Why wine isn’t an investment

By Felix Salmon
March 30, 2010
paper out claiming to demonstrate that if you add wine to a portfolio of financial assets, that decreases your risk, increases your returns, and helps you out (if you care about such things) on the skewness and kurtosis fronts as well. Leslie Gevirtz writes up the results here, and Reuters graphics supremo Silvio DaSilva has even put together some pretty charts from the paper here.

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Swiss researchers Philippe Masset and Jean-Philippe Weisskopf have a new paper out claiming to demonstrate that if you add wine to a portfolio of financial assets, that decreases your risk, increases your returns, and helps you out (if you care about such things) on the skewness and kurtosis fronts as well. Leslie Gevirtz writes up the results here, and Reuters graphics supremo Silvio DaSilva has even put together some pretty charts from the paper here.

I’m very skeptical about this result, however, for four main reasons.

  1. The number of people genuinely investing in wine — that is, buying with an eye to selling it, rather than drinking it — is still tiny, but Masset and Weisskopf are probably right that it’s growing. “The resulting improvement in transparency and liquidity has rendered this market even more attractive for investors,” they write, but I’m not so sure: I suspect that wine’s relatively low asset-price correlation during the financial crisis was entirely a function of the fact that it wasn’t really an asset class in the first place. If and when it becomes an asset class, then correlations are bound to rise, especially in times of crisis.
  2. Incredibly, Masset and Weisskopf treat wine as a cost-free investment: in the world of their paper, it costs nothing to sell wine, it costs nothing to store and insure wine, and it costs nothing to buy wine, over and above the hammer price at auction. On planet earth, of course, none of these things is remotely true. So far, I have yet to see a story on wine as an investment which takes into account reasonable estimates for these costs. If and when such a study comes along, I’m pretty sure that wine will suddenly look much less attractive as an asset class.
  3. There’s enormous survivorship bias in the dataset. Masset and Weisskopf looked back at the wine market between 1996 and 2009, and then cherry-picked the regions which, in hindsight, turned out to have the greatest volume at auction. Then they took the wines from those regions and cherry-picked again, choosing only wines which traded at least once a year. So the 1982 Barbaresco Riserva Santo Stefano, for instance, made the cut, as it rose sharply in price between 2002 and 2009. But a neighboring Barbaresco which sold for just as much in 2002 would be ignored if it didn’t appear at auction in 2003 or thereafter. An investor in Barbaresco in 2002 would have no way of knowing which one was going to go up and which would end up impossible to sell, but by the lights of Masset and Weisskopf, the one which went up a lot was entirely representative.
  4. This isn’t a buy-and-hold market: you have to know exactly when to sell your wine before it becomes passé. Masset and Weisskopf try to spin this as a good thing, saying that they “discard wines that are viewed as antiques and not as wine as such” and that doing so “eliminates wines that are mostly illiquid and are traded infrequently”. Without dwelling on the metaphor of a “mostly illiquid” wine, the problem here is that Masset and Weisskopf seem to think that it’s possible for investors, en masse, to buy wine when it’s young and sell it at a profit when it’s middle-aged, but before it gets old. Of course, they can’t: who’s meant to be buying all that middle-aged wine? This strategy is all well and good so long as there aren’t enough wine investors to move the market. But if wine-as-an-investment ever takes off, that’s certain to significantly increase the supply, and therefore decrease the price, of good middle-aged wines being sold before they get too old. And when that happens, the returns from a wine-investment strategy could easily turn negative.

To get an idea of how Masset and Weisskopf think, check out this chart:

chart2.gif

The thing to note here is the way that all the different wine regions have been rebased to 100 in 1998, as though people first decide how much money they’re going to spend on wine and then work out how much wine that will buy. Masset and Weisskopf don’t provide the actual datapoints in their paper, so I don’t know how much the average Rhone wine was going for in 1998 compared to the average Bordeaux. (And, of course, remember that we’re not actually talking about the average Rhone wine here: we’re talking only about the Rhone wines which, in hindsight, turned out to be the ones that wine lovers wanted to buy at auction. If you bought an obscure Rhone wine in 1998, which Robert Parker then started extolling in 1999, you would have made lots of money; if he didn’t, it probably wouldn’t make the index.)

But let’s say that Rhone wines were a quarter of the price of their Bordeaux counterparts in 1998, and a third of the price in 2009. No self-styled wine investor would ever allocate on an equal-investment strategy, investing say $10,000 in each: investors are always going to be overweight the most expensive Bordeaux. If you ran this same chart on the basis of average price per bottle, rather than rebasing everything to 100, it would look very different indeed — and would be much more representative of how wine investors actually view the wine market.

At its heart, this paper is an exercise in highly-theoretical number crunching, and bears little if any relation to the real world. If you want to go out and buy fine wines, that’s great. But don’t kid yourself that you’re making an “investment”. I should know: I still own a case of 1963 Croft which my grandfather bought for me when I was born. I’m not a huge port fan, and haven’t been drinking it. But I wouldn’t be at all surprised to hear that storage costs alone, since purchase, exceed its market value. Of course, if my grandfather had bought me first-growth Bordeaux instead of port, then that might not be the case. But he didn’t have the benefit of Masset and Weisskopf’s hindsight. They shouldn’t assume that he did.

Update: Masset and Weisskopf respond in the comments.

17 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

We are glad our article generated interest and we very much appreciate feedback, especially if it is constructive. In the present case we are, however, a bit surprised by the fairly aggressive and subjective critique it provoked. Therefore allow us to give our point of view on the above remarks:

1) We conduct our research on what happened the last 13 years and particularly during the recent financial crisis. Fact is that during that period correlation remained low. It might well be that in the future it will rise but at this stage this would be a simple conjecture. Nevertheless, even if correlation would increase, it would certainly happen gradually and take time. It is to be expected that it will also stay relatively low (as is the case between the arts market and financial assets). Why? Because wine is not and never will be a purely financial asset.

2) You are right that in the current version our paper does not take different costs into account but we are working on integrating this in our analysis. However, your knowledge of the literature on wine economics seems incomplete. At least two papers on wine as an asset class exist and have taken these costs into account (Fogarty 2007 and Henderson-Masset 2010). They both conclude that the effect of costs associated to holding wine are by far not as dramatic as you suggest. In our context, even if we consider a very conservative framework with high transaction, storage and insurance costs, returns on wine during the examined period remain attractive as compared to the Russell 3000 and first and foremost it does not have an impact on the diversification benefits and risk reduction characteristics of wine.

3) Like every piece of serious research the goal of our paper is to avoid obtaining incorrect and imprecise results due to errors in the data or the presence of outliers. By concentrating on the most liquid wines (which represent more than 90% of the market) we avoid this kind of bias. We also calculated the different indices including and excluding different wines but results remain very stable (robustness checks). Your critique therefore seems inadequate. It is, however, true that by focusing on wines selling at auctions we make the implicit hypothesis that these wines represent the evolution of the wine market. Ok but if these wines do not represent the wine market, which are the ones that we have to consider instead? Following your line of thought would mean that the S&P 500 cannot be considered representative of the US market as less liquid stocks are not included in it.

4) A bottle of wine does not perish from one day to another. Wine is not primarily an asset. It is foremost a consumption good that people enjoy drinking (wine enthusiasts and drinkers will still exist in 10 or 20 years). This implies that the quantity of wine bottles from a specific vintage and estate naturally decreases with time. As a consequence this leads to a reduction in supply. Moreover, investors normally do not just sell, they also happen to buy, including wines that are already 5, 10 or more years old. Thus leading the demand to increase.

5) Your last critique (linked to the graph) is due to a misunderstanding of the aim of our paper. Our aim is not to tell people “you should invest in Rhône wines, they are great”. Our goal is simply to document the evolution of the wine market over the last 13 years and to provide a picture as accurate as possible of what happened on this market during that period.

6) It is clear that people should have some prior knowledge about the wine market before investing in it. However, we would argue that this is true for any asset and market. An investor buying stocks without informing himself beforehand would be labeled a fool. This should also be true for wine investments.

Thanks again for your interest in our research.

Regards,
Philippe Masset & Jean-Philippe Weisskopf

Posted by fifboy | Report as abusive

“Your critique therefore seems inadequate. It is, however, true that by focusing on wines selling at auctions we make the implicit hypothesis that these wines represent the evolution of the wine market. Ok but if these wines do not represent the wine market, which are the ones that we have to consider instead? ”

His critique seems entirely accurate. You preselected winners based on unknowable future volume, this seems to make the paper unsalvageable.

I imagine the wine market did very well in the last 13 years as compared to the Russell 3000, but so did practically ever single other asset class, such as Hannah Montana concert tickets, iPhone fart application futures, and wood already on fire.

I think a pressing issue is did Masset and Weisskopf manage to reject the hypothesis that the wine market is very much like the Dutch Tulip Bulb Market Bubble? This seems especially likely as the value of the underlying product is a function of label fashion rather than substance. (hint: try looking at any blind taste tests)

Posted by inboulder | Report as abusive

I know someone who is a multi millionaire and the ONLY investment they make is in buying and selling highly priced bottles of wine $5000 or higher in value per bottle.

Posted by JV2222 | Report as abusive

I think the key issue here is that Felix has a bottle of 1963 Crofts. I have been privileged to drink a number of bottles of 1960s Crofts including a 63 and they were delicious. I would recommend that you find a suitable occasion and get it open as it may well change your view on Port!

Posted by greatneb | Report as abusive

I agree with flowercoco123 on this one.

Posted by Matt-Chicago | Report as abusive

Some people look at the glass as half-full, and I’m one of them. Moreover, I’d rather have half a glass of wine than a gallon of Wall Street vinegar.

Cheers!

Posted by HBC | Report as abusive

Nice one, HBC. Vineyards still sell for a pretty penny

Posted by Story_Burn | Report as abusive

“3…Following your line of thought would mean that the S&P 500 cannot be considered representative of the US market as less liquid stocks are not included in it.”

The S&P 500 in 1998 did not consist of the most liquid stocks over the period 98-10. You are post-selecting for liquidity, when liquidity is very likely linked to performance.

Posted by Mr.Do | Report as abusive

The liquidity pre-selection criticism is fair but their response is also justified. They didn’t have any choice (you can’t analyse non-existent data)! However, I don’t think it follows that the research is hence useless, far from it.

Also I disagree with both sides on the supply-demand question.
We simply don’t know at what age most wine is consumed.
If the people who decide to “invest” in wine are the same people who would have bought the wine to consume but switch their behaviour, that won’t change the supply-demand dynamic. Likewise when it comes to sell it, if they still want to consume middle-aged wine then they will have to buy it from another investor, if they sell theirs. Again no change in supply demand.

The more interesting scenario is a step change increase in the number of investors with a buy-and-hold strategy. That will surely drive up the price of young wines. At that point many buy-and-hold CONSUMERS will miss out. They will then be forced to buy the wine at middle-age rather than in its youth. As long as they don’t change their consumption habits, the supply-demand remains in balance again. The question is whether they have to pay more at middle age than buying young, storing and insuring. From the charts I suspect YES. Hence given any price-sensitivity demand WILL decline.
As a result, an increase in wine investment activity will surely drive down the price of middle-aged wine.
Bring it on.

Also, Felix, surely your port storage and insurance costs are zero. Unless you PAY someone to store it for you AND take out special port insurance OR have built some expensive wine storage area. For one case I think that highly unlikely.

Posted by TinyTim1 | Report as abusive

There’s always someone who loves to put the market down, most of the time (and I think this is the case here) it’s by people who have little to no understanding of the wine investment world.

Next time, please do a bit of research or speak to people who have been in the market for a few years.

“This isn’t a buy-and-hold market: you have to know exactly when to sell your wine before it becomes passé.”
The sorts of wines that are worth investing in have a life expectancy of OVER 50 YEARS…. So don’t argue about having to know exactly when to sell….

“So far, I have yet to see a story on wine as an investment which takes into account reasonable estimates for these costs. If and when such a study comes along, I’m pretty sure that wine will suddenly look much less attractive as an asset class.” I’ll give you a list as long as your arm of people who have made money including the costs/fees. Why are there so many Fine Wine Funds out there making money then ??

If wine isn’t a good investment then why do all the big papers write about how good it is. Here is an article from the Guardian.
http://www.guardian.co.uk/money/2009/nov  /21/alternative-investments-performance -2000
The opening line “Fine wine was the best investment of the decade, with the top French vintages earning returns that far oustripped equities, gold and property.” There are plenty more if you don’t like that one…….

Posted by JamesF213 | Report as abusive

Re: “You have to know exactly when to sell your wine before it becomes passé.”

On a related note, I heard expert Maureen Downey (http://chaiconsulting.com) speak about the current wine market. She says the wine market for collectible wines is smaller than it used to be. So it’s important to make sure the wine you’re buying is of investment grade. A lot of things that were collectible are no longer, so it’s back to blue chips. And don’t forget about the increasing numbers of counterfeit wine bottles on the market.

Posted by foodwinemaven | Report as abusive

Fine Wine may potentially be a very good investment if approached with methodical discipline and the right expertise. That comes after several years of trading in the industry and by knowing the product inside out.
Fine Wine may well be considered as an asset class and as such has strengths and weaknesses.
By investing in fine wine, investors reduce the volatility curve of their portfolios while retaining a tangible asset that may increase in value as it becomes rarer through consumption.
But it is also true that fine wine may be extremely illiquid depending on market circumstances and this can act as a double edge sword for investors that may suddenly need cash.
Fine Wine is indeed a growing market and with China playing a big part on the consumption of top end wines, there may be a much welcome re-balancing between the “real demand” and supply.
This means that unbalances and possible dislocations in a market driven by speculators (wine funds hold a high percentage of “investment-grade wines”, hence the increasing correlation with financial markets) may be offset by fine wine drinkers that will reduce supply in real terms.
Ask for a free consultation by visiting our web site at
http://www.boltonsinvestments.com
or email us at info@boltonsinvestments.com

Posted by 123jump | Report as abusive

Felix’s post is somewhat ignorantly drawn for an elite media organization. It reads more like a vanity blog for friends and family than a careful response with a couple hours of internet research into it. Many comments summed the up the factual deficiencies so I won’t add to that.

But one thing Felixdoesn’t take into account is that access to the the market for investment grade wines is by nature limited. There aren’t a lot of intermediaries dealing in wine as or in an investment-based form for the masses. So the people who invest in wine need to rely on themselves to know enough about drivers and trends so they can trade the market (not to mention the transaction costs, which are not at all costly relative to investment values, but which transactions do require active follow up and involvement – you are taking possession of a physical thing, after all).

So the indicies put forth in the study model only the performance of wine that actually trades regularly at measurement prices. These are the only wines anyone making money trading wine trades, Felix.

How does one know which wines are the top-performing investment wines? Some of this is common information – e.g. that Chateau Lafite, Petrus, DRC and a small handful of others are the bluest of the wine blue-chips – in wine they are called “cult”. In the best vintages, they are valued even more highly, but even in the worst they hold value or frequently appreciate consistently over the long term.

However things like vintage quality, relative supply/demand of different bottles, knowledge of past pricing trends – you still have to know all of that to make this work unless you can find someone else to do it for you. But one thing is clear, people like the author or an average person who doesn’t understand the market they are going into (and I’m talking about basic understanding here) may not reproduce the returns reported in the paper.

But they may wind up being able to drink some fantastic wine!

Posted by winetastic | Report as abusive

Depending on which wines that you invest in. If you stick to the best wines then you are certian to make great returns. I have friends that have invested in wine and have made great returns. i am being adviced by a company below is there link they have adviced me very well http://www.wineinvestmentadvice.com/dj_l afite_2003_promo

Posted by James531 | Report as abusive

Depending on which wines that you invest in. If you stick to the best wines then you are certian to make great returns. I have friends that have invested in wine and have made great returns. i am being adviced by a company below is there link they have adviced me very well http://www.wineinvestmentadvice.com/dj_l afite_2003_promo

Posted by James531 | Report as abusive

Do you have an update to this article, circa spring 2014?

Have you watched “Red Obsession”?

Posted by MarketMole | Report as abusive

stylish, easy and restrained