Getting Started With Wine Investment

On May 24, 1976, an earthquake in the form of a blind wine taste-testing competition in Paris rocked the wine world. Red wines and white wines from both California and France were the competitors, and the judges were respected wine experts from France. When the covers were removed from the bottles and the labels were revealed, the judges were astonished to find both the best red wine and best white wine were from California. Stags Leap, California, was suddenly on the map, and was victorious despite the French wines including the likes of Chateau Mouton-Rothschild (current vintages are around $900) and Chateau Haut-Brion ($500).

While the immediate result of this seismic event was bringing California wines to the forefront of international wine lovers’ consciousnesses, the long-term impact was creating an awareness of other sources of high-quality wine worldwide. Over the ensuing years since the taste-testing competition, wine lovers, connoisseurs, and especially investors discovered high-quality wines from regions far outside the wine market giant, France. In addition to California, investment-quality wine was found in Spain, Portugal, Germany, Australia, and many other previously ignored regions.  

In the realm of alternative investments, wine has emerged as a fascinating and lucrative asset class, attracting the attention of savvy investors seeking diversification and potential returns. Beyond its allure as a beloved beverage, wine possesses unique qualities that make it an intriguing option for those seeking to broaden their investment portfolio. Unlike stocks or bonds, wine is a tangible asset that can be held, enjoyed, and appreciated. The limited supply of rare and sought-after wines, coupled with the intricacies of winemaking, creates a unique market with distinct investment dynamics. Investing in wine allows individuals to combine their passion for wine with the potential for financial growth. 

But what makes a wine collectible or even investment-worthy? Several factors must be considered; we’ll explore these factors below, but first, some general information about investment and valuation.

Wine Investment and Valuation

The roots of wine investment can be traced back to ancient civilizations, where wine was cherished for its cultural significance and trade value, and played a pivotal role in religious ceremonies and social gatherings. 

However, only recently did wine transcend its status as a consumable luxury and gain recognition as a viable investment option. The turning point for wine investment came in the 20th century when the global wine market experienced significant transformation. In the 1980s, London emerged as the epicenter of the international wine auction market, attracting buyers worldwide.

During this period, a surge in demand, particularly from American buyers, fueled extraordinary growth in the wine market. As collections of rare wines were sought after by auction houses, the limited supply of older vintages could not keep up with demand. The scarcity of these prized bottles and exponential price increases transformed wine into a luxury asset and collectible.

With the maturation of the wine market, the need for standardized pricing and valuation methods became evident. In the early 2000s, the Liv-ex 1000 index was introduced, providing a benchmark and liquidity platform for wine investment. Liv-ex aimed to establish an online stock exchange for wine and established market credibility.

In the following sections, we will explore the various character and financial factors that contribute to the attractiveness of wine as an asset class and make wine investment an intriguing proposition.

Understanding Wine Character

Investing in wine involves understanding the life of the vintage, from harvested grapes to bottled product. The following variables play a crucial role in a wine's character and, thus, value.

Grape Varietal 

First and foremost is the type of grape. A collectible wine must improve with age. Great wines not only improve with age but change. In red wines, the tannins begin to mellow and create a smoother mouthfeel. The primary tastes of fresh fruit yield to tertiary flavors of honey, herbal notes, minerals, tobacco, mushroom, and earth. The fruit tannins and wood tannins must be in balance, otherwise the wine will never improve.  

Most age-worthy wines are red, with some of the best-known being the ubiquitous cabernet sauvignon and merlot. However, there are a multitude of other red wines that age well but are less well-known, including tempranillo, sangiovese, nebbiolo, zinfandel, grenache, cabernet franc, syrah, malbec, and others. 

While red wines get all the attention as being the most age-worthy, some examples of white wine can age equally well if all the right factors are present — riesling, champagne, and certain chardonnays top this list. When it comes to investing, if a wine is not made from a grape that can improve with age, it is a waste of time to consider it for anything other than a delightful accompaniment to dinner.

Environmental Factors

The second quality that must be present is called "terroir" by wine aficionados. Terroir is a French word that includes the combination of the earth, climate, and overall environment. Interestingly, certain kinds of soil laden with minerals and rocks or gravel produce smaller yields of more intense grapes, which ultimately can create powerful wines of great distinction. Particular grapes do much better in warmer climates (syrah and tempranillo), whereas others excel in cooler temperatures (riesling and cabernet franc). Not surprisingly, climate change is forcing some vineyards to rip out grapes that were doing well in temperate climates and replace them with hot-weather vines. 

Annual Weather

The third quality is the particular weather of the year when the grapes are grown. Great vintages have near-perfect growing conditions throughout the growing season: not too hot, not too cold, the right amount of rain at the right time and a lack of rain close to the harvest.  

Je ne Sais Quoi

The final quality is difficult to define, almost elusive, but is of paramount importance. Great viticulturists and winemakers throughout history have become so through an almost magical combination of knowledge, affection for the grapes, and brand leadership. Those who are experienced have learned how to integrate botany, scientific analysis, business management, and marketing into an art form all its own — and their wines are the proof. For skilled viticulturists and vintners, grapes are more than "just fruit," and wine is more than "just a beverage."

Financial Considerations for Wine Valuation

There is a difference between collecting and investing. While it is essential to know the product you are investing in, you must also understand the financial valuation tools used to define wine as a market asset. 

Brand Power

Investors consider the impact of the wine's brand on global liquidity. Does the brand command a premium compared to others in the region? Does it overshadow quality concerns during off-vintages?

Drinking Window

Beyond the wine's aging potential, establish its suitability for trading within the desired investment window. Determine which stage of its life cycle the wine is currently in.

Critic Comparison Score

Assess whether the wine stands out within its own historical context, how it performs against peers within the same vintage, and if it represents a high-watermark iteration.

Market Liquidity

Evaluate the wine's potential to sell at the maximum price through conventional channels and determine typical duration for sale.

Price Volatility

Determine the level of price transparency for the wine, whether it's prone to significant price fluctuations, and how this volatility may affect a portfolio's balance.

Production Volume

Evaluate the impact of production levels on wine scarcity. 

Price History

Study the price trends across different vintages. Determine the price ceilings relative to critic scores and identify points in their life cycles when prices tend to plateau.

How to Find Collection- and Investment-Worthy Wines

If you want to explore wine collection and beginner investment on your own, you can start by reading reviews, sampling a few wines with excellent ratings, and, when a good vintage comes along, you can buy a bottle, a few bottles, or a case (or more). It's also a good idea to get on a winery's email list. Sometimes a winery will allow you to reserve wine before it is bottled — meaning you are getting in on the lowest price possible.

Wine auctions are another way to find excellent value, although sometimes the terms and conditions only allow the purchase of an entire case. Buying only through an approved wine auction that accurately describes the wine and bottle condition is essential for both quality and online safety. The wines for sale will often come from private individuals' collections, so some highly desirable bottles are available at relatively low prices.

If you want to take some of the guesswork and time out of wine investing, there are several investment firms that specialize in wines. A short list includes Cult Wine Investment, Vint, and Vinovest. 

You can also explore wine investment within the framework of your existing brokerage account through funds, stocks, and derivatives that offer exposure to the world of fine wine. Notable fund options in this space include the Wine Investment Fund and Sommelier Capital.

How to Transport and Store Your Wines

You’ve done your research and bought your wine — now what? First, you must arrange for climate-controlled transport to wherever you will store it. Typically, you will have it shipped to your home, where you have already set up climate-controlled storage that is consistently 55 degrees and 70% humidity. Temperatures below that will not allow proper aging; worse yet, temperatures above that will destroy the wine. Also remember that keeping the bottles on their side during storage is vital to preserving the cork's integrity.  

If you are buying a significant amount of wine, storage facilities will store your wine at the right temperature and humidity for a set monthly fee. This is a good option for people who don't have the time to maintain and monitor their own storage at home.  

What Are "Wine Futures?" 

Collectors and investors know one of the best ways to obtain valuable wine is through "wine futures." This means putting money into wine while it is still in the barrel. It involves a certain amount of research and risk-taking. Many well-known critics sample wines while they are still in the barrel and then publish their reviews, including predictions on the future quality of these fine wines. Some well-regarded reviewers include Robert Parker's Wine Advocate, James Suckling, Antonio Galloni, Neal Martin, and Jancis Robinson. These wine critics and their organizations have made wine prices increase or decrease dramatically based solely on their reviews.  

Of course, there are times when the experts are wrong. They may predict a wine will be legendary and it turns pedestrian in later years. But overall, buying wine futures as recommended by respected wine critics is a great way to obtain very high-quality wine that will likely increase in value (not to mention taste!) as the years go by.

Conclusion

Wine investing has become a fascinating and lucrative alternative asset class, appealing to investors seeking diversification. Collecting and investing in wine requires deep knowledge of the product and the market valuation, and several factors must be considered to determine the collectible or investment-worthiness of a wine.

As wine lovers and investors continue to discover high-quality wines from diverse regions, the market offers a wealth of opportunities. Whether collecting for personal enjoyment or investing for financial growth, the journey into the world of wine is a delightful exploration of flavors and an exciting avenue for expanding investment portfolios. So, do your research — both reading and tasting — listen to the experts, and, most importantly, enjoy yourself! Cheers!