Investing in Liquid Assets

Uncorking Profits in Today's Global Wine Market

David Sokolin, Alexandra Bruce

• Publisher: Simon & Schuster
• Year: 2008
• Print ISBN: 9781416550181
• eBook ISBN: 9781416565000
• Topic: Business
• Subtopic: Culinary Arts
• Index: Business

Now more than ever, the value of Investment-Grade Wines (IGWs) and opportunities to invest in wine as an asset class are soaring. With a little research and a little risk, wine enthusiasts on every level will find it possible to gain big rewards in wine investment -- and there's never been a better time to try. IGWs have dependably outperformed blue chip stocks over the past 150 years, and the upscale wine market is still an area in which independent investors can profit handsomely. A third-generation wine merchant, and CEO of one of the largest rare-wine companies in the world, David Sokolin knows how to turn fine wine into cold cash. And he knows how you can, too. In simple, practical terms, Investing in Liquid Assets provides all the information you need to understand the economic principles that govern the world of fine wine and take advantage of the resources currently available. Using his insider's expertise, Sokolin defines Investment-Grade Wine and identifies the most financially important wine regions and styles. Defining the key players in the field, Sokolin shows you how to navigate the world of wine critics and understand the impact of their scores, and he explains why it's perfectly fine that your own personal tastes really don't matter. He offers tips on where to find reputable sources for fine wine, how to manage storage and resale, as well as all-important buying and selling strategies. In the second half of the book, he gives overviews of the world's greatest wine regions and offers his predictions about which regions and which wines are likely to represent the greatest investment opportunities in the near future. Providing information and tactics previously known only to successful professionals, Investing in Liquid Assets turns your passion for fine wine into a valuable resource that will pay for itself.

PART I

Wine-Investing Basics

1

THE GRAPES OF MATH

The Finances of Fine Wine

Unless you’re day-trading stocks or currencies for the thrill of the kill, investing generally isn’t considered a game of fun. It’s a much more sober affair for the most part, all cash flow analyses and financial ratios of one sort or another. The only time investment and wine generally mix is at cocktail parties, where there’s always someone who has downed a bit too much Chardonnay and prattles on incessantly about the long-term potential of some nano-technology stock he’s suddenly an expert on because of inside information he picked up at the barbershop from a friend of a friend who knows someone.

Wine, as you might imagine, is different. How can you invest in wine and not have fun? You can’t drink a share of Microsoft, but you can certainly sample one of your bottles of ’82 Château Latour and physically experience the character of the wine. You can’t invite your friends over for a blind tasting of bonds, but nobody’s missing the date if you arrange a vertical tasting of a half dozen of your back-vintage Latours in your private cellar.

Wine is just, well, fun.

Mix in a little profit potential, and suddenly it’s a blast.

For many of my clients, collecting, sampling, and enjoying all that wine offers hedonistically overlaps seamlessly with wine as an investment—so much so that many never realize they’ve become investors until, by happenstance, they see somewhere that those bottles of ’90 Château Le Pin they bought years ago for a few hundred dollars apiece are now worth nearly $5,000 each. That’s when they realize they’ve become accidental wine investors. They’re people not unlike Hans Denbaas, the subject of a 2007 Wall Street Journal story on the emergence of wine as a viable investment class. Years ago Mr. Denbaas bought for his own consumption cases of 1989 Château Haut-Brion, one of the premier wine producers in the Bordeaux region of France. His cost: less than $200 per bottle. By early 2007 those cases were selling for more than $12,000 each, leading the accidental wine investor to comment: “You start to ask yourself, ‘Gee whiz, am I really going to pop the cork on a $1,000 bottle?’”

That’s a good question. Most people don’t start off buying wine with an investor’s mind-set. Many of my clients are essentially Mr. Denbaas; they come to me with a passion for wine the liquid but at some point start seeing their wine as a liquid asset. Wine becomes a vehicle for profit, as well as pleasure.

Ironically, the largest sellers of wine on Earth—the wine merchants—are seldom holders of large stocks of investment-grade wine. The wine auction business is purely focused on brokerage, and very few wine merchants have the capital to hold on to stock over the long term. The role of the wine investor, therefore, is to step in and hold inventory of IGW for wealthy end consumers in a marketplace that has few holders of wine stock. In that role exists great opportunity for the individual investor.

But as with any investment, you need to understand the exogenous factors that move the asset you own.

Macroeconomic Factors Moving Wine Prices

Traditional, fairly obvious macroeconomic forces tug at wine prices just as they do with every other market from stocks to currencies. When economies are rocking, stock markets are climbing higher, and a sense of economic well-being pervades the populace, wine prices do well. The increased wealth provides the necessary discretionary spending to fuel price spikes as consumers spend up to afford the best that they can, be that fancy cars or fine wine. When economies roll over and stock markets tank, wine prices soften as consumers rein in their spending. But prices don’t tumble as you might expect with stock prices. That’s because unique factors are at play in the wine market, and it’s those idiosyncratic rhythms that wine investors need to understand.

Wine, for instance, is truly an agricultural commodity affected by climatic conditions that can have a defining impact on the available supplies from one vintage to the next. The best wines are in short supply in bad years—especially after a run of bad vintages—and are the ones most in demand during stellar vintages, which limits their supply as well.

At the same time, wine is a true collectible with demand that, while it can run slack during bad economies, never fades completely. No matter the state of the economy, people are forever consuming wine, so the float of available fine wines is continually shrinking, day by day. Imagine how much more Picassos or Dutch Masters would be worth if they started disappearing on a routine basis!

Bull markets in other assets tend to reflect in the wine market as well. In the heyday of the 1980s real estate boom, wine prices had a major run higher. During the tech bubble on Wall Street in the 1990s, wine prices surged. Even in the dark days following the 9/11 terrorist attack and the resulting stock market downturn, my company continued to grow at a rapid pace. Though people were buying less wine, there were more buyers because so many had entered the market in previous years. Wine prices certainly softened during that period, but they did not tumble, and within a couple of years they had rebounded well past their previous high-water mark.

I’m not trying to imply that wine is immune to weak economies. However, investment-grade wines have certain properties that can insulate them from the worst of the bad times. When the going gets tough, the tough rarely forsake their wines. In more than fifty years combined in the wine business, my father and I have found that wine prices can go down during a recession but volumes tend to stay constant. People never seem to stop drinking. Although they may delay getting larger-ticket items like cars and houses, even expensive wine is a relatively low-ticket luxury that many people refuse to give up. Since most people who own investment-grade wines can more than afford to hold on to their collections during recessions, you don’t generally see fire sales of these when good times go bad.

Today, the prime mover of wine prices is the global growth in wealth. From Shanghai sushi shops to caviar bars in Moscow, discretionary dollars are flowing through the world’s emerging economies, with many of those dollars—well, yuan, rubles, and rupees, really—earmarked for Western-style luxury goods, including the finest of wines. This new trend was apparent during the 2005 Bordeaux futures campaign, when wine buyers gathered to buy the new vintage when it was initially released to the market. And 2005 marked the first vintage in which Asian buyers, who had historically been leery of putting money into futures or prerelease wines, entered the market in significant numbers.

The additional demand far outstrips the supply of an asset already in relatively low—sometimes extremely low—production. The greatest French wines are fully planted and have no room to expand; many châteaux’s vineyards press against one another or stop at natural land breaks such as streams and rivers. Production that has not increased for decades will effectively be the same centuries down the road. The 10,000 cases produced today—while sounding like a relatively large lot—will increasingly be spread more thinly across an ever-growing class of consumers outside North America and Europe who now have or soon will have the means to afford these wines. This huge increase of new buyers, then, is making investment-grade wines harder to buy, yet easier to resell. Basically, if you own it, buyers will come.

Microeconomic Factors Moving Wine Prices

Along with the macroeconomic factors are the microeconomic dynamics that are driving wines prices higher and have nothing to do with the global economy but everything to do with local winemakers.

Low Crop Yields: Starting in the 1990s, winemakers embarked on a trend to make wines that were more concentrated and flavorful. They did so via crop reduction, meaning they reduced the number of grape clusters on each vine so the remaining grapes could flourish. The result was wines that were higher in quality and, because of the lower production numbers, rarer. That, in turn, supported increased prices for the wine. Case in point: Château Cheval Blanc.

Back in 1989, much of the château’s production went into its first wine, the eponymously named Cheval Blanc, which at that time retailed for $50 to $60 per bottle. The remaining production was earmarked for the château’s second label, Petit Cheval, priced at $15 to $20 a bottle. Under new ownership, starting in 1998, Cheval Blanc increased the quality of both its first and second wines through rigorous crop selection. The result: 50 percent of the château’s production went into Cheval Blanc, the rest declassified for use in Petit Cheval, and in doing so, the château increased the quality and the intrinsic values of both wines, pushing the price for Cheval Blanc to $165 a bottle while Petit Cheval jumped to $80. They winery had more than doubled the price of its flagship wine by reducing the production by almost half and more than doubled the price of its second wine while simultaneously doubling its production, generating more revenue than ever. Today, Cheval Blanc’s good vintages are released at more than $600 per bottle and the 1998 is currently trading at over $1,000 per bottle with a 96-point score from Robert Parker in his Bordeaux book.

High-End Wines That Drink Young: Also during the 1990s, advances in winemaking technology led to the trend of designing high-end wines that “drink young,” meaning the wines do not require the same cellaring time that many older wines require.

Early-drinking wines exit the market at a faster pace because people consume them, causing their values to climb in proportion to their increased rarity. Wines that drink younger price-appreciate quicker and create a client base at a faster pace. These wines are also easier for the reviewers to understand since they don’t have to guess what they would be drinking like in the future; they already taste great upon release. Wines that drink young garner higher scores upon release, which, in turn, makes them more highly coveted, which ultimately drives their prices higher at a quicker pace.

Twenty Years of Bordeaux Pricing

OK, so macro-and microeconomic factors push and pull at wine prices. How have prices actually moved in the wine market?

Consider the charts below. These are price histories for cases of wine in a hypothetical cellar made up of ten-case lots of a variety of good-vintage Bordeaux, ranging from First Growths to Fifth Growths, and all of these wines are considered to be First- and Second-Tier IGW (in an upcoming chapter, I’ll explain more about the growths and price tiers).

I’m focusing on Bordeaux here and throughout much of this book because, well, Bordeaux in large part is the wine market. Though other styles of wine command investors’ attention—particularly Burgundy, Sauternes, and others—the bulk of the world’s wine investors spend the bulk of their time and money buying, cellaring, and ultimately selling Bordeaux. The 1986 data in the chart on chapter 1 come directly from my father’s book, published in 1981, while the 1997 data are the average case prices of wine sold at auction that year by the New York auction house Sotheby’s. The 2007 prices were the average prices for the same cases available for purchase on the Internet.

What you should note here is that the dollar value of the 220 cases in this fantasy cellar would have almost doubled by 1997—a fairly respectable 7 percent annual return. Take a look as well at what occured to the same virtual cellar over the next ten years as the world began to view wine as a liquid asset and as global wealth exploded and demand for top-notch wine soared. The cellar’s value is up more than 500 percent, an annualized return of more than 19 percent a year. That’s good money. The Standard & Poor’s 500-stock index during the same period was up only 4 percent.

If a collector had purchased this cellar back in 1986 and stored these cases over the ensuing ...

Table of contents

• Cover
• Colophon
• Title Page
• Copyright
• ACKNOWLEDGMENTS
• Dedication
• Contents
• Introduction
• PART I: WINE-INVESTING BASICS
• PART II: AN INVESTOR’S VIEW OF THE WORLD’S GREATEST WINE REGIONS
• Conclusion
• Appendix: The Bordeaux Classification of 1855
• Investing in Liquid Assets