Dr Vino's wine blog

Mixing pleasure with profits is a tantalizing blend. But buyers should beware; investing in wine is not always as sweet as a wine from Sauternes. In fact, the best approach may be to just drink your profits from other pursuits. For most people, pleasure before profits is an unbeatable strategy.

But if profit enters the calculation, investors have three main ways to invest in wine: land, financial products, and “the juice.” First, you can buy vineyard property. California vineyards are being hit hard by the current grape glut and many are vineyard owners are uprooting vines or selling the property. Wine growing is a cyclical business and right now the cycle is at the bottom. Vineyard land in Argentina has also been beaten down thanks to a recent currency crisis, but it seems like the worst is behind them so pick up your Mendoza property now.

The obvious benefit of buying vineyard property is that you can live in a wonderful climate and location and be the object of envy of all your city dwelling friends (on that note, Mrs. Vino and I would be happy to test-drive anyone’s property for them). But owning property is high maintenance and decidedly big ticket. As with hotels, location matters. Those considering this strategy should focus on a location with a good viticultural pedigree to protect the investment. And also bear in mind the California aphorism that “the best way to make a small fortune in the wine business is to start with a big one.”

Another strategy for investors has come with the advent of a secondary market for wine. This has only fractionally more wine enjoyment factor than owning shares of Cisco. In 2001, Euronext, the European exchange, introduced wine futures. Fully 35 of the top Bordeaux wines are now available as tradable derivatives. Bordeaux Index also trades wine futures and has their data available on Bloomberg terminals. How insulting to the connoisseur to have Château Lafite flipped like a sack of pork bellies! Sacré bleu!

Shares and funds are other options long on finance and short on pleasure. Many wine producers have been getting bigger and are listing their shares on equities markets. This asset class mostly provides liquidity in the wrong sense. Further, money managers, in their creativity for new investment products, have also devised wine hedge funds. Hopefully they have profits, because there is not much pleasure in the glass.

But for most people considering investing in wine, the most common route is simply buying bottles of the stuff. Remember, it is always easier to become a collector than an investor, so caveat emptor! Almost any good wine reference book has tips for collecting and investing in wine, so I will be brief. Basically, most wines are not worthy of storing, nor do they have any investment value. Proper storage is essential for anyone considering investing in physical bottles of wine!

The best places to buy investment-grade wines are stores with big portfolios and long histories as well as auction houses (don’t forget to factor in the buyer’s premium though). Big stores often sell wine as “futures,” also known as en primeur in the UK. These futures have some risk but a lot more pleasure than the Euronext futures. Purchasing these futures means that you are purchasing the right to buy wine, already harvested but not yet bottled, that will arrive in the shop sometime in the future. The risk is that the shop could go out of business, so stick with big shops with good reputations for futures purchases.

Which wines are good to buy now? As I have discussed in previous columns, geopolitics has driven down the price of French wines currently on the shelves. The economic slowdown has reduced the froth of wines at auction. Some real bargains may be in the 2002 Bordeaux futures. The great Robert Parker cancelled his spring trip to the region, so the world is without his ratings, which have served as a pricing guide for the Bordeaux trade for the past two decades. Thus futures on the 2002 Lafite are $100 a bottle, the lowest initial price for this wine in years. To make the investment have more scarcity value, why not go for a magnum (1.5 liters)?

The real benefit of buying 2002 futures (or 2001 for that matter) is a hedge against currency fluctuations. The US dollar has fallen by about 25% against a basket of other currencies in the past year. Will bulging budget deficits, deflation, slow growth, and declining consumer confidence drive the dollar lower? If so, then the 2002 futures are a good way to lock in the current exchange rate. Of course the risk is that Parker will pan the vintage that received only a tepid endorsement from other critics. At least you would have some nice wine to drown your sorrows!