Can a Liquid Be an Asset?

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S1: This ad free podcast is part of your slate plus membership.

S2: LOWE Welcome to the wine edition of our special swag series.

S1: Slate Money. This is where I, Felix Salmon of axios, go through various asset classes in vestibules and collectibles that don’t generate any kind of cash flow. But people seemingly consider investments anyway. We’ve talked about art. We’ve talked about bitcoin. We’ve talked about luxury goods. And today we have Dan Rosenheck from The Economist. How are you then? Great. Thank you very much. And you are going to talk about the most liquid asset of all, which is wine.

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S3: I mean, it’s literally liquid and it sure is.

S1: And you are the very first person in the world to ever make that plan. But we’re going to talk a bit about the liquidity of the wine world. We’re going to talk about which wines are the most liquid, not in physical sense, but in terms of being able to sell them easily. We’re going to talk about which wines count as investment grade, how much it will cost to buy such a wine, and whether the vast improvement in wine quality over the past couple of decades has changed that calculus. That’s all. All of that coming up on Slate Money Swag. So then I hear that people value wine cellars.

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S3: It’s a thing that they like ensured for certain amounts and they’re worth lots of money and they’re bought and sold. Is it actually true to call wine an asset class?

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S4: It’s certainly an object that people value and that some people are willing to exchange large amounts of currency for. So in that sense, yes, any belonging can be an asset.

S5: In general, I think when you talk about asset classes, you’re referring to the idea that they will something belonging to an asset class at least has a chance to gain value in real terms over time. And then you can then compare those those profit to those returns, to the performance of other asset classes.

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S6: And there are definitely people who try to make money by investing in wine, hoping to sell it at a later point in time for more than they paid for it.

S3: So who who are these people? I mean, have you met them?

S4: I have met people who work for investment funds that take money from investors and plow it into wine cellars that they then hope to sell for a later date. That’s amazing. And I have lots of hobbyist friends, you know, who will sort of speculatively try to pick up wines that they hope to flip. But I don’t think they’re generally putting their retirement savings into that asset class. Right.

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S3: I mean, it’s it’s wine. I mean, let’s be serious about it. So, like, I don’t think anyone’s expecting people to put like half of the net worth into wine. But you definitely know people both institutionally and personally who buy wine without intending to drink it.

S5: Yes, absolutely. I think that’s fairly common. I think if you are a personally a wine collector and this is your hobby and you feel like you’re plugged in and you talk to your friends and you follow them some Elliott on Instagram and you you’re on, you know, Internet discussion boards like wine berserkers. And I think there’s definitely a lot of overlap between people who occupy that world and people who convince themselves, rightly or wrongly, that they’re smarter than the next guy. So I think there’s a lot of people who are hobbyists who sort of dabble in this and think, oh, well, I like this wine. I think it’s a good value. Therefore, it’s probably undervalued. Therefore, why don’t I just scoop up a case or two of it and maybe, you know, I’ll drink a few bottles and then, you know, the profits and the remainder will pay for my pay for my drinking and that.

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S3: And then some that I get I get it. I get to drink for free. OK, now that’s the values. Now you’ve piqued my interest. So tell me, has it ever worked out that way and bragged if they give me walk me through how this might all work in practice, how where would I buy this wine? And then once it had gone up in value, where would I sell it?

S4: So in general, the two main I guess there are three main channels for buying investment grade wines, such as if that term has any meaning would be established to auction houses. So above all, places like either generalists like Sothebys or industry specific shops like Acro Merrill Condit or Hart Davis Hart have regular auctions where they, you know, sell millions of dollars at a time of highly collectible wine.

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S3: And that will definitely be a place where I could sell my wine having bought it.

S4: It is in dispute. A place where you could attempt to sell your wine having bought it. They generally won’t take a consignment that they don’t think has a good chance of selling, and of course they will charge both the buyer and the seller a fee for the privilege of their matchmaking. But yes, that is extremely common. You can also just straight up buy from retail and certainly in the case of some of the most heavily traded and if you’ll excuse the pun, liquid and collectible wine regions.

S6: So above all, Bordeaux and now increasingly Burgundy. A lot of these wines are well, certainly in the case of Bordeaux. They’re sold before they’re even bottled through what’s called the on Palmyra’s system. The wines are tasted in barrel and then individual buyers, the middlemen called negotiations, will actually put up the money now to receive the wine. When and only when it is bottle, which is usually months or years later. And then it typically, particularly because Bordeaux takes a long time before it’s ready to drink. It will then typically sit in seven refrigerated warehouse for a decade or two or more. And then the buyer, the very patient buyer, will hope that it will magically be worth vastly more than he or she paid for it and definitely for things like collectible Bordeaux. Over the past 20 years, that has absolutely been the case. There’s no guarantee that it will continue to be so.

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S3: So there are two things going on here. I’m assuming. One is the wine have become all that fine wine, investment grade wine. And we can we can get to what that means in a minute. But this kind of wine has become more desirable and more valuable over the past couple decades. And then the other thing, which is sort of regardless of whether wine is an Afrique laughs it’s become more desirable is this idea that wine improves with age and just by dint of being aged and having gotten older. The wine is going to be better 20 years later than it was when it was new and therefore it is going to be worth more. And those two things kind of work in conjunction with each other. Is that fair enough to.

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S4: First of all, it is definitely true that somewhere between many and most collectable wines do wind up tasting better as they get older for a period of time. Eventually it all turns to vinegar, and if you keep it for 200 years, it will be worthless except as a museum piece. Now you’ll find people who want to pay for museum pieces, but I wouldn’t recommend it. Certainly with something like the most collectible bordellos, you probably want to wait 15 or 20 years before you would even consider popping the cork. That said, that improvement in quality of the experience for the drinker is completely priced in from the start. The idea that you can buy your case of Le Ft. Rothchild now and it will be worth more later because it’s now ready to drink, is just not how the market works. In fact, there is often much better value to be found in sort of neglected, older, ready to drink vintages than there is in recent ones. Typically, the recent vintages will sell for prices per bottle that are at the very least comparable to those event of good vintages from 30 years older that are actually ready to drink. So if you’re buying young vintages, you know, in the hope that they’ll appreciate because they get better.

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S6: Sadly, you’re not the only person that knows that wine gets better with age, at least for a time. And that’s all priced in.

S3: It is amazing. So like, if I’m just a drinker, if I’m not an investor, then I should basically never buy young. Why? I should just buy old wine because it costs the same and it tastes better.

S4: Depends on the region. I would say region and grape types certainly for wines that have that shape of an aging curve where first they get better, then they plateau for a while, then they get worse. That is true for my personal collection. I don’t think I own any Bordeaux that is younger than the year 2000. And the median age of the Bordeaux or the California cabernet is in my collection is probably late 70s, early 80s.

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S3: That said, you normally do buy them when they’re like 20 years old or older. Absolutely right. I mean. I mean, just because you have the value and just to be clear, when you’re buying older wine. The potential for price appreciation goes down, because if you wait another 20 years from the wine could actually get worse rather than better and become less desirable. Is that why people are buying the younger wines just because they have more time to wait for them to appreciate in value?

S4: I think a lot of it has to do with provenance. When you buy old wine on the secondary market, you don’t know where it’s been and a lot of wine is really badly stored. And that makes a huge difference. So the only way to ensure. That your wine will reach the greatest heights that it could theoretically obtain. Is to buy yourself on release. Store it and wait. Other than that, you are at the mercy of the market and the kinds of, you know, vaguely re-assuring labels you would see in auction catalogues like removed from a temperature controlled seller mean absolutely nothing. And definitely I mean, I. For my personal collection and drinking habits, I mostly buy mature wines and I have a decent size heat damage and failure rate. But I’m you know, I just bake that into the cost of doing business.

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S5: And when I get a wine that that has been well stored and tastes great, I feel like I’ve gotten more than I paid for and that, you know, cancels out or, you know, offsets the times when I buy a total debt.

S3: Have you ever sold anyone? I have.

S4: I haven’t sold wine at auction.

S5: I have sold wine to and through friends. And then I have one friend in particular who owns a wine store. And sometimes I ask him to flip a couple bottles for me and then through online discussion boards. There’s often a very vibrant sort of back and forth buy and sell for where you can make individual transactions. But I personally mainly I buy a drink and if I’m flipping, it’s because I then hope to plow the proceeds back into some other wine that I now want to drink more.

S3: So let’s talk about the cost of selling wine. If I guess if you’re a super active, what did you call them? Wine mazurka, then you can. Yes, find like some other individual and just like meet in a parking lot somewhere and hand over the wine and get Venmo the cash in it. And that’s what I do. The cost is nothing. Whereas if you went to an auction house, they would charge you like 20 percent or something. That’s correct.

S4: The cost free, you know, individual hand to hand sale works great for individual bottles. If you’re trying to move 20 cases, you might have some trouble finding the taker and handling the logistics. Auction houses exist for a reason. There’s a demand for their services. They both match buyers and sellers and they handle all the logistics.

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S3: And yes, they charge sites and they can get like bidding wars going as well. You don’t actually know until the day, but it’s possible a bunch of like two or three bidders will really want some particular lot and it will go for like substantially more than maybe you expected. If that does that happened in the wine world like it does in the art world.

S4: It happens all the time. But it is, of course, difficult to predict, you know, which wines that will you know, which specific lots or wines that will happen with just good that happen for wine. It won’t happen with another. And then, you know, if that happens, that tends to set a new benchmark. And then in short order for that particular wine, the next time it comes up for auction anywhere, everyone will be aware of it. And, you know, the estimate will be higher. And you’ll you know, the bidders will be when down to a few. But yes, definitely you’ll see for particularly rare coveted trophy lots you can. If you have, you know, two or three people with very deep pockets, you know, for whom a large portion of the value of the wine is the ability to, you know, tell a fellow plutocrat over dinner that I have this and you don’t.

S6: Then there is no limit to how high I can go. And that’s how you get, you know, lots of bottles selling for comfortably, many high mid to high five figures and in rare cases, even higher than that.

S3: So how is that when when we have the answer discussion on this show, which really help her, in which she basically said, if you’re serious about buying investment grade, you want to be spending at least half a million dollars per piece. What’s the equivalent number for wine? What if there were a dollar amount where investment grade wines sort of begins and below which it’s not really an investment. It’s just like a crazy gamble.

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S4: I mean, again, it depends on how savvy I think I am. If I’m a really good, I would aim to start really low because the place where you get the eye popping returns, the kinds of returns that you know would be competitive with excellent performing stocks is when you managed. On a trend. So if you have a producer or a wine that previously was not seen as super collectible or investment grade and then it big and then it gets trendy for whatever reason and it’s in, you know, produced in some limited quantity, you know, then you can 10x 20x and I mean, certainly if you if you look at this, that what the wine investment funds tend to try and do is to like identify those those like 10 baggers.

S3: Is that is that how they try and is how they get the limited partners to invest in them? Definitely not.

S4: It’s what I think they should do. It’s definitely it’s definitely what I think has the most opportunity. You know, that sort of more venture capital type approach I think probably would ultimately have even after adjusting for risk if you’re diversified. You know, the best returns, but no wine investment funds will essentially be buying exclusively. First growth Bordeaux, which would be anywhere from three hundred dollars a bottle to sort of five thousand dollars a bottle. And Grand CRU Burgundy is which would be anywhere from sort of, let’s say, three hundred dollars a bottle up to twenty thousand dollars a bottle. And it would only be you know, there’s really there are not 20 producers in the whole world that are seen as sort of where there’s sufficient familiarity, tradition, demand, comfort with it as sort of a, you know, a cash like product that you can buy and sell on, you know, on demand. It’s not 20 producers that would meet that that standard. And when you’re bi and wine investment funds. So I said exactly. They’re like index funds. They’re buying a representative portfolio of the big names and hoping it goes up. They are definitely not opportunistically picking and choosing the way a venture capitalist would.

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S3: OK. So let’s just dive a little bit into these. Less than 20 names. It’s it. You said it’s exclusively Burgundy and Bordeaux. Ninety five percent. And and so in Bordeaux, it’s going to be Chateau Lafitte and places like that. And then it will be the five first gross.

S6: laffy Latour. Marco Mouton and O’BRIEN, OK.

S4: And there’s a lot of the three on the right, plus the three on the right bank. So you have Petrus luffler and Le Pen, if you can find it. Shevell BLOCK, maybe Diner, 10, 9 or 10 names in Bordeaux. That’s it.

S3: Several blown calls. The one from that movie, right?

S4: Yes. 1961, Shalva Blanc was featured in Sideways Shevell. Blunkett’s hideaway made my favorite wine.

S3: That was it. I remember this guy for several Blunkett’s. How much would a 1961? Several blonde set me back where I find one today?

S7: A couple thousand. One, two thousand. Depending on provenance and their model.

S3: And then there’s a few others in Burgundy as well. But they are in much smaller quantities, right?

S6: Correct. In Burgundy, I mean, it would be above all, Domaine Della Femina Conti, which is the most coveted and expensive wine in the world.

S4: And they make different wines from different vineyards, unlike in Bordeaux, where each producer only has one top wine.

S6: The most coveted vineyard from Romani County is is the Roman Conti vineyard. And that used to be ten thousand dollars a bottle regardless of vintage, and is now probably somewhere in the 15 to 20 range. But there’s a bunch of other producers in Burgundy that are now approaching D.R.C. at its abbreviated D.R.C. whose price heights so domain. Why leaps to mind?

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S4: Armand Russo Mooney a rheumy a those kind of names and anything from California. So that’s a different a very different market in California. You have what are called cult wines, which are produced in very small quantities and they’re typically distributed via a mailing list only. So you’ll have these very long waits of years or decades for people who sign up hoping to get an allocation of a couple bottles.

S6: They generally tend to be cabernet based. They tend to be unlike trophy Bordeaux, meant to be drunk young. They tend to be quite the riper, fruity or more voluptuous side argue. I would say less age where the obviously people who collect them wouldn’t agree. And yes, they definitely get up there in price. Certainly screaming Eagle, which if I’m not mistaken, is owned by by Stan CROAKY of National Football League fame.

S4: Screaming Eagle is yeah. Twenty five hundred three thousand dollars a bottle if you can find it. It’s a status symbol. But those wines, you don’t usually see them sort of. Held for decades in the same way, they tend to be sort of, you know, purchased as trophies and then and then consumed rather than retained as stores of value, the way you make money on called cabs is by getting on the mailing list and then flipping the second you get it and hoping you don’t get traced. So they don’t, you know, strip away your allocation. It’s not a buy and hold kind of thing.

S3: Now, is it fair to say the wines in general today these days generally there’s less vintage variation between them and they are more likely to be perfectly delicious when they’re young and there’s less need to wait years and years before you open them?

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S4: As with all these things, it depends on the grape and region and price point. The first thing to say is yes, wine is just better now than it used to be across the board. As with all things, there have been technological improvements. There’s greater now. There’s been until 20 years ago, like not everybody had perfect cell or hygiene. There were no farming techniques to deal with. Inclement weather were less sophisticated than they are now. So, you know, virtually everybody is making better wine now on average than they used to. You don’t need perfect weather to produce a great wine. It’s also true that certainly in Europe, presumably because of climate change, it is getting warmer and there there is less. There are certainly fewer cold. You know, rain wash out vintages where you just have to, you know, dump bird, declassify everything onto the bulk market. So in that sense, it’s good for producers. Now, there’s a risk that you get vintages that are too high, which is happening more and more. And they’re needing to adapt to that in various ways. And in the frontier of wine production is moving other ever further north to account for that. But yes, it’s definitely true that wine is is is is more consistent probably as well because of a changing climate. Now, to then get to the issue of how long you have to wait. Well, a third trend is that wine.

S6: In the past 20, 30 years, there’s been a trend in the fine wine world towards producing wines that are more accessible, young and obviously makes better commercial sense to not have to hold back inventory for that long if you’re the producer or to have to wait 10, 15 years to drink it to cellar and drink it. If you are the consumer and certainly in places like in California, definitely there’s been there was a very sharp move towards making wines that were more approachable at an earlier age in in the 90s and early 2000s. That has continued to this day. You certainly see that on the right Bank of Bordeaux, where they make Pramit primarily Marleau based blends. And you see that a lot in Italy, certainly in the Piedmont region, that makes grapes from nebbiolo, which is my favorite region. It used to be until the 80s or 90s that those wines were just tough as nails for 25 years. And now you can go drink in Barot Lower Barbara ESCO and visit the wineries and it’ll taste good out of the barrel. It’s just not would not have happened 20 years ago. With all that said, I wouldn’t.

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S4: There’s nothing there’s still nothing that compares to the beauty and joy of a complex, fully mature wine. And the wines that are still made with the stuffing to age, I think will eventually get to a greater place than than those that are designed to peak earlier. And I do think there’s a trade-off there. There are rare wines that might be wonderful in different ways that, you know, at every point on the aging curve. But in general, if you’re making something that’s more approachable young, it will not have the stuffing to attain the high the greatest of heights later on.

S3: There isn’t like the oversupply issue here. It’s not like everyone makes better wine that the supply goes up and that, you know, and it’s sort of just simple supply and demand terms drive the price down in a weird way. It seems to me that what you’re saying is that the supply of wines that are designed to get better over many, many years is going down. And that might be driving the price up because people are making less of that kind of one. I would agree with that.

S4: Definitely the number of certainly in California, the number of producers that I think are making 30 year wines or 50 year wines, it’s much smaller than it used to be. And that’s that’s unfortunate. But I also think that, you know, the producers are responding to market incentives just like everybody else does. And I think that the supply of wines that certainly the supply of wines that need a long time before they get really good if it’s shrinking, it’s because maybe either people are less patient than they once were or they now have better alternatives that they don’t have to wait for. So although they might be willing to be patient, they.

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S3: No longer have to be so one of things that you see in the art world or in like the cryptocurrency world is that you can go out and buy something for a thousand dollars and then wake up the following morning and it’s worthless. That’s that’s pretty hard in the wine world.

S4: It’s pretty easy if you expose your wine to you know, if if your fridge conks out in the middle of the summer or if you get too sloshed and, you know, break your bottle. I mean, it’s a physical product and you better have it insured. And that’s expensive. There are also definitely like any collectible. There are trends and fashions and fads in the wine world. And there are definitely wines that, you know, had their day in the sun and now sell for a fraction of what they used to. I mean, certainly I think there are a number of Australian producers that have that have suffered that kind of fate. There probably some California producers that that have as well. It’s for that the venerable established trophy producers in France. I mean, you know, certainly it’s the case that if you take the best known Bordeaux producer, which is Lafitte Rothschild in around roughly two thousand six to eleven, there was a huge surge in demand for it from Asia, principally China, as it became sort of a trendy gift and the price soared. And then after the Chinese government tried to crack down on gifting, that dried up. And, you know, the price of a 1982 two feet, which is sort of the benchmark vintage, fell from maybe $4000 a bottle to half that or a little less. But there’s a difference between a fifty five percent loss and the kind of ninety five percent loss you might see in in other industries or the other asset classes.

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S3: How much were the eighty two feet worth.

S7: They have to check. I think it’s like twenty five hundred bucks a bottle so definitely still not as high. It hasn’t regained those highs from 2011 but I mean it’s expensive bottom line, but it’s far from being the most expensive bottle of wine in Bordeaux.

S4: It is far from being the most expensive bottle of wine in Bordeaux only because there is quite a bit of it on the left bank in Bordeaux.

S6: What’s unique about Bordeaux in the whole wide world is that they can make these enormous industrial quantities of world class wines. I mean, I’m a firm believer that the great wines of Bordeaux are as wonderful as anything in the world, but if you have the cash, you can get your hands on them.

S4: I mean, it’s, you know, tens of thousands of cases of each one. And to get into the real stratosphere where you’re sort of pushing over 5000 dollars a bottle, you need to have a scarcity factor that you’re not going to see with, you know, any Bordeaux after sort of nineteen fifty or so. It has to be on the way. You get up to that up to that level is if you get the part of the value of my having it is that I get to tell you that you can’t have it. Zero sum positional. Good thing.

S3: So I have a bet with Ben Horowitz about bitcoin and cryptocurrency, which is going to come due in about four years. And it’s the second bet I did. I had with him the first bet I won and I won a pair of alpaca socks and high roller for the for the second bet. He’s like, we’ve got to we’ve got to be betting more than just a pair of alpaca socks. And so. I’m not quite sure how this popped into my mind, but I decided that we were going to the stakes of the bet, at least partially the stakes of the bet were going to be a hundred year old bottle of Madeira. Oh, cool. Is Madeira collectible investment grade wine like or is that just like a weird outlier?

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S8: It is.

S4: It’s a niche market. I mean, there’s a lot of people out there buying Bordeaux and Burgundy. Madeira is a really particular taste. I will admit, despite some effort, I have not been able to teach myself to love it. And that’s, you know, for ancient rare Madeira. And you can get 200 year old Madeira without great difficulty. It is designed to live forever. There are people who will who will pay up for it, both as a beverage and as a piece of history. But it’s a really tiny share of the wine market. It’s I personally don’t know anyone who collects it, but I do know that such people exist.

S3: Do you think that my like hypothecated bottle of Madeira that one of us is going to owe the other one is the safest store of value in the crypto currency?

S4: I store of value. Sure. I don’t. I mean it. Given that it’s Madeira and lives forever. It probably won’t ultimately go to absolute zero, whereas there’s no guarantee that cryptocurrencies or whether it’s any given one of the entire asset class. There’s no guarantee that at some point in the medium to distant future, anyone will assign any value to them at all. With Madeira, there will be at least one person in the world who will want to have that experience, or at least he’ll want to buy the bottle just because he owes it to me to settle a bet. That is a very distinctive investment strategy.

S3: But I hope it works out for you, and I can assure you that if I win, which I have every intention of doing, yeah, I’m going to drink that shit.

S4: Well, I might ask you to invite me to a different wine tasting than Rosenheck.

S9: Thanks very much for joining us. Thank you for having me. Great talking.