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Fine Wine - Beverage or Collectible?

Most people who buy wine, fine or otherwise, do so because they enjoy drinking a glass or three with meals. Of course, some folks prefer to dispense with the meal and just have a few sips to help forget the day’s tribulations. There are also wines which are meals unto themselves. In all of these cases, however, wine bottles are being opened and the tasty contents are consumed.

For literally thousands of years, wine has been considered a beverage. Today, conscientious wineries do their utmost to ensure fruit is at an ideal state when harvested. Winemakers either minimize their involvement to maximize expression of the fruit or employ their technical skills and spicy barrels to make wine in a style their customers will love.

Despite all of this, there are people who don’t think of wine as nectar of the gods. Instead, it’s a status symbol, an opportunity to diversify their portfolio, or both. This is not a new phenomenon but it has, in my opinion, gotten out of hand now. Covetous acquisition and speculative hoarding by people with loads of disposable cash has driven the price of many wines to ridiculous levels — levels that put these wines well past the point at which a wine enthusiast can buy them to drink or investors might reasonably expect good returns.

Yesterday, Tom Johnson quoted a money manager who used to buy wine as an investment, but now finds the valuations too high. He is not alone. Collectible wines, especially First Growth Bordeaux and DRC Burgundy, are realizing much higher prices in Asia than Europe or the United States. In the West, the recession has not only constricted income and hurt returns on other investments, it has reminded some people that the value of one's stock, house or wine cannot rise indefinitely.

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For years, people who invested in “blue chip” wines, essentially Bordeaux First Growths, have been rewarded with handsome increases in value over time. The Liv-Ex 100 Fine Wine Index, the most prominent benchmark for tracking the value of investment grade wines, has tripled over the past five years. More than 90% of the wines followed by that index are red Bordeaux. Much of that increase has been driven by less than 50 wines. The meteoric rise has been going on since 1994 with 12x growth from then until now. Is that type of growth sustainable?

Most of the growth has come during two fairly short periods of time. From 1988 through 1993, the index was virtually flat. Between January 1994 and January of 1998, there was a 400% increase. That was followed by a correction which saw a quarter of the value erased, a recovery over 30 months and then flat values until January 2006. Between 2006 and today, values have nearly tripled, overcoming a steep but short-lived correction during the worst of the financial crisis. The growth seems driven by periods of what Alan Greenspan has called "irrational exuberance" and by the increasing concentration of wealth among smaller and smaller segments of the population.

Stock valuations are driven based by company performance: revenue, growth, profit. As companies add new products and increase sales volume, stock prices go up. Investing in wine is more like investing in commodities, the prices are driven in part by demand and scarcity of supply. But, unlike most investment commodities such as corn and lean hogs, investment wines aren’t “used” on a routine basis nor are their prices moderated by the need to keep them affordable to billions of “normal” consumers. Unlike oil and gold, wine is a renewable resource. Unlike houses, it provides no shelter. Unlike diamonds, wine does not last forever. Like other investments gone wild, wine prices are going up now simply because of recent increases and the belief that it will continue to do so. Cough. Tulip bulbs. Cough.

In the beginning, wine’s investment value was based not just on scarcity and brand reputation but on the desirability of the wine as a beverage. The best investments have been top Bordeaux from great years. They are wines that  improve with extended age and which also offer historical interest. There was a “gold standard” for the wines in that, eventually, the person who wound up with them at the end would drink them and find the experience pleasurable. Because those wines have shown the greatest historical appreciation, they remain the most sought after by investors. But the backup plan, drinking, is no longer viable.

There are certainly people who can afford to pay thousands of dollars for a single of bottle of wine to drink. There are also people who can pay $19,000 a night for a hotel room. But the number of such people is low and the amount of wine available increases every year. And how many of those bottles would they be willing to drink? Due to improvements in viticultural and winemaking techniques, the frequency of great, and thus theoretically investment-grade, vintages is increasing too. There have already been three “vintages of the century,” as 2000, 2005 and 2009 have been declared by pundits, and we’re only ten years in. Perhaps someone is working on a 110-point system for grading wines. Why would a reasonable person pay more for 100-point wine from 2009 than they would for such a wine from 2000? Tom Johnson also has a brief piece about the risks Bordeaux is taking with their 2009 pricing. It is, perhaps, especially dangerous given the grave concerns about en primeur just a year ago.

Nonetheless, those who pitch wine as investment and make money through consulting fees or by selling their own inventory are still beating the drum. Consider these comments from Paul Fraser Collectibles, “a new expo this month will show why investible fine wines offer great return for minimal risk.” Has the financial crisis not taught us that there is no such thing as “great return for minimal risk?”

He hints at where the market for these special wines has gone, “The most covetable objects in the world.” These wines are baubles, not beverages. Other items featured on his home page include an auction of “archaic and rare Chinese bronzes” and realized auction prices for the “first ever” Cadillac and a “full slice of Moon rock.” Wine has come to this.

One of the participants in the Masterpiece London show, which will be featuring the collectible wines about which Fraser enthused, is wine merchant Bordeaux Index. They seem to realize what’s going on but, rather than talk people off the ledge, want to assure the punters that there’s still stuff to drink. “Although prices for the very top “blue chip” wines have reached the stratosphere, there are still countless examples of wines to drink that offer exceptional value,” says director Andrew Bruce. Come ogle the Ferraris but don't forget we’ve got Kia out back.

In the frenzy to hype increased auction prices of wine, even auction houses are getting sloppy. In a news release, Christie’s trumpeted the sale of 6 bottles of 1961 Hermitage La Chapelle in May for $98,951 "a new world auction record per bottle." Under the impression this was a record for wine in general, several news outlets picked up the story and it was a big headline for a few days. The sale was heralded as another sign of economic recovery and as fodder for wine as an investment. Sadly, the claim pertained only to that specific wine. I called Christie’s on it. Literally. And, after 3 weeks, rather than issuing a retraction, they simply changed their realized prices sheet to clarify that it was the highest price ever for Hermitage La Chapelle. So, several million people saw the incorrect statement and, maybe, fifteen — plus my faithful readers — will see the correction. The original press release is unchanged on their site. In fairness, it was an exciting price. Almost twice as much per bottle as for that slice of Moon rock!

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What harm does all this speculation do? In the end, if a bunch of rich guys lose money on wine, it won’t have much of an impact on you or me. It’s probably been years since we’ve been able to buy a bottle of Chateau Petrus to drink, if we ever could. Inaccessible times ten is still inaccessible. [As I write, I've received a solicitation trumpeting 2008 Chateau Petrus as a bargain at $2,500 per bottle! Better to spend money on this, no need to worry about it being corked and you can keep it in plain sight.] Filling a cellar with wine because it’s a checkmark item in the “how to fit in with rich people guide book” is obnoxious, but not any more so than a lot of the other extravagant expenditures that go with such a lifestyle.

I have three main objections. First, with all of the hype about wine as investment, there will be people who buy in yet cannot afford to lose money. They will very likely get hurt. Second, the prices of the “investment grade” wines are used as justification for increasing the price of others. That artificially escalates the cost of good wines everywhere. It also gives some winery owners unrealistic revenue expectations leading them to make unwise decisions about expansion, renovations, etc. Finally, it’s a shame that so many of the world’s best wines will never be tasted in their prime. They were made to be enjoyed.

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This article is original to NorCalWine.com. Copyright 2010 NorCal Wine. All rights reserved. Moon rock photo displayed at Paul Fraser Collectibles without attribution. Housing bubble chart attributed to http://housingbubble.jparsons.net.