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Feeling Bordeaux This Christmas? I Have a Grape Way to Pass the Time
Investing in Fine Wine, the Why and How?
The Porchester Papers are now back from a break.
It has been a crazy few weeks, the highlight of which was no doubt getting down on one knee and proposing to my now fiancée in Finnish Lapland!
Another notable event was a visit to wine merchant Berry Bros & Rudd for the Christmas Tasting in their cellars for those who hold a wine cellar with them.
Upon entering the cellars, we were presented with a list of wines to work through all laid out across five different tables. Each had two reds and two whites to try from each respective region, apart from Table 5 which was a gorgeous dessert wine and a whisky. It’s safe to say, multiple trips were made to Table 5!
I have been investing in wine with Berry Bros for a few years now, and it has not only been rewarding financially with the wines I hold appreciating in value on average by close to +24% in that time, but also I have learned a lot about wine and found new wines that I enjoy drinking myself at home.
I was recently interviewed as part of Commonstock’s “Investor of the Week” feature and this was the final question:
Which of your current investments are you most convinced in?
It’s not actually a stock or anything you might be able to buy on your brokerage account. I have an allocation to fine wine! Unlike stocks or bonds, when a wine investment loses value, you can drink it and you immediately feel better about the money you’ve lost. It’s a win either way!
Although I don’t condone getting drunk when you begin losing money on your personal portfolio, however, my fine wine investment is the one I am most convinced in and am most confident in the longer term.
It is always worth considering alternative investments to diversify a portfolio and fine wine is a fantastic addition. Additionally, it has never been so easy to begin investing in fine wine.
This article is not sponsored by Berry Bros or any other wine merchant or investing platform, I am simply writing from my own experience.
As always, none of what I write should be considered investment advice.
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Feel free also to follow me on Commonstock, I recently got my 300th follower and that number continues to increase fast!
Why Invest in Fine Wine?
The fine wine market has seen returns of close to +8% a year for the past 15 years.1 This is very comparable to returns you might expect in traditional asset classes such as stocks, bonds, or even real estate in the long term. On top of that, it can serve as a fantastic portfolio diversifier, with returns uncorrelated to other asset classes.
In the current climate of cryptocurrency assets disappearing due to fraudulent management of exchanges, when you buy wine you are holding a real asset and you are the owner of that case of wine. This is compelling as we head into a recession where you want assets to be secure as possible.
Unlike maybe other private and alternative asset classes, wine is a liquid asset. And no I don’t mean in that it is a liquid, but liquid in the sense that it is easy and quick to buy and sell. There is a marketplace for any case at any point in time.
I am based in the UK and there is a compelling tax management reason to invest in fine wine (I am obviously not advocating for any tax evasion here, everyone should be paying their fair share). When you purchase fine wine via a merchant, you can purchase it In Bond. In this case, you can choose to have your wine stored in a bonded warehouse approved by His Majesty’s Customs & Excise (though the merchant will charge you for storage costs).
When a case of wine is stored in a bonded warehouse on purchase, you will not pay any Duty or Value Added Tax. You will only pay this if you choose to have your wine delivered for your own consumption, where in that situation you will pay Duty and VAT on the purchase price of the case of wine. If the wine has increased in value since you purchased it, you have saved money on Duty and Tax.
Additionally, since His Majesty’s Revenue & Customs deems wine to be a wasting asset in that it has a useful life of fewer than 50 years, it is exempt from Capital Gains Tax if sold at a profit. I can only speak for UK law, I am not versed in what the treatment would be in other countries.
And obviously what I think is the best reason to invest in wine, is that you can learn and drink the wine! Choosing wine and trying wine is all part of the experience, like when you carry out research on a publicly traded stock or bond. As I mentioned in my interview with Commonstock, if the wine goes down in value, you can always drink it!
What Determines the Price of Wine?
Like with any asset the price is determined by supply and demand, and wine is no different.
Each vintage from any given vineyard is produced in a finite number. This number naturally reduces over time as each bottle of wine is drunk, and therefore in the long run the supply falls dramatically. The rate at which each wine is drunk depends on the wine. Some are drunk very soon after being bottled whereas some Bordeaux for example many will wait ten to fifteen years at least before drinking.
Additionally, the supply of wine produced in any given year in any given region fluctuates dramatically. For example, Burgundy production from 2021 was particularly low because of the weather in the region. The year began with very bad frosts, followed by rain and hail, then rain again in the late season. Some vineyards have lost close to 70% of their grapes.2
On the demand side, some regions and flavours are prized above others. Additionally, some vineyards come with huge prestige, and as such, there is always a very high demand for them. These very well-known vineyards are not only of higher quality but are also very collectible.
The more research you do about the different regions, grapes and vineyards, the better placed you will be when it comes to building your own cellar. Like with a portfolio of stocks, you want to build a diversified cellar of solid wines from different regions which will pick up value in the long term.
How to Buy Wine?
There are many platforms and merchants that can help you buy wine and build a cellar. What I think is most important if you are a beginner is to find a provider who will help you when it comes to what wines to choose from. When you start out (and personally I still have no idea!) it’s best to have an expert or some research available to help make the best decision.
These platforms will come with fees that they charge. What fees these are and how much depends on the merchant. Often it will all be included in the storage cost and the cost will be charged for each case stored with the provider. Usually, this is a flat fee regardless of the value of your case of wine. As such it is worth checking how much you are paying for each case versus the fees. If it is a case of smaller value, any potential returns you could make could be all given up in fees. Make sure each case is of a decent enough value that the costs won’t eat up your returns.
Thirdly you want somewhere that has access to the best and most sought-after vineyards because those are the wines that will give you the most profit. A merchant who gets significant allocations in the best wines so you can have access to the best possible opportunities.
Maybe instead of buying Champagne to drink over Christmas or New Year’s Eve, have a look at starting at building your own cellar. Not only will you have fun and there’s plenty to learn, but also you could make yourself a tidy little profit!