A Guide to Investing in Wine

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Many people in my social network have, over the years, asked me for advice on how to invest in fine wine. My response is invariably the same: Unless you’re prepared to invest a lot of time and effort probing the market, refining your tastebuds and losing money as you learn, forget it. Go buy an S&P 500 tracker fund and improve your golf game.

Think of the fine-wine market as the Wild West. It is not regulated. Market participants are free to manipulate prices, corner markets or disseminate false or misleading statements without any consequences from a regulatory authority. And the complexities don’t end there.

While there have been wine collectors for millennia, the real beginnings of fine-wine investing can be traced to 1966, and auction house Christie’s recruitment of the late British wine legend Michael Broadbent to run a new London-based fine-wine auction–department: Broadbent’s acumen and ability to ferret out incredible collections of old wines brought broader interest in the category and bottled wines began to change hands at very high prices, which in turn made younger, top-quality wines more valuable as long-term investments. As the saying goes: “The rest is history . . . ”

Getting Started

When it comes to acquiring your fine wines—which, in economic terms, are those regarded as a store of value—a shortcut route is to go to a well-known wine merchant, open an account, ask for advice and start buying. This can lead to disappointment. The merchant will not have access to all the wines you might want, and you’ll need to earn their respect with your wine knowledge to avoid being sold stock that they are struggling to get rid of.

Alternatively, you could attend some big wine auctions and start bidding. Auction houses, though, can be very expensive: There’s a reason why world-record prices are regularly achieved at auction, and the houses only really specialize in selling back vintage rather than new vintage.

What about buying En Primeur wine futures, which involve a promise from your fine-wine merchant to deliver, in a couple of years’ time, the latest, yet-to-be-bottled vintage? Bordeaux futures have been around since the 19th century as a way of getting cash flow to the châteaux, and there is an En Primeur campaign for Burgundy wines in the UK every January. It’s a welltrod route to getting onto the ladder. However, if your merchant or broker goes bankrupt or fails to deliver, there is not much you can do.

A wine investment fund is an option—but they have one big limitation. They need to deploy a lot of money to the enterprise to be effective, which can limit the types of wines they can buy. And they also need transparent pricing and the ability to liquidate their holdings to satisfy redemptions if investors vote with their feet; so they have to invest heavily in Bordeaux, where pricing is transparent and the spreads are tighter than in other markets. If the Bordeaux market is not on a roll, your fund isn’t going to perform.

Going Solo

Bordeaux has clear benefits, though, if you choose the final route—going it alone—and buy the investment-grade wines among the big five First

Growths of the Left Bank: Château Haut-Brion, Château Lafite Rothschild, Château Latour, Château Margaux and Château Mouton Rothschild.

The problem with being too top-heavy with Bordeaux, though, is that if prices stagnate, your returns are going to be poor. Diversifying with wines from Burgundy, Champagne, Italy and California will ensure that you don’t overexpose yourself to one part of the market.

Burgundy is the most sought-after and highest-returning fine-wine region in the world today. This will probably continue due to the very small quantities of top wines made by the region’s domaines and the low-yielding harvests it has faced in recent years. (Climate change has severely impacted Burgundy.)

New-vintage Burgundy wines sell exclusively on allocation, with increasing numbers of domaines limiting the quantities that anyone can buy. Case sizes on offer have reduced from the traditional case of 12 bottles down to six, then down to three, and now, often, down to a single bottle. Of course, you can go to the secondary market or the auction market and try your luck there— but this is not the best strategy for purchasing wines in an efficient and costeffective manner.

Burgundy is based around a pyramid structure: the Grand Crus at the top, then the Premier Crus, the village wines and, finally, the regional wines. Unlike Bordeaux, you’re just as likely to make good returns owning white wines as you are red. The blue-chip domaines include the holy trinity of Domaine de la Romanée-Conti, Domaine Leroy and Domaine Armand Rousseau.

Moving to Champagne, Prestige Cuvées such as Krug Clos du Mesnil and Clos d’Ambonnay, Dom Perignon P2 and P3, Salon and Cristal age incredibly well, pair with many foods and have the potential for long-term price appreciation in the secondary market. As for Grower Champagnes—those made and bottled by the same person who grew the grapes—the top wines from Jacques Selosse, Pierre Péters, Agrapart & Fils and Bérèche might be considered a small but worthy part of your portfolio.

Over on the West Coast of the US, when it comes to your portfolio, it is probably advisable to limit your selection to a few names: Screaming Eagle, Harlan, Dominus, Opus One, Colgin Cellar, Sine Qua Non and Ridge Vineyards.

Interestingly, despite the abundance of fine wine being made, there are remarkably few investable fine wines outside the aforementioned regions. A small allocation for your portfolio could be considered, though, made up of Germany’s Egon Müller and Weingut Keller; JL Chave Hermitage and Château in the Rhône Valley; Trimbach’s Clos Ste Hune; in Alsace, Clos Rougeard in the Loire Valley; F X Pichler’s Unendlich Riesling Smaragd in Austria; Gantenbein’s Chardonnay in Switzerland; and Penfolds and Henschke’s Hill of Grace in Australia.

Serious collectors-in-the-making should also consider bottle format. Wines in magnums always age better (less oxygen per liter gets into the bottle) and they are rarer—especially when it comes to Grand Crus Burgundy wines.

Avoiding Pitfalls

Once you get started, how you store your wines is every bit as important as what you invest in. Light, humidity, temperature, vibration—all are factors in how the wine will age. The UK has professionally managed warehouses in which goods are not deemed to have entered the country from a tax viewpoint, even when trading between warehouses (many US collectors keep a portion of their collections in them).

Meanwhile, you might wish to steer clear of wines bearing US “strip labels”—a US-government requirement for alcohol arriving from abroad— which down values wines for historical reasons relating to transatlantic shipments. Packaging also impacts the perception of provenance. Most Bordeaux wines come in original wooden cases, whereas most Burgundy cases come in original carton cases. Any deviation from this will induce deep discounts.

As for potential damage, breakage, theft or any other impairment, the UK bonded warehouses, such as Octavian Vaults, build in storage charges that include the cost of insurance: crucial, as even scuffing or water damage on the labels can make your bottles unsellable or subject to severe discounts. Consider, too, the taxation: Which country you are resident in can have a material impact on your real returns.

Returns are difficult to calculate. You need to factor in the costs of storage and insurance, as well as “slippage costs.” Selling fees can be high: 10 percent through a wine merchant and perhaps more through an auction house. If you want to sell a lot of wine quickly, you are unlikely to get the current market price.

After weighing all of this, you might end up thinking that you would have been better off—and enjoyed a smoother ride—putting your hard-earned cash into that S&P 500 tracker fund.

Here’s the heart of the matter for me, though: Investment in wine should be a labor of love—a passion investment with abundant emotional returns.