KEY POINTS:
Wine lovers had a great year in 2006. First, we found out that resveratrol, a key ingredient in wine, may prevent ageing. Later, a study suggested that it may help prevent obesity and diabetes as well.
But now the news gets even better. If you are heading out
to the store to buy a case of wine for a holiday party this week, you might want to have a look at the latest economic literature before you depart. If you do, you might buy a few extra cases.
Wine, it turns out, may be more fun to invest in than to drink. The only thing better would be the discovery that it induces kids to eat their vegetables.
A paper by economists Lee Sanning, Sherrill Shaffer and Jo Marie Sharratt at the University of Wyoming investigated the returns that wine investors get. They collected "hammer price" data for auction results of red Bordeaux vintages ranging from 1893 to 1998. They studied auctions that took place between 1996 and 2003, and estimated risk-adjusted returns for individual wines.
The results were stunning. The holy grail for investors is an asset that delivers healthy annual returns, but doesn't have a great deal of risk.
The authors found that wine investments have almost no correlation with the market as a whole, yet have high returns.
The average annual return for those who invested in Bordeaux was between 7.5 per cent and 9.5 per cent higher than would have been predicted by factors that account for risk.
This means fine wine, over that period at least, was about as good an investment as you could find.
Why? Economic reasoning suggests a number of answers. First, fine wine is clearly a luxury item. As societies get wealthier, citizens can be expected to consume more. Since 1996, the world economy has grown considerably, and this has driven up demand and prices.
Second, the finest wines have a scarcity value, which can snowball over time. Think of it this way: If you get a big pay rise this year, you might celebrate with a fine Haut-Brion. If lots of people get pay rises, then they will celebrate in the same way, and suddenly there is very little remaining Haut-Brion, and prices go through the roof.
This pattern is confirmed by data reported in the study, which details that the excess returns are largest for the wines that have always been considered investment-grade splurges. The champion vintage was found to be 1966 Haut-Brion, which posted an average monthly return of about 7.5 per cent during their sample period, but 75 wines were found to have average monthly returns in excess of 1 per cent per month.
So should you invest in wine?
Maybe. A key problem with the study is that the biggest risk facing home wine collectors was excluded. After all, the authors' methods analysed the performance of buy-and-hold wine strategies.
But it is one thing to buy a fine wine and cellar it with the intention of auctioning it off later. It's another thing to successfully walk by it year after year without drinking it.
Behavioural economics teaches us that individuals may buy with the intent not to consume, but then have a hard time maintaining discipline. That lack of discipline certainly explains the high returns. Enough people have been uncorking the best vintages that their scarcity value has skyrocketed.
That said, it can't hurt to stock up.
- BLOOMBERG
