I have studied the numbers over the years, and over the long term wine is a terrible investment from a return standpoint. The only real way to make a worthwhile return on wine is to flip it in the short term and take advantage of inefficiencies in the marketplace. And when a wine is well allocated across major markets, there is not the volume to make it worthwhile.
That said, wine makes a great vanity investment- and so there are a lot of people who are dabbling in it, or using other people’s money to dabble in it. And this is why it is difficult to know when, or even if, the bottom will fall out of the current bubble when it comes to burgundy and certain low production wines in other regions like Le Pin where quantities are so tiny.
For most of the investors, the relative dollar amounts are not all that large, and they are not relying on wine returns to put bread and butter on the table (or gasoline in the Lear Jet.) And so many of the fundamentals of sound long-term investing in assets do not apply. If you look closely at where the money is flowing, it is not systematically flowing to what wine drinkers would generally regard as the best wines (it catches most of them, but not all), nor is it on a pro-rata basis flowing into wines just below the perceived “A-List”. And finally, the Rudy effect continues to live on in the fact that many investors are still living in the reality that never was of a decade ago which says that the greatest burgundies are immortal. They are not- and many of the hottest wines today continue to be examples which are well past maturity.
And so you have a very irrational investment approach combined with the biggest red flag of all- that point where the dollar value of the asset reaches a point where utilizing the asset for its intended purpose is no longer worthwhile in the eyes of the intended end consumer.
Ostrich farming in Texas is a great example of this. When I was growing up here ostrich farms were all the rage. And in most cases it was a vanity investment undertaken by the very wealthy. The ostrich is a very useful creature- virtually all of its hide, including the legs, is suitable for the manufacture of high end leather goods, and the meat is quite delicious as well as being a healthy alternative to beef. And yet there is no ostrich farming in Texas anymore because speculation drove the cost of eggs and breeding pairs to a point where the only way to make a good return was to sell your ostriches to someone else. Add in the fact that the long term costs of upkeep were more than many had considered, and one of the most useful and valuable animals on the planet from a consumption perspective became a very bad investment indeed.
DRC illustrates the current tipping point quite well. Consider the following,
Starting with the 2009s/2010s, a great many merchants were selling virtually all of their allocation to one or two people. And there are/were a great many people buying at that level from several sources. So right off the bat, the true customer base has shrunk dramatically.
I personally know of several situations where such individuals stopped buying when the 2015s came along. Allocations got very small, and most retailers started taking markups to reflect secondary pricing as they expected it would be for a vintage of such fame. And what is the result- despite the legendary status of the vintage even some of the big money speculators got priced out of their comfort zone. And right now, at this moment, for the first time since the 2007 vintage- if someone in Texas came to me and wanted to buy multiple bottles of every 2015 DRC wine produced from Texas retailers, with 3 phone calls I could fill their hearts desire. This is an astonishing reality.
The pricing for older DRCs is not nearly as vintage- dependent as it should be if drinkability or desirability from a drinking standpoint is the primary valuation factor. Assortments of 1992, 1993, 1994 and 1995 sell for very similar amounts. And that should not be the case if investors are rationally considering the end use and ultimate purpose of the asset being traded. There is much to be said for the lovely 1992s (drink soon), and the 1994s have a very valid purpose at the table (hold another decade in most cases IMHO.) But worth the same as 1993 or 1995 which are magnificent DRC vintages? No way.
So yes- we are living in a strange world right now, but given the fact it is vanity investment and not a Wall Street approach that is driving the speculation- and speculation in a relatively tiny asset base compared to more traditional investments like D-Flawless diamonds, it is very hard to know exactly when and in what manner the bubble crashes. Given the vast concentrations of wealth in small hands, it is quite possible that a large sell-off could result in minimal value reductions with the wines going to people who can, and would happily, drink La Tache every day. Or perhaps even more broadly in smaller doses to a wide range of consumers like many of us. If La Tache were suddenly $1,500 a bottle again (a percentage decrease akin to some past Bordeaux first growth pricing corrections)- I would be very tempted to lay down a case or two for the future.
There are two bright spots in this however.
- For the flexible consumer who wants to drink wine, the irrationality in the markets can work for you as well as against you. At auction I recently bought a pristine 6 pack of 2010 Drouhin Bonnes-Mares for about the going rate of a single bottle of 2010 Roumier Bonnes-Mares. I do not have 2010 pricing at hand, but I think I paid at or near where that wine sold at release. Drouhin’s Bonnes-Mares is darn close to Roumier, some would argue as good or better- just different. And 2010 is a magical vintage. These days, I do not fret over the price of Roumier or DRC- I instead look to producers like Drouhin and Meo-Camuzet who can deliver an experience of similar caliber at what are often ridiculously low auction prices.
Also, keep watch for when things fall out of favor. I do not know why- but Vega Sicilia is not on the A-list anymore- at least not at the moment. The market is being flooded with the stuff, notably the Reserva Especial. You can grab that up for a song at auction right now- less than half of retail. And if you do your homework on the vintage composition of each release, you can get your hands on the best of the best- as I recently did- for less than what those particular bottlings went for wholesale at release.
- Consider the massive upgrades in quality at many Burgundy Domaines in recent years because of higher prices and also consumers demanding higher quality and buying based on critical reviews rather than the vineyard name on the label. A lot of small Domaines and even some of the bigger negociants have really soared in quality in recent years. And that quality upgrade applies to the A-list wines now selling for a fortune as well as the insider favorite premier crus which can still be had for a good price. We have all benefitted from this.
I could go on, but I will leave it there.