The other week a friend of mine was over for a few drinks and he stumbled across a portfolio report I had left by mistake on the kitchen table. When I came back into to kitchen, and he'd managed to pick up his jaw from the ground, he started firing question after question at me about my experience in the fine wine market. We ended up having a great conversation and he even stayed passed the normal curfew placed on him by his lovely wife.
So i'm sharing with you my favourite question that he asked, and it's a very important question - "what's the best way for a beginner to get started in the fine wine market?"
If you were unaware, fine wine is one of the best performing asset classes over the last 20 years. And with the most expensive lot of wine ever sold going under the hammer in October (at a Sotheby’s auction in Hong Kong 114 bottles of Romanée-Conti Burgundy went for £1,035,000 – around £9,800 a bottle), many are starting to cotton on that buying high-end cases could be the answer to an early retirement. That’s not to say that it's all glitz and glamour, there are of course risks and I'm going to discuss them with you now.
1. Only invest what you can justify losing … or drinking
I have always started and invested in the region of £10,000, sometimes more, but bare in mind the same rule for any investment applies. I have never used money which is likely to be necessary for my living in the short- to medium-term. Spend what truly won’t be missed because there isn't a guarantee with any investment. Having said that, top wine is a valuable commodity and I have found my returns to be both impressive and pretty consistent.
2. ONLY purchase the very best you can afford
Only stick to the main châteaux of Bordeaux and Burgundy. I have looked at other regions in the past which didn't end too well, however the French Bordeaux have by far been the best for maintaining a steady profit. If both the vintage and provenance are good then you are likely to be quids in. The key is to invest in wines with a record, those which have a truly global secondary demand. Wines from first-growth Bordeaux, like of Château Lafite Rothschild, Mouton Rothschild, Margaux, Latour, Haut-Brion etc have provided sound returns for me.
The top Burgundies and Rhones have also performed well for me over the past five years, as have top Champagnes. So, buy the best that you can afford, and it’s worth bearing in mind that a smaller quantity of the finest wines will serve you better than cheaper cases which will hit you in the pocket when you tot up the annual insurance and storage charges. Typically, you will pay £15 per case, per annum.
3. Don’t think short term
A fun fact, Fine-wine has almost always produced positive absolute returns in every five-year holding period since the first record back in 1999. Some might fight the corner for global equities, but the truth is that fine wine outperformed then 98 percent of the time over any given handful of years. The best investment-grade wines are produced in small quantities due to their consumption over time that drives prices higher over time.
So for the best returns a medium- to long-term view needs to be taken. Do not believe any quick fix pitches from wine brokers with the best thing since sliced bread. Have your own strategy in mind. I came unstuck once believing in a wine brokers 6-month strategy that simply didn't exist.
4. Store the wine you buy in government licensed bonded warehouses
It is of paramount importance to ensure your bottles are stored professionally and correctly, in the right conditions. When you come to selling your wine, making sure it is stored in the right conditions is crucial to the sale price. The best way to prove unquestionable provenance is to store fine wine in wooden cases ‘in bond’ (IB), which means in a bonded, ‘duty-paid’ warehouse such as London City Bond or Octavian Vaults or EHD. These bonded warehouses provide the optimum environment for storage, with the temperature, humidity and other microclimatic factors carefully regulated. When the wine is removed from bond completely taxes will need to be paid.
Also, a note on insurance: accidents happen – assets may be damaged or stolen. It’s important that you insure your stock in your own name, and at replacement value. It’s vital you know who has custody of your assets – there is nothing safer than your own, fully-insured account in a bonded warehouse. If you're using a fund then make sure a genuine custodian is looking after both your cash and your stock.
5. Approach en primeur wines with caution
En Primeur or ‘wine futures’, is the process of purchasing wine while still in the barrel, with bottling and physical delivery likely to occur two or three years later, after the vintage release. Some of my biggest movers have been En Primeur as I was able to acquire stock at the lowest market price. However I also learnt some important lessons by not sticking to the top graded Bordeaux wines which offer the greatest security of provenance. So bare in mind that buying en primeur can be fraught with risk because you're means committing to wines that still have all the maturing to do, before the final blend and oak-ageing is complete.