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Demystifying Fine Wine Investment: Part 1

The world of fine wines is complex, mysterious and alluring – much like a glass of exquisite Barolo.  If you love wines, you have probably toyed with the idea of investing in a couple of cases of fine wines, in the hope that their value will skyrocket someday like a Chateau Lafite Rothschild 1982.

Let’s go on an exploratory journey through the key elements of wine trading: the wines, the suppliers, the buyers and the marketplace.

What to buy

As an investor, you’d like a wine with these characteristics: The winery is reputable, the wine quality is endorsed and ratable, and it has superior aging potential.  All these mean that this wine has a good chance to appreciate over time.  Many wines fulfil these requirements.  For starters, we shall look at the most high-profile part of this market – the Liv-ex 100 fine wines.

Liv-ex 100 is the wine industry’s benchmark index, compiled by The London International Vintners Exchange, the DJIA of the wine world.  The index measures the price movements of the world’s 100 most-traded fine wines.  Not surprisingly, the list is dominated by Bordeaux First Growths.  It has evolved over the years with the inclusion of prestige cuvée champagnes and New World wines.

The Liv-ex 100 wines are the best of the best, and most have appreciated considerably since their release.  To maximize your profit margin, you need to secure the wines earlier on in order to capture the most of this appreciation.  Therefore, instead of buying exactly these 100 wines, you might also consider buying younger vintages from the same wineries.   More enterprising investors may buy en primeur wines or “wine futures,” which is buying a wine before it is bottled, betting its value will appreciate in the future.  The uncertainty lies in the eventual quality, rating, and market price of the wine upon its release, versus its en primeur pricing.

How to buy – Plan A

The distribution model of fine wines, especially French wines, is historical, complex and highly codified.  A sharp divide exists here, firmly separating the insiders from the outsiders.

At the peak of the buyers’ pyramid are the insiders, who buy directly from the wineries and top-tier wine merchants like the “negociants” of Bordeaux and Burgundy wines.  Insiders are invited to private wine dinners, cellar tastings, and winery tours.  Most importantly, insiders have priority access to selective vintages, en primeur wines, limited editions, and large formats (i.e., magnum, jeroboam etc).  Quality and authenticity is guaranteed.

The vast majority of buyers exist outside this small and exclusive community.  Most people buy wines from various resellers – wine agents, distributors and retailers. Everyone wants to secure the best qualities and the lowest prices.  Only the insiders have any chance of achieving both. Outsiders might also be able to buy top-quality wines, but inevitably at much higher prices.

The burning question on your mind must be: What does it take to be an insider?  Two things, basically – a deep pocket and the right connections.  The former is relatively easy, next to the formidable challenge of the latter, which requires a huge amount of effort, time, and a true passion for wines.  You need to build up your track record and reputation as a serious collector.  You must have strong connections with all or most of the stakeholders – top-tier wine merchants or negociants, wine critics, winery owners, wine-makers, sommeliers, and Epicureans (the worlds of wines and gastronomy are intertwined).  It takes a serious commitment.

If the route to becoming the crème de la crèmeof buyers is too much work for you, despair not.  You still have room to play, albeit at a different scale.

How to buy – Plan B

Assuming you are keen to get your hands on the real bottles of the precious wines – you can buy wine funds instead, which is a completely different story – the critical success factor here is selecting the right wine retailer.  One frustrating characteristic of the wine market is its imperfect information.  But this is also why it offers good profits to be made.  Those in the know have a distinct and overwhelming advantage. Your wine retailer should ideally be your “in-the-know” partner who will navigate you through the world of fine wines.

You can either go to the big wine-store chains, or niche independent specialists.  The big retailers have buying clout and influence, usually on the more commercial types of wineries.  Some also hire experienced wine consultants who could provide you with good investment advice.  But prices are higher, and you do have to spend your way to become one of their preferred clients in order to access priority purchases, wine tastings and dinners etc.

The other option is independent wine specialists. Some owners are themselves wine collectors or connoisseurs, who are extremely well connected in the wine industry.  Choose one who has a good chemistry with you, whom you’d enjoy spending time with to learn and taste wines.  Many specialists have occasional access to the odd lot of fine wines, which could turn out to be good deals.  The independents provide a much more personalized service compared to the big retailers.  Prices could be more negotiable.  But there is slightly more risk on wines’ authenticity, on which you would need to do more of your own homework.

Now you know how to get your wines.  What’s next?  Read on to find out about the marketplace and how to sell.

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