Tuesday, 20 March 2012

Wine Investment - The Complete Novice Way - (Nearly) 2 Years On

*Disclaimer* - you really should seek sound, professional financial advice before investing. Investments can go down as well as up. This is not a recommendation to invest all that you have in wine, it is purely our story!

Hello All!

A lot has happened since my last update in July 2011, which was 1 year after our initial foray into the world of wine investment; of course as complete novices! Given that the Bank of England base rate was, and still is, a paltry 0.5%, our savings (earmarked for a house deposit) were not growing particularly well. Wine seemed to be doing very well and the "Vintage of a lifetime" Bordeaux 2009 wines were about to be released, so we took a gamble. Back in July, we had notched up a nifty 20% return on investment and things were looking pretty rosy until a major market correction would cast a rather gloomy shadow and wipe out most of our growth...

Little did we know that the prices our back vintage wines reached that July (Chateau Mouton Rothschild 2002 and Chateau Pontet Canet 2003 reaching £4100 a case, and £1050 a case respectively) would signal a peak (barring a few wobbles) before the Fine Wine market would plummet and lose about 25% of its value. In January of this year, the price of Mouton 2002 had dropped back almost to the initial purchase price, at around £3000 a case, but has since rallied to £3400, while the Pontet Canet 03 fell back to, and remains at, £850 a case. So, still a positive growth you might say? Yes, but these are purchase prices from the merchants. Typically, the price you get on selling is 10-20% less which gives very little return! Put it this way; the 6% fixed rate bond we were trying to beat looked particularly attractive at this point!

Such a shame that we were not running a short term investment strategy along the lines of setting trigger points for selling, moving them up after every price rise. If we'd have timed it right we could have sold at the peak, and re-bought at the bottom, cashing in about £1200 in the process! However, we are of course novice investors, and we view it (as we were told to) as a medium to long-term investment. Still, it would have been nice to catch that peak! Hey ho.

So, why did the correction happen? There are many theories but I think the most widely accepted is that the demand from China was overestimated, supply was over-egged and inevitably the Chinese, barring a few Billionaires, decided that they would not continue to pay skyrocketing prices for Bordeaux. It was a bubble, and it inevitably burst. 

But, just like any investment and asset class, there are downs and ups. And more recently there has been a little upside, thanks to (God bless him!); Mr Robert Parker! After sitting at pretty much a few percent above their initial release prices for nearly two years, the 2009 Bordeauxs are now in bottle and have been re-scored by Bob. Good old Bob! What I said in my initial post now almost seems prophetic, although I was just spouting what I'd read:

"There might be some positive price movement in the summer of 2012, when the wines actually get bottled and shipped out to our merchants (i.e. they actually become physically-available entities rather than “futures”). Also, as the years go on, Robert Parker will re-score the wines from time to time. If the points go up the price might go up." and "100-point Parker-rated wines are almost sure-fire winners!"

Thanks to Bob, the purchase price of our 2009 Pontet Canet went from £1300 a case to £1800 almost overnight, as did the Montrose 2009 from £1500 to £2500, due to them both receiving perfect 100-point scores! We purchased these for £1150 and £1350 respectively so a nice little increase, especially for the Montrose, which I bought on the advice of my advisor at Bordeaux Index (who I must remember to thank) while impatiently waiting for Leoville Poyferre to be released. Sage advice!

Upwards also went our Lynch Bages 2009, albeit to a more modest extent, from £1250 to £1400, thanks to a 98-point rating and its highest since 1990 (which now trades at £2500) so could be a good one for the long haul.This we bought for £1050. 

So, the total value of the fund now is something approaching £10,900 but less say, 15% commission, so more like £9250. Which on an investment of about £7800 is about 18.5% return over 2 years. A little better than that 6% Bond, but not quite as good as say, Gold at 70%, or Brent Crude at 60%, over the last two years then? No, not quite. Oh well, you can't drink Gold and you'd be pretty ill if you drank your oil!

Another downside is that I do not think there will be any significant movement now for a good while. Nobody's really going to drink all their 2009s just yet (but if you do have some, please do...<wink> ) so the supply isn't exactly going to be dwindling any time soon. Unless the market miraculously picks up overnight, I don't think we can expect to see much further return, other than a gradual, market-linked rise. The saving grace might be the back vintages, which could, as before, rise on the back of the very high prices now demanded for the 2009s and 2010s. 

So the question remains; do we change tack and adopt a short-term strategy, maximising our short term gains on the back of these new high scores, or stick with the traditional approach and see it through for the long-term? Gold and oil look great in hindsight, and I actually toyed with idea of stocks and commodities before deciding on wine. Damn it. Oh well, time will tell... If you're taking the investment plunge, good luck to you!

...Oh and if you're reading this Bob, a 100-point Pontet Canet 2010 will do nicely too. And a crystal ball if you have one. Thanks.

As usual, speak to you soon,