Dan's Papers - July 4, 2008 - Investing in Liquid Assets

Investing in Liquid Assets is not the kind of book about wine tasting where you might pick up goofy comments like, "It's a little young, but I'm amused at its audacity." Instead, it's a serious reference about selecting wines that will compliment your investment portfolio. If you have ever thought of taking the plunge, you should keep a copy of this well-written book close at hand.

Author David Sokolin is a third-generation wine merchant who runs a wine sales and storage facility in Bridgehampton. He says, "While most of my friends were taking their first sip of beer from Dad's mug, I was sampling my father's 1961 Petrus...You may be surprised to know that returns on IGW (Investment Grade Wines) have dependably outperformed blue-chip stocks over the past 50 years...Fine wines have become very easy to trade on line and you don't even need your own cellar to store them. Despite rising prices, IGW are still among the least expensive, easily tradable, and most profitable investment opportunities around." That "least expensive" remark may be debatable, but potential for profit seems to be very real.

Sokolin explains that the global growth of wealth, especially in Russia, China and Latin America, has spawned an unprecedented interest in wine among investors and consumers. Demand is outstripping supply and most high-quality vineyards have little room for expansion. The LIV-EX 100, an index of the most widely traded fine wines, primarily from Bordeaux, can be found on Bloomberg.com, along with other economic indicators. At the beginning of June 2008, the LIV-EX 100 was up 7.4% for the year - modest compared to other years, but the S&P 500 was down 14.7% in this tough economy.

Sokolin recommends six criteria for choosing wines as an asset. They should have scores of 90 to 100 from one of four reviewers, with Robert Parker being the most influential. They should be great vintage years. They should age well over a long period of time. They should have good pedigree from estates with the most cachet, and trading histories for back-vintage wines (anything older than the current year) should be trending up. The New York Times Book Review recently covered three books about wine and called Thomas Jefferson "America's first famous wine geek." Jefferson's records from 1788 reveal that "he ordered 125 bottles of Chateau Haut-Brion for Monticello." In his book, Sokolin lists today's Haut Brion as one of 11, first-tier Bordeaux IGW. How's that for staying power?

The book predicts prices five and 10 years out for three tiers of Bordeaux wines. In fact, he does the same for every IGW wine region. Super second-tier wines, he says, represent good potential for investors because there's room for significant appreciation as they get pulled along by soaring first-tier wines. Storage of an IGW is critical, and it may be wise to use a professional facility that runs $15 to $20 yearly per case, plus up to two percent of the collection value for insurance.

Rhone wines also have good investment possibilities since they trade at more affordable prices, and Robert Parker is particularly fond of them. Champagne, says Sokolin, is a tricky market that should be left to connoisseurs. Most Italian wines "don't age very well" and you must stick with the 97 to 100-point Super Tuscans and Piedmonts. The downside of high-scoring Australian wines is their high entry prices and inability to age long-term.

Winemaking technologies developed in California are now used across France, Italy and Spain, yet California wines make up less than one percent of IGW, and Sokolin isn't bullish about them. He says they tend to be expensive cult-wines and are tough to buy early unless you're able to get on elite mailing lists.

In his "Through The Grapevine" column in the May 23 issue of Dan's Papers, Christopher S. Miller agreed with Sokolin in endorsing wine over stocks as an investment, and said that unlike equities, IGW wines get consumed, supply is thus lowered and the value of the wine goes up. And both wine writers say that when buying Bordeaux from first and second-growth Chateaux, "the sooner the wines are bought, the better the price" - and the greater the appreciation.