With Oktoberfest and its celebration of alcohol around the corner, we are in the mood to find out what else this liquid of euphoria can give us besides just that. Over the years, there has been much discussion on investing in alcohol that has been fermented for a long time due to the direct relationship where the longer it has been aged, the higher its value would be.
There is a saying that goes ‘the booze industry survives in a recession because people drink even when they’re broke”. Alcohol, being one of the common vices around, are less affected by the cyclical downturns of the economy and provides a constant stream of dividends during market slumps. However even with such an apparently steady commodity like alcohol, such generalisations would have to be verified before capitalising on this apparently lucrative investment. Here are some classifications of alcohol and its respective factors that have to be taken into account before jumping into this venture.
Any alcohol aficionado knows that the longer whisky has aged, the more valuable the drink is. However as the saying goes, “too much of a good thing is a bad thing” and this is also applicable to the aging duration of whisky.
This generalisation impels spirit producers and bartenders to profit from this belief though. While whiskey and brandy that are barrel-aged for a considerable amount of time are quite valuable as opposed to those that are not aged in a barrel, the correlation between age and quality in a barrel would increase only until a certain point (usually 20 years) before the quality would start to plateau or even decline.
Besides aging, other factors can include the history of the barrel and the climate that the whisky is stored in. For example, Bourbon is aged in brand-new barrels in relatively dry conditions while scotch is aged in previously used barrels in a relatively humid climate.
Another factor that may be overlooked by most people is its rarity i.e. whether the whisky is limited edition or from a distillery that is still operating. If a whisky is from a distillery that is no longer operating or a “silent distillery”, its value would definitely be higher. E.g. Port Ellen, a distillery that closed its doors in 1983. Port Ellen’s ‘ First Release’ bottles were originally priced under £100 (S$157) in 2001 but is now going for £2,000 (S$3,136) per bottle!
An electronic alternative to the traditional auctions (e.g. Sotheby’s or Bonhams) to gauge demand for such premium whiskeys, could be the Rare Whisky 101 Investors Index compiled by Rare Whisky 101 that shows the distilleries which are performing the best as an investment. This index is based on UK auction data and plots the percentage change in the value of all bottles from the respective distilleries. Another index compiled by the same site, the Rare Whiskey Icon 100 Index, which tracks 100 iconic collector’s bottles that are highly sought after and traded on a regular basis in the UK, has seen a 28.98% increase during the past year as of 31st August 2016.
Successful investors like Mahesh Patel, a whisky collector from Atlanta, Georgia, transformed his love for drinks into financial gains. In the beginning, Patel started investing US$2 million in about 5000 bottles over the years but they are currently valued at approximately US$6 million. His success should be taken with a pinch of salt because not everyone can afford to start off with such high capital and if the value of whisky were to fall for a particular reason, not everyone can afford to absorb those losses.
Like whisky, there are some wine varieties that do not age well. For those that do though, most experts would suggest setting aside $10,000 or more that would help you to make a decent living of fine-wine investments.
Paul Bowker who is the former head of wine at Christie’s auctioneers based in London commented that by picking the right wine could help you to see returns of 30% a year. While the capital set aside on wine can be quite a hefty sum, the rule of investment that one should not use money that is necessary for day to day living to invest in this type of luxury goods, still applies. However, even if these returns for your chosen bottle are not realised, don’t fret because you can just drink away your negative equity.
Due to the pricey nature of this investment, one should consider reading reviews from wine critics such as Robert Parker, a leading U.S wine critic, before choosing the right bottle. He rates wines out of 100 so the higher the score, the higher the quality of wine.
These ratings are useful and allows you to know the quality of wine you are choosing and for you to decide whether that quality is within your budget.
For newbies, it is recommended that your first investment be Bordeaux because that region produces more wine than other regions, making it a sustainable market.
Unfortunately, the sustainability of wine is still unable to fully insulate it from the ups and downs of the economic cycle. When the effect of the Asian Financial Crisis 1998 hit the stock markets a month later, wine prices crashed resulting in many wines losing 20-40% of their value. According to Livex, the fine wine exchange, the index fell by 3.7% from 31st August to 30th September 2008. A statement from Max Lollondrolle of Berry Bros and Rudd that is based in UK stated that even bordeaux wine was hit with first growths losing up to 25% over the past few months before October 2008. Perhaps diversifying your portfolio or cellar would be a good idea.
Spirits that don’t usually age
Spirits such as vodka are not meant to be aged in a wooden barrel because then it would not be considered vodka in the first place. In fact just holding a bottle of vodka over the years would not add to its quality like barrel-aged whisky and hence the value (and taste) of a bottled vodka held for a long period of time would not increase exponentially. However, currently the trend of cask-aged vodka or starka, that was popularised 500 years ago in Eastern Europe which involves the aging of vodka in wood barrels, is starting to catch on. As with aging whiskey, aging vodka in a wood barrel is to add complex flavours and richness into the liquor. While this may be just a novelty now, it may just become a valuable commodity in the future as more people appreciate this unique blend.