're risky because they're essentially a gamble on the bottles' ultimate desirability.
While some aspects of wine investing are quantitative, it's the quality of the wine that is most important. However, not all fine wines are investment-worthy—few wines have the longevity to age for many decades and also taste good. The best investment grade wines last long past the drink-by date, so quality is king as far as long-term wine investors are concerned.
The best wine investments are in bottles that'll last until the intended drink date and beyond. Wines must be age-worthy before they can be investment-worthy, and those with the highest levels of acidity and tannins tend to have the most longevity. These properties are largely the result of the species of grapes being used—which is why red wines tend to age better than white wines—and the types of wood the casks are made from.
Tannins are bitter compounds found in organic matter, like tree bark and grape skins, that are often used in winemaking. Tannins have a dominant bitter flavor but are important for producing signature properties like the "dry" texture that red wines are known for. Along with acidity, tannins are an important part of a wine's structure that allows flavors to continue developing in the bottle over time.
For a wine to be considered "full-bodied" or robust in flavor, it must have sufficient tannins and acidity alongside proper levels of sugar and alcohol. Sugar and alcohol content are also properties that help a wine age, though to a lesser extent, but they can also be overpowering in terms of flavor and intoxication. Generally, wines that are more tannic and acidic have more refined flavors and increased longevity.
How long a wine will last is of key importance to investors, but they should also know how old the bottle is as well as the age of the wine inside it. Most investment wines begin appreciating in value ten years after bottling and they tend to peak after 25 years. While some can last even longer in a wine cellar, investors look at where a wine has been as an indicator of where it's going—AKA its provenance.
Wine must not only last with age, but it must also develop a more complex flavor profile in the meantime. Wines that're fruity when they're young tend to be more savory later in life, but this, again, depends on contents like alcohol, sugar, acid, and tannins. This is why white wines are fruitier because they lack acid and tannins and don't age as well. Hence, red wines tend to be superior long-term investments because they're better at retaining those desirable characteristics.
If you're more of an investor than a wino, critic scores are extremely helpful to determine the best wine investment because they reflect expert opinions. There are different rating systems for high-quality wines: on a numbered system, anything higher than 95/100 is considered high quality, with the highest quality wines usually labeled as either "classic" or equivalent. Wines that don't meet the highest critical standards are risky investments, to say the least.
The best investment wines have a rich heritage rooted in a prolific viticultural region known as terroir. Terroirs are geographical areas with the ideal climate, soil, and topography for vineyards as well as a traditional winemaking culture. Certain terroirs are known for the unique products of their prestigious winemakers, which is why many wines are named after their terroir. These are your Burgandys and Bordeauxs, Champagnes and Chardonnays, as well as your Tuscans and Riojas.
However, not all terroirs are household names and some of the best investment wines have up-and-coming terroirs. For instance, wines from less famous regions like Napa Valley and Los Gatos in California are competitive in both price and quality to some of the best French wines.
Last year, California became the fourth most-traded wine region after France and it produced the highest number of 100-point wines. Investors who are looking for lucrative wine opportunities on the horizon are getting familiar with regions like Central and South America.
High-quality wines from reputable winemakers are best at retaining their value, but scarcity is the impetus for the desirability of a particular bottle of wine. In other words, while a quality bottle will retain its value because it lasts longer and develops with age, this wine won't necessarily go up in value. Even with age, the most superb bottle that's still being produced won't be as good of an investment as a high-quality vintage simply because the latter can't be replicated.
It's hard to determine if wine is a good investment based on subjective market sentiments like 'desirability.' Investors won't know when for certain their wine will go up in value, but they can be almost certain that it will occur based on public perception of the wine and the market supply. It's not enough for your wine investment to be in high demand, but it must be so highly desirable that it can sustain that demand over the life of the investment.
When a winery can sustain or even increase demand for a fine wine without increasing its supply, then that becomes the ideal investment.
How can I get started with a wine investment?
How can I get started with a wine investment?
The obvious way to start investing in wine is by buying and storing bottles. Physically investing in wine requires a lot of time and effort and can be risky for those without access to a wealth of wine wisdom. Also, storing wine isn't simple since bottles must remain under certain conditions in order to age properly and maintain their flavors. Investors without a proper wine cellar must take on the costs of paying for a custodial wine storage service.
Since investors ultimately want to sell wine, those that don't properly store their bottles will make less profit than those who do. Wines only have longevity under certain conditions, so maintaining the correct temperature and humidity is crucial for turning wine from an asset into an investment. This is why many have forgone the process of building a physical wine portfolio by finding other ways to invest.
Wine investment platforms
The easiest way to invest in wine is through a wine investment platform like Vint and Vinovest. These platforms give retail investors access to a portfolio of fine wines that are managed and stored by the platform for a fixed fee.
Vint is the first SEC-qualified alternative investment platform dealing exclusively in wines and spirits. Vint allows you to buy a share in their crowdfunded wine collection and they're also building a secondary market to allow investors to trade their shares.
Vinovest is another alternative investment platform that has professional sommeliers use their proprietary algorithm to curate a personalized wine portfolio for investors. Anthony Zhang founded Vinovest after finding that certain wines from particular regions outperform other asset classes. Vinovest users create a profile by choosing an investing style and picking a tier based on the size of their investment.
Vinovest provides storage, insurance, authentication, and proof of ownership, as well as expert wine consultants to help users get the most out of their investment. Vinovest can help you profit from wine investments by timing the market, but will also make shipping arrangements if you choose to keep your wine.
Another way to invest in wine is to buy stocks in adult beverage companies. Most publicly-traded alcohol companies manufacture wines among many other spirits and hard beverages and are also usually exposed to the broader food and beverage industry. While investing in wine stocks isn't ideal because they aren't directly linked to wine as the underlying asset, the few publicly traded companies that haven't yet diversified beyond the wine industry may be good to invest in.
Since there are no exchange-traded funds (ETF) that deal exclusively in wine, it is lumped with all other alcoholic beverages into the consumer staple category. Consumer staples indices like FSTA and VDC include wine companies in their diverse portfolios, but their exposure to other commodities and consumables make them far from ideal for investors only interested in wine. Private equity firms are a better way to invest directly in wine as an underlying asset.
Wine Investment funds
Wine investment funds are similar to private equity funds as they allow investors to buy shares in a privately managed portfolio of fine wines, productive vineyards, or a combination of both.
Like wine investment platforms, portfolios of wine investment firms are professionally managed by knowledgeable experts who constantly pursue ways to exploit the wine market for profit. While they're great for investors who value expertise in a particular terroir or specific wine type, returns on wine investments can take many years to realize, and low liquidity makes it harder to cash out of a wine fund.
Is wine a good investment?
Is wine a good investment?
While there is no simple 'yes' or 'no' answer, the vast majority of wines are not good investments. That being said, there are a minority of exceptional wines that continue to be profitable with each auction and private sale. Identifying which wines are part of that minority requires a fundamental understanding of what drives desirability and its relationship with supply and demand and familiarity with attributes like terroir and longevity.
Personal preference also plays a notable role in wine investing: Some prefer juvenile wines with less developed flavors while more refined pallets prefer wine that's hardy and mature. There are also the bon vivant who could care less about the taste and are more concerned with projecting prestige and opulence. Whatever the case, here's to all your investments aging like fine wine.