Why Age Wine?

By Michael Meagher

It is only a recent development that we can ask the questions of why and how we should age wine.  As little as 400 years ago (wine dates back at least 6,000-8,000 years, so 400 years is pretty recent history) wine moved on a relatively quick journey from grape juice to wine to vinegar since storage vessels were usually wooden barrels or poorly sealed containers that allowed large amounts of oxygen to come into contact with the wine.  It was only with the development of glass bottles and cork closures, which protected the juice from rapid deterioration, that consideration of whether a wine is age-worthy entered a consumer’s mind.  While there certainly are some wines out there that are designed for consumption as soon as possible, a good portion of wines will be consumed many months or even years before they reach their peak.  The truth is that most people don’t see wine as a living, breathing, evolving beverage that usually will benefit from a bit of patience before you pull the cork. 

So why age wine?  One rationale in favor of ageing wine points toward the fact that in the process of creating what we know as wine, the juice goes through a lot of “growing pains” in becoming what we are familiar with.  Fermentation is a fairly violent process with naturally occurring heat, carbon dioxide, sulfur, and all sorts of other chemical changes, and if it’s a red wine then there is extraction of anthocyanins, polyphenols and tannins from extended skin contact. 

If the wine sees time in a barrel, then there are more additions and changes to the structure of the juice with tannins, vanillin and slight oxidation taking place.  By the time the wine reaches the bottle, it’s gone through huge amount of change.  For those who are skilled in the kitchen and have made a soup or stew, there’s the adage that it’s always better the second day, and this holds true to wine.  It takes a while for the ingredients in a wine to mesh and aging a wine will give it the necessary time to reach that optimal state. 

Now not every wine needs the same amount of time to age and show more integration of its components.  Only a few varietals are ready to drink after only a few months in bottle, so winemakers will often hold wine back from release to avoid premature consumption.  This is because of one of the great qualities of wine, its ability to develop secondary characteristics after years of bottle aging. 

Wine in its youth will show primary flavors of fruit, which makes sense since it’s made from fruit.  However, as a wine develops, a lot of those chemicals that are floating around in the bottle have a chance to either bind together or bind with some of the small amounts of oxygen the cork allows to enter the bottle.  This will cause development of secondary aromas like tobacco, mushrooms, dried herbs, savory meatiness, and even what is affectionately referred to as “barnyard”.  

Perhaps the best reason to age wine is for the fun experience of seeing it change and evolve over time.  Instead of buying just one bottle, buy four bottles, (it doesn’t have to be ultra premium juice) and open them over the span of a year or two.  Take some notes on the aromas and flavors each time you pull the cork and compare them from each bottle.  The differences might be subtle, or they might be drastic, but they will give you a good illustration about the nuances and potential of a bottle to improve with age.   Plus, it’s kind of fun, which is what wine is supposed to be all about.

Michael is a Master Sommelier Candidate is in the process of completing his Diploma of Wine Studies from the WSET.  Being a former collegiate athlete, he is now focusing that competitive spirit on the wine world.  He won the 2010 Chaine de Rotisseurs Best Young Sommelier competition, finished third at TOP|SOMM The US Sommelier Championships.  He also serves as Chairman of the Boston Sommelier Society and owner of the beverage consulting company, Sommelier On-Demand.

How recent events have impacted the investment wine market?

The past month or so have been largely volatile for the world’s equity markets to say the least. The S&P started August 1,292 and finished the month with its tail between its legs at 1,213. Although that’s only a 6.1% decrease, along that bumpy trail it dipped to 1,120, a thumping of 13% in a matter of two weeks. The first part of September has seen a continuation of the uneasiness, with the close on Tuesday at 1,162, a decrease of 10% from August 1.

This was largely caused by three factors:

1. The Debt Ceiling Debate and subsequent S&P downgrade,
2. Continued weak US economic data, and
3. That mess of a world body known as the EU.

With all of this happening simultaneously, the market has been highly reactive, with nearly ever news story sending equities either higher or lower in 2-5% intervals. Luckily, the past few days have restored some relative optimism; however with the EU’s handling of the P.I.I.G.S’ (Portugal, Ireland, Italy, Greece, Spain) debt situation, don’t expect prolonged calm seas anytime soon.

Over the course of the past few months, I’ve been writing heavily regarding wine’s viability as an investment. It’s certainly an asset that doesn’t have the same strictures of an equity (i.e. earnings, balance sheets, restructuring, etc) and in trying times, it’s been seen to be a hedge against volatility. This past month has seen the different Liv-ex indices take a hit; however when looking at aggregate long term performance, along with YTD performance, wine is holding up and has held up quite nicely through some violently turbulent periods in the equity markets.

The first illustration below shows the Liv-ex indices through the end of August and the second illustrates the two major, broad-based US indices along with the numbers for the Hang Seng. I’ve included these as they are the indices of the markets of the two largest wine collecting nations,Chinaand theUS. Finally, I’ve been getting a lot of hits on my blog with searches surrounding “wine stocks”, so I’ve thrown in the two major players in this game, Diageo and Constellation Brands. 

Index	MOM	YTD	1yr	5yr
Liv-ex Fine Wine 50	-4.4%	3.6%	20.2%	175.6%
Liv-ex Fine Wine 100	-4.0%	2.5%	13.5%	109.8%
Liv-ex Claret Chip	-4.9%	1.5%	14.8%	139.9%
Liv-ex Fine Wine Investables	-3.7%	5.3%	17.9%	132.7%
Liv-ex Fine Wine 500	-0.4%	13.9%	24.4%	120.1%

*through 8/31

Index	MOM	YTD	1yr	5yr
S&P 500	-1.49%*	-6.29%	8.52%	-0.31
Russell 2000	-2.45%*	-12.56%	8.09%	.08%
Hang Seng (Hong Kong)	-4.43%*	-17.89%	11.35%	3.21%
Constellation Brands (STZ)	-1.81%*	-16.41%	8.53%	-33.36
Diageo (DEO)	0.34%*	5.22%	15.45%	30.81**

*through market close 9/12    **includes dividend reinvestment

As one can see, over the longer term, including the debacle of ’08, the different wine indices held up amazingly well. There was a recent shift and month over month the wine indices have stumbled somewhat. From everything I can tell, this is largely due to the steady decrease in performance of different vintages of Chateau Lafite-Rothschild, most notably the performance of the ’08 vintage. Why all of a sudden?

Is this the Lafite "bubble" bursting, or simply correcting?

If we look closely at the relative decline of the Hang Seng, I think we’re able to isolate the issue. Lafite benefited from a meteoric rise in price and stature, becoming the most sought after of all Bordeaux First Growths amongst the Chinese. With the Chinese government’s attempts to slow down the ferocity of growth in their economy, I feel the side effects are being felt in this “bubble” within the wine investment world. Other First Growths have lagged the dynamic growth and demand of Lafite for a couple years now; however this much needed reset seems to have finally arrived thanks to tightened liquidity in China and a recent sharp correction in the Hang Seng. If this does turn out to be a reversion then this is quite healthy and is an indicator that this may not be a bubble after all.

The overall murkiness of the global economic condition and its direct impact on wine investments will be something to pay attention to. All has not been doom and gloom, in fact I expect to see a gradual tick upward as two very strong indicators offered hope. First, Acker, Merrall & Condit recently completed a US auction in which 97% of the lost sold for a total of $3.8M. This is a very promising participation rate. Second, in China, the most expensive single lot of the year went for $539K. To me this shows that the money is still there; however its probably going to be more selective moving forward. In the end, it’s through these times that we can truly assess whether or not an asset class is truly a hedge against volatility. I still feel wine offers that hedge and over the long term, so do the numbers.

Please be sure to consult different expert guides to wine investing before taking the plunge. Below are a couple articles I’ve written that may assist in offering additional clarity as to some of the topics discussed in this article:

• Wine: Understanding and unlocking its investment potential
• Wine Company Stock vs. Investing in Wine: Understanding the differences

The mentioning of the stocks in this article by no means constitutes a recommendation to buy or sell, rather they were used for informational purposes only.

Why 1855 is so important to wine

Come browse our wines for great deals.

Bordeaux is to the wine what Rolls Royce is to autos, the pinnacle of class. It’s what every wine lover lusts to try and will pay a king’s ransom to do so. For all other regions that aspire to produce great wines, Bordeaux is the “gold standard”.  In the best vintages, Bordeaux produces wines that are so confounding that trying to put their brilliance into words is nearly impossible. Due to the quality of this region, the châteaux (any wine producing house) were forced into classes at the request of Napoleon III, in an attempt to create a hierarchy of quality. But is this class system necessary today?

To start to understand the intent of the Bordeaux Wine Classification of 1855, we must first understand the man who requested it and why. Napoleon III was in many ways a civil visionary that was pleased by straight lines, rationality and order. These characteristics are best illustrated by looking at a map of Paris. 

Haussmann's renovation of Paris gave the city its present layout of long, straight, wide boulevards that run parallel to one another with narrower cross streets running perpendicular. The symmetry and order is what made Napoleon buy into this concept.

During the renovation of Paris, Baron Georges-Eugène Haussmann created the controversial urban plan that we witness today and to which Napoleon enthusiastically approved of. With long, straight boulevards running parallel to the Seine River, the design was unheard of at the time. Although provocative, the easy to navigate grid of roads is a thing of beauty and played into Napoleon’s insatiable desire for order.

Similarly, Napoleon requested a classification of Bordeaux’s châteaux for the upcoming Exposition Universelle de Paris. The goal of this classification would be to provide a ranking system that was easy to understand for those importers visiting the agricultural venue at the Expo. For the purposes of the classification, the châteaux were ranked based on two parameters: reputation for quality and trading price at the time.

All of the châteaux in the classification hail from the Médoc region except for one exemplary house from Graves, Château Haut-Brion.  Since this classification leaves out the châteaux situated on the right bank of the Gironde estuary as well as other regions in Bordeaux, it’s not an all encompassing classification.*  With that being said, it’s the most significant and highly-regarded classification in the wine world. Not bad considering it was only meant to be temporary.

The 1855 classification broke down the châteaux into five categories, knows and Crus (meaning “growths”).  The following is how the market at the time dictated the hierarchy of wine:

One of the original four Premiers Crus per the 1855 Classification, Chateau Lafite-Rothschild.

Premiers Crus (First Growth)

• Château Haut-Brion
• Château Lafite-Rothschild
• Château Latour
• Château Margaux

Deuxièmes Crus (Second Growths)

• Château Brane-Cantenac
• Château Cos d’Estournel
• Château Ducru-Beaucaillou
• Château Durfort-Vivens
• Château Gruaud-Larose
• Château Lascombes
• Château Léoville Barton
• Château Léoville-Las Cases
• Château Léoville-Poyferré
• Château Montrose
• Château Mouton-Rothschild (reclassified as a First Growth in 1973)
• Château Pichon Longueville Baron
• Château Pichon Longueville Comtesse de Lalande
• Château Rauzan-Gassies
• Château Rauzan-Ségla

Troisièmes Crus (Third Growths)

• Château Boyd-Cantenac
• Château Calon-Ségur
• Château Cantenac-Brown
• Château Desmirail
• Château Dubignon (absorbed by Malescot St. Exupéry in the post- phylloxera** era)
• Château Ferrière
• Château Giscours
• Château d’Issan
• Château Kirwan
• Château Lagrange
• Château La Lagune
• Château Langoa Barton
• Château Malescot St. Exupéry
• Château Marquis d’Alesme Becker
• Château Palmer

Quatrièmes Crus (Fourth Growths)

• Château Beychevelle
• Château Branaire-Ducru
• Château Duhart-Milon-Rothschild
• Château Lafon-Rochet
• Château La Tour Carnet
• Château Marquis de Terme
• Château Pouget
• Château Prieuré-Lichine
• Château Saint-Pierre
• Château Talbot

Cinquièmes Crus (Fifth Growths)

• Château d’Armailhac
• Château Batailley
• Château Belgrave
• Château Cantemerle (added as a Fifth Growth in 1856)
• Château Clerc-Milon
• Château Cos Labory
• Château Croizet Bages
• Château Dauzac
• Château de Camensac
• Château du Tertre
• Château Grand-Puy-Ducasse
• Château Grand-Puy-Lacoste
• Château Haut-Bages-Libéral
• Château Haut-Batailley
• Château Lynch-Bages
• Château Lynch-Moussas
• Château Pédesclaux
• Château Pontet-Canet

As you can see, there were few modifications to this Napoleonic classification after it was released and only two of significance. The reclassification of Château Mouton-Rothschild marks the only time a château has moved up in status and the addition of Château Cantemerle marks the only time a château has joined the elite.

This organizational benchmark has proven its worth through the years. It’s guided would be importers of the 1850s just as much as it’s guided would be consumers today as to the respective quality the châteaux. Have some chateaux improved? Of course. Are some non-classified châteaux making better wines than some classified growths? Sure. However the overall brilliance of this framework is its continued relevance and how it’s taken something that could’ve been quite confusing and made it brilliantly simple. In this simplicity, a legend was solidified.

*Part of this project was also the classification of the white wines of the Médoc, namely from the Sauternes and Barsac region.  This classification is of lesser importance for this article, however it is worth being aware of.

** Phylloxera is a louse that is native to North America.  In the 1850s it was brought to Europe for research and in the 1860s it spread rapidly nearly destroying the French wine industry.

Wine Company Stocks vs Investing in Wine: Understanding the differences

Beringer, Chateau St.Jean, Etude, and Penfolds are all names that evoke an image of high quality and in the cases of Beringer and Penfolds, tremendous consistency across broad product lines.  These are just some of the wineries that Treasury Wine Estates (TWE) is fortunate to own in their impressive fine wine portfolio. This raises the question: Why not invest in the stock of a company that deals with wine rather than having to deal with the perceived headaches and overhead involved in wine investing?

Recently, I wrote an extensive article about investing in fine wine as a diversification tool (click here to view). Media coverage of record wine auctions are the attention grabbers; however studies have shown collectible wines to be a compelling investment, as well as a potential hedge against traditional investments. This is the case especially in bear markets and I feel these findings strongly support looking in wine in this manner. With that said, companies such as TWE, Diageo, and Constellation offer, compared to investing in bottles, a more traditional investment play that involves wine. For the purpose of this article, my focus will surround TWE, as it’s the only pure wine play out there, the other two have substantial spirits holdings as well.

My first direct experience with TWE came when I attended a Heritage Tasting of the Penfolds line-up in Boston earlier in the year. Considering the way TWE puts on informative and aspirational events such as this for restaurateurs, shop owners, distributors, and state liquor buyers, it shows the level of class and understanding that they have. Add to this a product line that has two sensational collectibles as trophy pieces, Penfolds’ Grange and Beringer’s Private Reserve, along with a highly knowledgeable and reputable sales force (many of which are Certified, Advanced or Master Sommeliers) and TWE looks to be a compelling company. This high quality, luxury character has even attracted lustful looks from the bigger companies and private equity firms that are continually inquire about a buy-out.

That being said, investing in TWE is vastly different than investing in individual bottles of wine. When a wine is released, there is little uncertainty about the quality of the wine. The likes of Robert Parker, James Suckling and other noteworthy critics assist investors, collectors and consumers in identifying quality prior to purchase. Conversely, when a wine company is trading on the stock market, for example TWE on the Australian Exchange, there’s much uncertainty about its future profitability.

The best way to illustrate this difference is to look at TWE and their trophy wine, Penfolds Grange. A collector can confidently go out and purchase a bottle of 2005 Grange, knowing it’s of superior quality as it was rated 96 by Robert Parker and traditionally has massive demand as an investment wine. TWE, the company that owns Penfolds Grange, can’t go out and rely on analysts ratings or name recognition alone to succeed in the market place. Rather they must rely on strong sales of their full line-up, global demand for Australian and Californian wines, marketing expenses, strength of their sector, as well as a host of other variables to remain attractive to investors and profitable.

This doesn’t make TWE as a wine stock unattractive; it simply means that it has a different route to success than a bottle of one of their wineries’ wines does in the collectibles market. Understanding this fundamental difference illustrates and strengthens my argument that wine is a solid diversification tool, or even as a standalone investment. Because its quality is known, it can be effectively collected much in the same way art, stamps and other non-financials can. They’re a known substance, whereas the stock and bond markets are dynamic. This is why in bear markets it’s been shown that wine has very low correlation to traditional investments. This is why wine makes sense.

This is not a recommendation to buy, sell or hold any of this stock; however what this article was meant to do is to make wine lovers aware that there are companies out there that have significant wine holdings that drive their performance.

Wine: Understanding and unlocking its investment potential

Over the past few years there has been a surge in mainstream interest surrounding wine as investment. With volatility and uneasiness surrounding the stock market, high levels of sovereign debt and a lack of confidence in governments, both foreign and domestic, more and more people are looking to non-financial assets for a portion of their portfolio.

Last Wednesday on CNBC’s Squawk Box, Scott Minerd, Chief Strategist and CIO of Guggenheim Partners, was discussing the viability of non-financial assets at a time when structural issues cast a massive shadow over the U.S. and Europe. Albeit he was speaking of these assets as a hedge, it strengthens this arena’s appeal as a viable investment. Whether it’s antiques, art, diamonds, or wine, there’s something comforting about investing in something tangible.

This comfort should not be the only reason that you invest in these assets, there must be the potential to make money as well. When looking at the Liv-Ex 500, a region-weighted index based on current best (cheapest) list price, in comparison to the S&P 500 or any other major equity index, one can quickly see the value that wine can add to your portfolio.

There has been no “Lost Decade” when it comes to the fine wine world; however it’s important to truly understand the risk and involvement necessary to obtain these figures. (Source: Liv-Ex.com)

The potential for big returns is all well and good; however one should always consider the risks involved in investing in non-financials. When investing in wine, there are three primary risks that one should clearly understand:

Liquidity Risk: the risk that you won’t be able to convert your asset quickly into cash. Although a liquid, wine is highly illiquid as an asset, as it may take weeks and potentially longer to find buyers for your collection.

Principal Risk: the risk that the wine you selected will depreciate in value causing you to lose principal. This is why the selection of viable investment wines is so important.

Storage Risk: as with any physical investment storage is always something that needs to be considered.  Improper storage can lead to spoilage, theft or damaged goods. To prevent against theft or damage, be sure to contact your homeowner’s insurance provider. Conversely, wine when properly stored can increase in value significantly.

With the key risks being covered, let’s look at seven rules that will help you create an appreciating investment cellar.

Rule 1: Create a plan!

This seems intuitive; however the importance of having a plan can’t be stressed enough. You’d be shocked by how many investors purchase wines on impulse. Everything, from what, to how much, to when to buy and when to sell should be plotted out well in advance. If not, you run the risk of misappropriating your funds on the wrong wines.

Think of your wine portfolio in the same manner as your investment portfolio. To successfully manage your wine portfolio you need to follow five basic guidelines:

1. Asset allocation and diversification:What regions do you want representing your core holdings (could be more than one)? What region’s wines do you want to compliment the core and at percentage? This is also the time to start breaking down the portfolio by vintage as well. Basically you want different lots coming due at different times; so create a plan for vintage selection as well.
   

   A sample allocation by region, meant for illustration purposes only. Although Bordeaux-heavy it illustrates the use of other regions for diversification. (Source: Liv-Ex.com)

2. Research: Once you decide your allocation, begin to research the wines from the regions you’ve selected and begin to narrow them down based on your criteria. Once you’ve isolated the ones you want, begin monitoring them and find the most cost effective source from which to purchase. I’d also recommend having a few back-up wines in mind as well, as you may come across a bargain that makes more sense. It’s all about margins!
3. Invest: Begin implementing your strategy by making the purchases. Depending on the region you’re featuring in your cellar, you may have to decide whether you purchase your wine en primeur, or futures, or at release. Typically, en primeur prices are lower than the release price by a decent amount. Plus even within en primeur the wines are released in different traunches with each subsequent being more expensive, so having a plan helps you capitalize. To receive this preferential pricing, you’re buying wines that are still aging in an oak barrel somewhere and won’t be shipped for a couple years, thus tying up your capital. When purchasing wines at release, it’s vital that you have a good relationship with a reputable wine shop. They can provide two things: better pricing and access to rare wines. This relationship is essential due to the typical three-tier system.
4. Manage: This is the difficult part, whether investing in stocks or wine. You need to have the discipline to review your portfolio on a set schedule and analyze your current holdings and make changes when appropriate. If you do your planning up front, this part is far easier, because you already know when certain wines should be sold due to progress in age. By this I mean when wines reach a certain level of maturity, restaurants and consumers begin to look for those bottles, thus there’s increased demand and limited supply. They pay the premium for the work you’ve done. Also, assess the wines that aren’t living up to their potential as an investment. There’s nothing wrong with cutting your losses if a wine has lost momentum in the marketplace. You can always replace them with another wine you’ve been researching and deemed a viable replacement. Finally, cash in or scale back on your winners, investing is only worthwhile if you can make money!
5. Your representative: You want to be able to sell your wines in the most efficient manner while generating the most buzz for your lots. Continually reevaluate what secondary vendor you use to sell the lots you’re looking to move. Your four options are retail, broker, online auction and live auction. Each option has its pluses and minuses. Each represents you as the seller differently and at a different cost. What’s good for one lot may not be the same for another.

Rule 2: “Blue Chips” are your best friends

Auction houses and other investors are rarely interested in what cool, esoteric wines you’ve discovered. Very few wines go on to become Screaming Eagle or Sine Qua Non and even fewer would-be buyers care about which wines you enjoy. I’m not being a jerk, only a realist.

Although there’s a niche market for obscure wines, “Blue Chips” are the way to go. These wines are your huge names in the auction market that will have heavy demand many years from now. Since liquidity is always a risk to keep in mind, these wines should make up a majority of your cellar because of the activity they generate. Remember, when dealing with any region, the prestige of the vineyard is as important as the producer. There’s plenty of Schafer out there, but it’s the Hillside Select that collectors look for, not the 1 Point 5. With that being said, I’ve broken this group into a rudimentary two tiers system (which should be broken down further within the tiers; however for the sake of not making this article unbarably long I’ve left them combined):

Tier 1 – Wines that are historically the most sought after and lucrative in the world wine market, hence limited supply and higher demand. These are the wines you’d likely consider as part of the core of your wine portfolio.

Tier 2 – Are wines that have more traction within certain specialized niches. This means that the demand is primarily coming from smaller pockets within the broader world market. They may not be Bordeaux, but they do offer some opportunities to those who are selective. These wines are typically seen as a way to compliment the core so tread lightly.

Tier 1

• Bordeaux: Although I’ve been critical of the Bordelais and their pandering to the Chinese passion for their wines, there’s no more important region when it comes to investing. Look to Left Bank First Growths and Super-Second Growths, as well as the best of the Right Bank (i.e. Petrus and Cheval Blanc) and d’Yquem, the mighty Sauternes. I’d even lump in the Second wines of the First Growths into this category as a diversification tool (see chart and subscript below). With the recent success of the ’09 and ’10 futures offering, there’s solid availability of other optimal vintages, namely ’05, ’03 and ’00. Also look to ‘shadow vintages’ such as ’06 and ’01 as they are largely overlooked due to their legendary predecessors. Although you pay a premium, Bordeaux should be considered the core of your core holdings.
• Champagne: Stick with the best houses from the best vintages as they are the place to be when it comes to bubbly. There’s a reason why Krug, Veuve’s La Grande Dame, Roederer’s Cristal and Dom Perignon have the prestige typically associated with them.
• Burgundy: Stick to red (for the most part), Premier and Grand Crus only and try to avoid negociant wines, domaine wines are certainly preferable. Look predominantly to wines from Côte de Nuits for the most viable interest. There’s a lot of traps in Burgundy, so be careful!
• Northern Rhône:  Hermitage, Hermitage, Hermitage! This appellation is the most prestigious to investors. Names like Chave, Guigal, Jaboulet and Chapoutier should spring to mind.
• Southern Rhône: The best of Chateauneuf-du-Pape and only the best Chateauneuf-du-Pape. And by the best, I mean the best from the best. There’s a glut of CdP which isn’t a good sign; however the best offering from the top of the line producers are still strong, especially Beaucastel, Pegau and Clos de Papes.
• Australia: For the most part, outside of legendary Penfolds Grange and to a far lesser extent Torbreck RunRig and Clarendon Hills Astralis, there isn’t a vast demand for Australia. They certainly produce some iconic wines; however there’s a very small secondary market for most others. BUT, if you can put together a collection of Grange, you’ll be smiling.
• Tuscany: Super-Tuscans, such as Sassicaia and Ornellaia, are the real attention grabbers and should be the focal point of the Italian portion of your wine portfolio, if you want to have an Italian portion that is. Even then, focus only on the best vintages. There’s also potential for Brunello di Montalcino as they’re generating some deserved buzz, but don’t go crazy with them. I consider BdM Tier 2.
• Napa: Only estate and non-corporate/pre-corporate wines should be considered, with the only exception being Opus One. If a winery sources their grapes, they’re not necessarily a good investment, fair or not; however there’s always a few exceptions to this rule. Stick with the big guns with a solid track record and strong demand (i.e. – Bryant, Bond, Colgin, Harlan, Joseph Phelps, Screaming Eagle, Shafer, etc.). There are also a few new or reinvented wineries making a push to be considered blue chips, with two names, Schrader and Chappellet, breaking through the headwinds.
  

  Although flat in 2011, Second wines of Bordeaux First Growths diversification potential while capitalizing on the name. In my opinion, the flat start to 2011 has been cause by two major headwinds. The first being monies being redirected towards 2010 futures. The second being the geopolitical issues of 2011 causing some wine money to stay in the pockets for the time being, which is a healthy market reaction. Watch this area closely. (Source: Liv-Ex.com)

Tier 2

• Bordeaux: This time around we’re looking at Third through Fifth Growths; however not all of them. Some have more traction than others, be tactical here as some can really excel. Just ask the fans of Pontet-Canet.
• Ribera del Duero & Rioja:  The only regions in Spain with enough demand and only the top wines from the biggest names such as Vega Sicilia, Lopez de Heredia, Pingus and Numanthia-Thermes from these regions garner consistent attention.
• Piedmont: Angelo Gaja holds down the fort when it comes to Piedmont and has strong investor appeal, thus Gaja is Tier 1. Outside of Gaja, I feel as if Piedmont, and Italy in general, has been relegated to Tier 2. There’s some additional interest in the likes of Luciano Sandrone, Robert Voerzio and Bruno Giacosa, but these should only be viewed as options in the very best of vintages. Call me a skeptic, but I wouldn’t create a collection around them.
• Germany: Riesling is king of white wines when it comes to devotion and cult status. Focus primarily on Spätlese, Beerenauslese, Trockenbeerenauslese from Wehlener Sonnenuhr from and obviously from the best vintages. Not a huge market; however they do well as they’re increasingly hard to find due to most being consumed near initial release.
• New Napa and Other California: This is where things get a bit tricky. There are a lot of exciting wines being made in and outside of Napa; however that doesn’t necessarily mean that they make for a sound investment. Recent auctions reaffirmed Sine Qua Non as the most highly sought-after non-Napa from California. Other than SQN (which is Tier 1 caliber), Saxum continues to do well, with a few others garnering some interest.
• Chile: Very interesting from a consumer standpoint, but Chile doesn’t have a great track record at auction. Although, Casa Lapostolle’s sensational Bordeaux-styled Clos Apalta has been a new arrival to the demand portion of some auctions. There’s certainly another producer to watch in Almaviva; however there’s very little interest in other Chilean wines.

Rule 3: Buy cases when possible

If you have the means to purchase wines by the case do so. This simple act could increase the value of those wines. Lots maintained in their original case typically garner 10-15% more than broken cases at auction (those which have been opened and are no longer a complete case).

Collectors, especially the Chinese, love when wines have been aged in their original cases, especially if they’re Tier 1 wines in wooden cases. What the cases ensure is that the wines haven’t been handled or tampered with, which typically indicates better provenance (history of the conditions of storage). Considering the Chinese are currently driving demand, it’s best to know what they prefer.

Rule 4: You break it, you bought it!

If you’re purchasing wine as an investment, don’t disturb the bottles. Besides the potential to drop your investment and render it worthless, wine also ages best if undisturbed. Although inanimate objects, there’re very few things more interesting to look at then a great bottle of wine for a wine collector.

Then there’s always the temptation to pop the cork on a great bottle. You must exercise self-control. One way to fight the urge is to purchase a loose bottle or two for your enjoyment along the way and leave the investments in their cases.

Rule 5: Storage

If you don’t have a proper place to store your wine (i.e. – a cool basement with steady year-round temperature, a temperature controlled cellar or professional storage facility) then don’t start collecting just yet. Without appropriate cellar conditions, your wines could possibly depreciate. Auction houses and websites look for telltale signs of poor storage: abnormal ullage levels, seepage, mold, discoloration, etc. At the point of sale, these imperfections are brought to the attention of would-be bidders or buys, potentially limiting your wine’s upside if not rendering it unsold.

When considering storage, a few things should be kept in mind. A consistent temperature around 52-54 degrees and 70% humidity is widely seen as optimal, as well as a lack of exposure to ultra-violet light. Outside of volatile temperatures, UV exposure is the most damaging of all elements to a bottle of wine.

Rule 6: Provenance

Provenance is the most important word in the world of wine collecting. This is recent and significant, as we are in an era of increased awareness and skepticism towards rare or high-valued wines. Provenance isn’t a concept just for the big investors either. There’s increased demand that you know where your wines came from and how they’ve been stored when you plan to resell or bring them to auction. For high-end investors, companies such as Bordeaux Wine Bank play a vital role in their strategy.

—

Finally, there is the PR factor. This isn’t so much a rule, but a helpful suggestion. Considering most investors don’t have the opportunity to try all of the wines they invest in, they look to sources to confirm quality. As much as many people don’t want to admit, wine critic Robert Parker is the only voice that carries any cache in the wine investment market, so pay attention. When “The Emperor” speaks, investors listen. This is especially true when he reassesses a previous rating, it can cause a great surge or dive in a wine’s value.

These basic rules should serve as a good starting point in creating an appreciating investment cellar. Remember, these are rules for investing in wine, which is completely different from collecting wine for your personal enjoyment.

The keys to investing in wine, as with investing in anything else: appreciate the risks, have a well thought out plan, reduce your margins where possible (i.e. having a good relationship with a reputable wine shop), adhere to that plan with strict discipline and finally, revisit that plan regularly. Remember that the wine market is similar to the stock market in that it’s ever evolving, so your active participation is a must in order to be successful. Also remember that there’s one significant difference, wine tastes so much better than a stock!

The Wine World: Winning & Losing (Volume 8)

There are many things to consider when beginning a wine collection

I figure it’s been enough time since I last spoke about wine collecting/auctions, that I should bring it back to what I find an interesting paradigm. So for this installment of The Wine World: WINNING and LOSING we’ll be focusing on factors driving today’s collectibles and tomorrows prized bottles.  

Why look at wine in this manner? Well, given the state of World economics, the fact that wine is doing so well truly speaks to its worth as not only one of our favorite libations, but also as a potential asset.* The following are a few of my viewpoints on recent events/topics found in the news.

WINNING

2011 Napa Valley Wine Auction – Sticking true to what makes Napa a great wine region, the auction raised an additional $7.3 million for Napa Valley charities. Year over year this is a wonderful event that has raised over $100 million for charity since its inception three decades ago. The pleasant thing about this auction, it’s not all about which billionaire will walk away with a museum piece to show off to his buddies. The most saught after lots here are typically a package that showcases Napa in a truly unique way for the winning bidder. Now sure, this is still a playground for the rich and they still get to show off to their friends; however there is a bit more substance and romanticism to this auction. On top of that, it’s for charity!

Wine Cellars and Real Estate – This article is almost painfully obvious; however I decided to include it because more people should consider this, especially if they love wine and plan on building a middle to high end houses, or plan on remodeling their kitchen. With the increased interest in wine here in the States, more and more people have started their own consumption cellars. Eventually, their collection grows and can no longer fit in a wine cooler. What then? In my opinion, convert a closet or add-on a wine cellar. I know, this is not the most practical way of doing things; however the cellar will serve three huge functions: proper storage for your wine, a terrific focal point to show off to friends, and a unique component to your house when it comes time to resell. In a world of granite and stainless, this is something to truly set your property apart. I know the article focuses on the English market; however add cellar, even a small one, to your place in Boston, NYC, Miami, LA or Chicago areas and see what happens.

Robert Parker –  Minutes after writing the bit about En Primeurs (see losing) I read this bit about a recent interview with the king of all wine critics, Robert Parker. “Bordeaux is the epicenter of the greatest wines. I hate to see the image damaged by the fact people tend to think it’s too expensive.” He goes on to say, “Bordeaux is focused too much on the wealthy Asian market. Despite the fact thatChina has so many wealthy people, it’s a very dangerous game if they raise prices, because the world economy is very, very fragile.” Now some people blame Parker for the high prices, as his ratings are the only ones that matter to Asia and collectors in general. The higher the Parker score, the more valuable the wine. However the guy is just doing his job, it’s the Bordelais chateau owners that make the pricing decissions and unfortunately for us, they’re making a mistake. What happens if the Chinese economy has a hard landing and Bordeaux has to turn to a consumer base that they’ve effectively isolated?

1806 Chateau Lafite – Back in 1976, David Lyons purchased the bottle at a then world record price of $14,200. Now, you can barely get a case of Lafite for that price in a good vintage, so I’d sayLyons got a hell of a bargain. Gotta love inflation, investors and the emerging Chinese wealth. For the record, the current record for most expensive fermented juice is $232,692 for a bottle of 1869 Chateau Lafite purchased at a Sotheby’s Hong Kong auction in 2010. So investing in certain wines does make sense, because 1500% returns are fun, considering that’s based on a bottle that’s 63 years younger!

LOSING

2010 Bordeaux En Primeurs – It’s pricing season for the 2010 Bordeaux futures, that magical time when you are buying bottles that you won’t receive for another two years. The time of year that Americans wait for, but can’t afford…cause we’re poor. Thanks to the rabid lusting for anything luxury, prices for the futures of wines from the World’s most famous wine region have gone up 10-30% yet again. Last time I checked, the world financial system was still garbage, governments are using a heavy hand in regulating monetary policy and unemployment is still historically high. Considering the low levels of inflation in Europe I’m going to go out on a limb and say their operating expenses haven’t gone up by those same percentages. So, did I miss something? Congrats to the Bordelais for producing another fantastic vintage, yet pricing out even more wine lovers just to capitalize on Asian gluttony. Piss off, I’m done with Bordeaux! Ya’ll are playing with fire.

2011 California Growing Season – I know it is still early; however Mother Nature is toying with the already frail emotions of California’s vintners. If last year was a challenge, then this year may be a struggle. Late frost, and then heavy rains combined with cooler temperatures in May have left many vineyards about 4-6 weeks behind schedule. According to this AP article chronicling the shortcomings of this vintage thus far, the author states, “Now just days before the official start of summer it looks like early spring across California wine country. Buds are just emerging and the fruit is forming far behind schedule.” Unless there is a drastic turnaround of sustained months of warm and dry weather, this could be a rough vintage for vintners, consumers and collectors alike.

*There are risks associated with investing in wine. I highly recommend you read “Investing in wine: 5 steps to success” that I wrote for Smart Tastes, as well as do additional research before considering to do so.

‘Counterfeit Crusader’ smacked down

William Koch seen pictured a bottle of 1921 Château Pétrus that's at the heart of one of his claims against those who he feels have wronged him.

Of all of the topics in the wine world, there are none that intrigue me more than the ‘Counterfeit Crusade’ of billionaire wine collector William Koch. Love him or hate him, he is willing to go to any length to clean up what he believes to be the acrid stench that has infiltrated the wine auction industry. As I’ve written countless times before, I support the vigor in which he attacks this issue; however in some instances he has gone too far.

This past week, Christie’s, one of the two vanguard auction firms in the wine world, the other being Sotheby’s, scored a huge win against Koch. The complaint against them filed by Bill Koch was dismissed by U.S. District Judge Barbara Jones on the grounds that although Koch was financial impacted by Christie’s ‘misrepresentations,” she concluded that Koch knew the bottle ‘was counterfeit prior to making the purchase” according to a Bloomberg report. Jones further elaborated saying “here the cause of his injuries was not Christie’s misleading, but the plaintiff’s desire to gather evidence against Christie’s.”

So why would Koch seek to defame or undermine Christie’s knowingly? This all stems back to the 1980s when controversial German collector/wine hunter/shady dude Hardy Rodenstock brought to auction bottles of the polarizing “Th.J.” bottles of Lafite, which were purported to be owned by Thomas Jefferson. These likely counterfeit bottles, along with some other greats consigned by various collectors throughout the ‘80s, ‘90s and early ’00s, were the focus of Koch’s numerous, sometimes vindictive lawsuits. The reason that Christie’s comes under such scrutiny is due to the presence of the head of their wine division, the legendary Michael Broadbent. Koch sees Broadbent’s presence and supposed relationship with Rodenstock during that period as further proof that there had to be collusion between Christie’s and Rodenstock. In his mind it seems as if Koch is thinking, ‘how could Broadbent not know they were counterfeit?’

Considering Koch’s massive disposable wealth and ego, he’s been quick to lash out against any implied wrongdoings, although very few have come to resolution in his favor. Personally, I hold the opinion that Broadbent didn’t knowingly auction counterfeit wines; however there is the potential that he got swept up in the excitement of Jeffersonian euphoria, thus overlooking some potential “red flags”. But that’s only my opinion.

When it comes down to it, there are certainly counterfeit bottles out there and the fact that they’re being positioned as legit here and there’s a troublesome fact. This is why I continue to support Koch’s Crusade; however, as more judges rule against him and he continuously screams “victim”, I feel that he’ll continue to lose face and clout moving forward. In the end, he knew that some of the bottles had questionable pasts and still continued to pursue them. All he is doing with these shenanigans is undermining the noble part of his pursuit.

In the end, wineries and auction houses must continue to attack this issue head on, which they’ve been doing for the past half-decade with vigor. This is the legacy that I hope comes out of Koch’s Crusade as deep down you can tell he views wine as a purists’ pursuit. It’s an appreciation of land, nature, fruit, man and ingenuity’s ability to create something breathtaking; hopefully the resolve is there to defend Wine’s honor.  

Other article’s I’ve written regarding Koch’s Crusdade against counterfeits…

WS.COM: Christie’s Is Counterfeit Crusader’s Biggest Target

Bill Koch vs Everybody: It is time to hear the other side of things

Counterfeit Wine and Misinformation: Two wrongs don’t make a right

Word of the Day: Provenance

This OWC of 2000 Petrus is an example of Five Star Provenance (Photo: BordeauxWinebank.com)

Webster’s Dictionary defines provenance as:

1. Origin, source
2. The history of ownership of a valued object, work of art or literature.

Provenance is also the most important word in the world of wine collecting. For years, there have been exciting bottles to emerge on the auction scene. From rare bottles of pre-Phylloxera Château Lafite and Château Latour to the much fabled (and controversial) ‘Jefferson Bottles’ to the even ‘newer’ 1920s Petrus, there seems to be an intriguing supply of mythic unearthings. There’s one problem that these wine pose, unknown or undocumented provenance.

As many wine enthusiasts are aware, the problem of unknown or questionable provenance has caused an influx of skepticism and lawsuits, most notably by billionaire William Koch. After Koch purchased bottles with questionable origins, he undertook a crusade against those who he felt wronged him. This crusade is two-parts noble, one-part unbridled vengeance (in my opinion); however it has led to collectors being far more careful about the wines they purchase at auction. With the days of the high-flying, reckless spending orgy that was the 1990s now long behind us, collectors are more astute, or at least more protective of the fortunes they’re doling out for wine.

Enter the 2011 Hong Kong auction season. Thus far this year, the Hong Kong market has doled out cash at an alarming rate for fine wines with nearly $35 million being sold at three auctions alone. Although this hyper-inflationary trend is alarming and befuddling, it also revealed a refreshing side effect of the Koch Crusade. At the Sotheby’s January 23^rd auction, a consignment from the Bordeaux Winebank triggered record-breaking bids totaling $1.9 million. Why is this significant? Bordeaux Winebank is a consortium whose sole focus is on what they dub Five Star Provenance. Every lot from this firm has to meet the following strict guidelines:

* All wines are sold exclusively in original wooden case (OWC).
* All wines must have documented “ex château” provenance.
* All cases must remain in professional storage in Bordeaux since bottling.
* Professional storage facilities must be temperature and humidity controlled and monitored 24/7.
* Annual certification of procedures by a qualified auditor.

Yup, that’s five stars if you are doing the math and it adds up to no questions as to the authenticity of the wines they bring to the market. This is significant, especially in an era of increased awareness and skepticism towards rare or high-valued wines. Provenance is a concept that should not be lost on smaller collectors either. Demand that you know where and how your wines came from and ended up in your cellar, especially if you plan to resell or bring to auction at some point in the future.

One can only hope that the trend towards demanding impeccable provenance will continue to gain momentum to the point at which we can once-and-for-all bid farewell to the dishonest elements that have infiltrated history’s greatest drink.

Smart Tastes: Why age wine?

For a long time I’ve sang the praises of aged wine. Over the course of the past year I’ve had the opportunity to truly witness what proper aging can do; taking a wine that’s brooding, forceful and fruit-forward in youth and watching/tasting it mature into a strong yet dignified wine with complex layers of flavor with age.

My friend and Master Sommelier candidate Michael Meagher wrote the terrific article, Why age wine?,  for Smart Tastes that explains why you should consider aging some better bottles for future special occasions!

If you have any question regarding this topic or any others regarding wine & spirits, feel free to ask (either here or on Smart Tastes), we’re always happy to answer!

Is investing in wine “cuckoo”?

Lord Andrew Lloyd Webber (photo - WSJ.com)

A couple months back I began reading up on the legendary cellar of Lord Andrew Lloyd Webber. Yes, the same Andrew Lloyd Webber (A.L.W.) that wrote Cats, Phantom of the Opera (a personal favorite), Evita and countless other plays is one of the most significant collectors of French wine in the world. During this time there have been many articles telling of the background of his passion for wine and how the Chinese cannot wait for the Sotheby’s auction that will parcel off of a portion of his collection. I’ve found all of these articles to be quite interesting; however there was one thing said in a Wall Street Journal interview that put me off.

You see, there are many collectors out there who have this overly romanticized vision of wine. They collect it in droves, sharing some, enjoying others, and yet holding back even more for the right moment. But what is that moment? For many, it’s that point when they realize that what they are sitting on is too large of a collection, and simply put, a treasure. They usually realize this when Sotheby’s, Christie’s, Zachys or any of the other numerous auction have tirelessly pursued them to sell the lot, pocketing a handsome reward for their “passion”.

There’s absolutely nothing wrong with this practice, in fact the amount of hoarding that is done by wine collectors only benefits generations down the road. Without their need to have a massive collection containing many extremely rare bottles, the world would be without them forever. My issue comes when you have collectors that look at wine as an investment as “cuckoo” as A.L.W. so gracefully put it. He went on to say, “to think of something that is essentially a living thing purely as an investment commodity is, to somebody that is a wine lover such as myself, a complete anathema. Even when I was buying the 2000 vintage nobody could have foreseen how fantastically expensive wine has become.”

If it isn't about the money, then why not share with your friends instead of a no-name Asian collector? (photo: WSJ.com)

The amount of pretension in this statement is almost insulting, as if he’s above being considered an investor in wine. This is especially the case when it comes just a week before he completed the auction of that portion of his collection for $5.6 Million this past weekend. Considering many of these wines were purchased en primeur (futures offering prior to release) with the expectation that the value of the wines will be higher when issued, I feel that to look upon the potential of wine investing as cuckoo, is – well, cuckoo! If done correctly, wine, just like a stock or real estate, has proven to be an investment worth considering. And to add to his comment, “nobody could have foreseen how fantastically expensive wine has become” regarding the 2000 Bordeaux, plenty of people foresaw the potential of that vintage and scooped it up!

I don’t question A.L.W.’s love of wine in the slightest, it’s quite evident that he does. What I do question is his comment, and the many like it that I’ve come across in reading interviews of other collectors over the years. If the many collectors out there truly felt this way, then they’d be the ones to open their bottles of 1982 Château Pétrus or 1990 Domaine de la Romanée Conti La Tâche for their friends rather than allowing a no-name Chinese or Taiwanese millionaire bid it up. So, let’s be honest, wine is a terrific investment when you have the means and knowledge to invest properly, anyone who tells you otherwise is cuckoo!