Is wine really an investment?

Via Alphaville, I found myself today at Decanter’s wine investment guide — something which made for a very interesting read, given that I have just finished a book on Robert Parker. Parker will tell anyone who’ll listen that they should never buy wine as an investment, but that doesn’t stop guides like this being written, and millions of dollars being “invested” in wine by people who have no intention of ever drinking it. You can see why, when Decanter supplies them with prose like this:

In the last 20 years fine wine has also outperformed a number of equity and fixed income indices including the FTSE 100. For long term investors (as opposed to shorter term speculators) a well chosen and balanced wine portfolio should provide annualised returns of 10-12% per annum.

Wine is less volatile than stocks and shares, making it a less risky investment.

That’s right, I can get double-digit returns with lower volatility than the stock market — where do I sign up?

Of course, if you look at the guide with a critical eye, it seems much less impressive. Consider this kind of thing, for instance:

There are relatively few (perhaps only about 75 in total) investment grade labels… Bordeaux represents 90% of the wine investment market and should take the lion’s share in any portfolio… the Rhone remains undervalued as a region and has yet to really establish its investment credentials… Port is no longer regarded as a good investment bet… New and Old World ‘Cult’ wines from California, Australia and Bordeaux ‘garagistes’ are not the darlings of the market that they once were and are best avoided in the current climate.

If you then look at Decanter’s list of “10 great investment wines (and 10 not-so-good)”, everything becomes a lot clearer. The great investment wines, by definition, are the wines which went up the most in price over the past two years. And — guess what — 2005 and 2006 were great years for anybody investing in Bordeaux, and were not so great for people investing in the Rhone, or in Port, or in New World wines. In general, the outperformers are the wines you’ve heard of (Lafite, Latour, Margaux), while the underperformers carry names like Conseillante, Valandraud, and Mondotte.

With hindsight, it’s easy to construct a reason why this should have been the case: many of the newer buyers came from China and Japan, where buyers use Parker to pick the best vintages of the best Bordeaux, rather than to seek out obsucre garagistes. In California, a bottle of Araujo might have more cachet than a bottle of Lafite, because it’s harder to find and, in California, being an international luxury brand is not necessarily considered a good thing. On the other hand, international luxury brands have no better market than Asia — so you can look at the recent rise in price of 1986 Lafite as a luxury-brand story as much as you can see it as a wine-investment story.

In any case, the idea that wine which is undervalued should not be bought as an investment just goes to show me, at least, that wine is not really an investment. A good investor tries to pick undervalued assets, while if you believe the Decanter article, the best thing to do in the wine market is to avoid them. In other words, wine investors are basically momentum investors, working on the greater fool theory. Which generally works until it doesn’t.

But look on the bright side: at least all of this means that there are still lots of really good wines which aren’t being “collected” and therefore bid up to $5,000 per case and beyond. Which in turn means that those of us who buy wine to drink it, rather than to make money, still have a wide range of very good values to choose from.