Wednesday, 22 December 2010

Wine Investment - The Complete Novice Way

*Disclaimer* - you really should seek sound, professional financial advice before investing. Investments can go down as well as up. This is not a recommendation to invest all that you have in wine, it is purely our story!

I mentioned in my welcome post that D and I had put all our savings into wine. Well it’s true. In June of this year we put about £7,780 into wine. Every penny that we had saved up during the last few years.

If you don’t want to read my house price rant then skip the next paragraph…
We are looking to buy a house in a few years. House prices are ridiculous. In my opinion the true value of a house is about 2 to 3 times the average salary. Historically, that’s what they’ve been. Currently, the average salary in the UK is somewhere around £25,000 yet the average house price is around £246,000; nearly 10 times the average salary. The people responsible for inflating house prices should be hung. I don’t know how anyone around my age, earning around average salary or below, who did not get on the housing ladder years ago, will ever get on there! With only £7,800 in savings we don’t really have an option right now with Mortgages as they are. Many lenders are asking for 25 or 30% deposits, meaning that we need at least £45,000 deposit to get a £180,000 home, and a further £15,000 or more to furnish it. That’s £60k before we start! That is going to take a very long time. At this rate, I’m going to be at least 40 before we can get a mortgage. Then we won’t be able to get a 30-year one because I’ll be more likely dead than working at 70 years of age, after all the booze and cigarettes I consumed in my teens and 20s!

So Why Invest in Wine?
The majority of ISAs and savings accounts are currently giving under 3% interest. Inflation is running at nearly 5%. So in real terms, our money is dwindling by about 2% every year. Great. So what are we supposed to do? Desperate times call for desperate measures…

…So, in the hope of getting a better return than any ISA or regular saver account, we opted to invest in wine. Well, I did, and managed to get D alongside too. Wine has performed better than most other investments over the last 10 years, so we thought we’d give it a go. What have we got to lose? Nothing, apart from £7,800 of “hard-earned”. Oh, and about 3 years of additional saving if it goes wrong!

What is Wine Investment?
Basically, buying wine to sell on in the future, for profit, rather than buying for drinking. Buying wine early, often at initial release from the winemakers (called En Primeur) through an agent such as a wine merchant normally gives the best initial purchase price. However, some wines do drop after initial release and are better bought later on at auctions. Wine is viewed as a medium to long term investment, meaning it takes about 5-10 years before any decent returns can be had, although some may move quicker than that. Long term is good for us because we have a long time before we can save enough for a house deposit!

The mechanics of it are quite simple: Wine is produced in finite quantities. The finer the wine the more desirable it is and the greater the demand in the first place. Over time, some of it inevitably gets drunk, meaning that the quantity dwindles, cutting the supply and driving demand (and hence price) up.  Additionally, most fine wines appreciate in quality with age, up to a certain point, meaning that they will become even more desirable as time goes by.

Can Anyone Do It?
Well yes. As Myself and D have demonstrated. BUT, the more money you’ve got the better return you’ll get. Our £7,800 is peanuts in this arena. Most of the Bordeaux First Growths approached £10,000 a case this year. Yes, you did read it right, 10 Grand for 12 bottles of wine! The old adage of “How do you make a small fortune in wine?...Start with a bigger one!” certainly applies but it shouldn’t deter. If you've got £2,000 you should see a decent return. If you've got £20,000 then the "World is your Lobster [sic]"!
A couple of points worth noting are:

Get your money ready, decide on which wines, contact your merchant, purchase, done. Well not quite. Two years after the wines have been released they usually get bottled and shipped to your merchant’s storage facility (if they have one) or a location of your choice. Keeping them at your merchant’s storage normally costs between £10 and £15 per case per year, but should prove worthwhile. There are specialist storage companies for wines if your merchant does not have their own storage facility.

What Wines Should You Invest In?
The top 30 or so Bordeaux Chateaus, along with some selected Burgundies, Rhone, Italians and to a lesser extent some New World wines (California, Australia), are normally considered “investment-grade”. The best performing are often Bordeaux wines, notably the First Growths and equivalent St. Emillion/Pomerol wines from the Right Bank. The First Growths do very well. Cases of Lafite Rothschild do very well indeed. The 2000 vintage was released at £2,200 and now sells for upwards of £25,000. That’s an 1100% (yes, eleven-hundred percent!) growth in 10 years. Imagine you bought 5 cases in 2001 for £11,000, you’d now be sitting on £125,000!!! However, coming back down to planet Earth again, not all Chateaus or vintages yield those sorts of gains. In fact, Lafite is almost alone. Selected Chateau from lesser growths (the 2nds, 3rds, 4ths and 5ths) can also do very well but often not to the same extent. On the back of the high prices of the 2009s, even the “second wines” from the First Growths have done very well. Carruades de Lafite, Petit Mouton, Pavillon Rouge, Forts de Latour, all good investments in certain vintages.

The Chinese, with their booming economy and lots of new-found wealth, are voracious buyers of the top wines, Lafite especially. At the time of our buying, not many 2008 wines were left (apart from the dregs), but, if you were lucky enough to get your hands on Lafite, released at £1,850 a case, or Mouton, released at about £1,800, then you would now be a winner. Recently, Lafite put the Chinese symbol for 8 on the bottle and Mouton used a Chinese artist (Xu Lei) for their label. On announcement, both prices shot up. Lafite up nearly 20% overnight from £8,500 a case to £10,000 and Mouton has since risen to about £6,000. That’s how much the Chinese can affect the market. Many of the investment people believe that the Chinese demand will spread to the other First Growths in time. They could be good buys. Also, it tends to be the “lesser vintages” (2004, ‘06 and ‘08) that seem to have shown the most growth in terms of return on investment (basically percentage price increase), and if timed right, can be picked up much cheaper than the “great” vintages (2000, ‘05, ‘09 etc.).

Robert Parker, the American wine critic also plays a large part. His scores have a lot to do with both the initial release price of the wine and its potential investment performance. 100-point Parker-rated wines are almost sure-fire winners!

What Was It Like?
Let’s get this out of the way first: The merchants have enormous mark-ups. It almost feels like you’re being ripped off. For example the 2009 Lafite was released to merchants at €550 a bottle. That’s about £466 per bottle or £5,600 a case. It retailed at around £13000! That’s a mark-up of £7,400 or 232%! Ridiculous! The killer is, if you sell it onwards through them in the future, they’ll also take 10 to 20% of your profit too! At the Fifth Growth level, mark-ups may not be so extreme, but they are similarly greedy. Pontet Canet for example, was released to the merchants at €72 a bottle, translating to about £730 a case. It was sold to consumers at about £1,200 per case.

With only £7.8k, we obviously had to make do with some of the lesser wines, but still hopefully wines with good investment potential. Anything with a good reputation, good parker points and activity on the secondary market is a reasonable “punt”. There are many merchants offering En Primeur sales and back-vintages of investment-grade wines. Advice from one merchant didn’t actually turn up anything suitable for my budget. They advised against many wines and said to concentrate only on ones with a very healthy secondary market. They also advised to concentrate on the 2009 vintage alone as it would be the one most desired and talked about in years to come. Most were very expensive* and not available in full cases of 12, only 6-packs, due to their huge customer base and large number of pre-orders in this fantastic 2009 vintage. I don’t know why, but I was put off by the idea of a 6-pack; I wanted full cases of 12 (although research does show that a 6-pack is not frowned upon, or regarded as any less valuable than half a case of 12, give or take a few quid. It was more of a personal choice).

[*2009 was a great year in Bordeaux and the Bordelais knew it! Touted as the best for 30 years, or maybe even ever, the En Primeur release prices were several percent higher than the current market prices of the 2005s (the previous “great” year) which had been appreciating for a few years and were physically available. However, looking back at other “great” vintages with some years behind them, 1982 and 2000, several wines are worth a mint! The question is, will the 2009s appreciate as well as these, or better, or were they released at too high a price?]

Another merchant was more accommodating, stating that any wine could be re-sold through them and was “fair-game”, albeit with a substantial commission – they didn’t add! I decided to go with these in the end as they did have wines I liked the sound of, available in cases of 12. Also to split the risk a little I chose not to invest everything in the 2009s, choosing one case from 2002 and one from 2003. What if the 2010 vintage, or the next, or the one after that is better than 2009? Will the value of the 09s plummet? Who knows. Best to spread it out a little then?

However, I will praise both merchants’ salespeople for having patience with a novice. I bombarded them with “what if?” questions, to which they were quick to reply, informative and not once did they get pissed off! On the one hand they have clients spending hundreds of thousands and there they had me, humming and hawing over whether one case of Pontet Canet or Lynch Bages would be the better bet!

It got addictive. Very addictive. I spent many nights glued the PC pouring over prices, growth rates of previous vintages, Parker points and any information I could get my hands on. It was getting too much. In the end I had to man-up and decide.

What Did I Choose?

1st Growth Chateau Mouton Rothschild 2002 – £2900. Massively overpriced at the merchant when compared to auction prices, but with very good provenance. I was advised that this would be a better bet than Haut Brion and that it wouldn’t hang around long for under £3k.
I (stupidly) passed up a 6-pack of (5th Growth) Chateau Pontet Canet 2009 at £450 with Berrys only then to purchase a case of 12 elsewhere for £1150. With a Parker score of 97-100 and a lot of interest in this highly regarded Chateau, this might prove to be a good buy.
On the back of the high demand for the 2009, I also purchased a case of Chateau Pontet Canet 2003 for £600. I was advised that the high price of the ‘09s would renew interest in back vintages. This one has 95 Parker points.
I then got a 6-pack of (5th Growth) Chateau Lynch Bages 2009 from the first merchant (out of guilt from pestering their advisors!) – 94-96+ Parker points and a reasonable performer historically with the 2000 selling for £1600+. I topped that up with a full case of the same from the other merchant at £1040. If it takes off, we might be drinking the 6-pack in our new house in 10 years time!
I went slightly up-market from there to (2nd Growth) Chateau Montrose 2009 for £1350. Again, a potentially perfect score of 96-100 could make this one a winner.
Finally, that left me with about £300 which I spent on the (Cru Bourgeois) Chateau Sociando-Mallet 2009, 90-92+ Parker points. In all honesty I bought this one with the possibility of drinking in mind. A modest investment at the most, but the 2000 does go for £400+ so it could be ok. In hindsight though, I wish I’d have gone for the second wine of Montrose (La Dame de Montrose 2009) or Pichon Lalande (Reserve de la Comtesse 2009) for about the same price, both described as the finest ever made!

So that was it, all our money spent! I was tempted by some other wines but simply didn’t have the cash:
-         Château Talbot 09 at £400 a case (the 2000 trades at about £600).
-         Château Grand Puy Lacoste 09 at £575 a case (the 2000 and ’05 are about £800)
-         Château Beychevelle 09 at £595 a case, apparently popular with the Chinese due to the dragon on the label (the 2000 is about £1000)
-         Chateau Pavie 08 at £1200. The 2003 had a similar score and is £1700.
So I will keep an eye on these, if only for the masochistic pleasure of saying to myself, “See, I told you so. You should have bought some of them you…”.

What does the future hold?
It’s now 6 months on. Far too early to tell yet, but out of morbid fascination, if we were buying them now, we would have to pay about £9,000 in total. However, that’s not to say we’ve made £1,200 profit – if we were to sell now and take a 20% hit on commission we’d actually be out of pocket. There might be some positive price movement in the summer of 2012, when the wines actually get bottled and shipped out to our merchants (i.e. they actually become physically-available entities rather than “futures”). Also, as the years go on, Robert Parker will re-score the wines from time to time. If the points go up the price might go up. Alternatively, if the scores go down, the price may follow! The Pontet 2003 is nearing its drinking window, so hopefully that should provide some modest short term gain. It will be interesting to see if the exceptional interest in Lafite spreads to Mouton and it experiences the same gains as certain other back vintages, as it too approaches its drinking window.

The 2010 vintage looks to be a stunner too. Will we buy any? If I get a bonus this year, I may try and get a case of Pontet Canet or Lynch Bages, otherwise no. If it's another "great" year, prices will be high but the investment potential might be there too. Keep an eye out for Parker scores and release prices in June/July 2011 and decide for yourselves.

I’ll let you know how ours are doing every now and then. Who knows, in 5 or 10 years we could be laughing all the way to the bank (to have them laugh right back at us as we agree to pay them lots of money, every month, for the next 25 years to live in a building that we can call home, subject to us not losing our jobs, getting ill or affecting our ability to earn in any way).

Or, we’ll be crying into very expensive wine.

Either way, Woo Hoo!

As always,
Speak to you soon!



1 comment:

  1. Would be very interesting to see this post re-visited!