Wine Investment for Portfolio Diversification: How collecting fine wines can yield greater returns than stocks and bonds (July 13, 2006)
by Dean Tudor
Wine Investment for Portfolio Diversification: How collecting fine wines can yield greater returns than stocks and bonds (Wine Appreciation Guild, 2005, 179 pages, ISBN 1-891267-84-1, $58 hard covers) is by Mahesh Kumar, MBA, currently teaching finance at Mount Royal College in Calgary. This is the Canadian connection. He is also working on a second book, Collecting Wine for Pleasure and Investment.
The major problem with this current book being reviewed is that everybody knows wine increases in value and that greater yields are possible. That has been anecdotally known for some time: that fine wine has a higher expected return relative to its overall contribution of risk. Wine investments are not as volatile. Kumar proves it using Markowitz Theory, but so what?
The resulting technical book has a U.S. and U.K. investor focus. Kumar points out, quite rightly, that the stock market dive of 2000/2002 reminded all of us of the importance of portfolio diversification. Don't put your money into only one thing, and that includes wine. Don't churn, because you will want to avoid sales premiums at auctions. Invest for the long term, as people did with gold in the 1970s and real estate in the 1980s.
He has developed a "Fine Wine 50 Index" of 10 red Bordeaux from different vintages. There are 101 pages of text, followed by appendices of thirty tables of returns and ratios. Many people (including wine writers) react negatively to the thought of wine investments, claiming wine is hedonistic pleasure and not crass commercial marketplace material. Personally, I have used the Broadbent approach (see below) but I won't be selling my wines; I am now enjoying my investments, such as a Cote Rotie 1985 with my dinner tonight.
The book concludes with end notes, bibliographies, and internet sites.
Bottom line: Holding fine wine as part of a diversified portfolio of traditional financial assets (equities and bonds) enhances expected returns.
Audience and level of use: It should appeal more to investors and speculators, rather than to curious fine wine lovers.
Some interesting or unusual facts: From Michael Broadbent "My advice is to buy the wines you particularly like, of good vintages only and with your own money and look forward to enjoying them when mature. With luck and good management you might have the additional benefit of reselling the stock surplus of your drinking requirements at a price that reflects its enhanced quality and diminished availability."
What I don't like about this book: It has limited value to Canadians unless they go for off-shore storage and sales. There is no guarantee that the LCBO will continue to have sales auctions twenty years from now, and you'll have to pay transportation and "administrative" taxes to government.
What I do like about this book: Useful for estate planning and valuation. He has a good discussion on "alternative investments" (fine wine, fine art, antiques). Broadbent's introduction furnishes an engaging history of Christie's Fine Wine Auctions.
Quality/Price Ratio: To convince non-wine lovers, 89.