Burgundy may not be such a great investment after all

The financial media has claimed that investing in fine wine yields better returns than other asset classes. Andrew Chalk looks at one of these claims and finds it's full of holes.

Auxerre, Burgundy/Photo by michael guibert on Unsplash
Auxerre, Burgundy/Photo by michael guibert on Unsplash

The Economist recently claimed that “Burgundy Wine Investors Have Beaten the Stock Market”. The article contains a dynamic graph that plots Burgundy price data from Winebid and the S&P 500 over the period 2003-2018. The red Burgundy wine price starts at the same base value as the S&P 500 (100 in 2003) and increases to 600 by the end of 2018. The S&P 500 (dividends included) however is just below 400 by the end of 2018. 

Both investors did well, but it looks like a slam dunk for red Burgundy. So, go out and sell your stocks in S&P 500 companies and buy red Burgundy, right?

Not so fast. There are six reasons why the data and the interpretation are wrong. 

First, this result relies very much on timing the market. If you bought red Burgundy any time between December 12th 2008 and April 20th 2013 then it would have underperformed the S&P 500 through December 2018. That is a long period of underperformance that essentially shows that, at a minimum, the return for Burgundy is a timing trick.

Second, the wine data is based on Winebid sale prices and does not include transaction costs, which include the commission that’s paid to the auctioneer at the time of purchase, known as the buyer’s premium. This is 17%. That means that you walk out of the auction room with a return of minus 17%. 

Anyone who has traded stocks knows that a stock that has fallen by 50% must increase by 100% just to return to its original price, so an instant minus 17% return is a massive hit that requires a return of more than 20% just to stay even.

Third, the analysis ignores the storage costs of the wine, which can be significant. A study by Burton Malkiel and J.P. Jacobsen found that storage costs wiped out returns from the top Parker-rated 1982 Bordeaux returns over the period 1986-96. Storage costs apply to each bottle every year. The storage costs of stocks, by contrast, are negligible.

Then there are insurance costs. Fine wine only ages correctly if it is stored in a temperature-controlled environment. Estimates vary, but a 2010 study by Robinson estimated £10 to £20 per dozen bottles per year.   

Another factor that must be considered is spoilage: Some wine bottles just don’t make it due to things that happened before the wine was purchased by the investor. These costs may be recoverable by returning the spoiled product, but the conservative investor should assume that they are ‘all at risk’. 

Finally, there’s the question of risk. While The Economist claims that the standard deviation of its wine price index is lower than that of the S&P 500, the market for fine wine literally dried up (pun intended) in the 2008 Great Recession. How risky is an asset that is illiquid at the very time the investor might need liquidity? Risk measures for the S&P 500, on the other hand, are readily available and understood. 

Many people love the liquid known as wine. It is naïve, however, to use it as a source of liquidity.

Andrew Chalk

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