A Keynesian Theory of Investing in Fine Wine

Fine wine has been a hot alternative investment category this year, as Blake Gray recently reported in his Wine-Searcher column. Fine wine investment is a very specialized field and anyone who is interested in taking the plunge is advised to get acquainted with research on the topic, especially including the reports from Liv-Ex, a leading fine wine trading platform.

Drinkers, Collectors, Investors

I divide the world of fine wine buyers into three over-lapping groups: drinkers, collectors, and investors. It is important to “know thyself” in this taxonomy. We are drinkers here at the Wine Economist household and, although we have a few special bottles squirreled away to share with friends at the right moment, it isn’t a collection or investment.

I have only a few friends who are really fine wine investors, although many of the collectors I know sometimes speak about their collections in investment terms. The key is what you do when a particular wine has reached its market peak. Do you drink, sell, or hold?

An investor sells, of course, and takes the profit if there is one. A collector holds because now the wine is ever more precious as a collectable.  A drinker has no decision to make — the wine is already gone. What do you do?

I was introduced years ago to a wealthy man who generously endowed scholarships at my university. He liked to talk about wine and economics, so we got along very well. “I never pay for my wine,” he once told me. For every case of fine wine he bought to drink he also bought one with the clear intention to sell for profit. The investment gains paid for the wines he drank and, since he sometimes shared bottles with us, I cannot criticize his logic!

Drinkers buy what they want to drink, obviously, which is a matter of personal taste. Collectors buy what they want to hold, which can be influenced by many factors including status and rarity (with a nod to economist Thorsetin Veblen, I have called this “conspicuous non-consumption”). What should investors buy? This got me thinking about John Maynard Keynes, one of the 20th century’s most influential economists.

Keynes and the Beauty Contest Dilemma

Keynes was an investor and a wine lover as well as an economic thinker, but I can’t find evidence that he invested in fine wine. From what I know he was more of a drinker, like me. When asked late in life if he had any regrets, he replied that he regretted that he did not drink more Champagne.

It is possible Keynes’s advice about investment in general can provide some useful insights into fine wine investment. Keynes once compared investment in the stock market to a kind of contest that was popular in the Sunday newspapers of his time. The newspapers printed pictures of a number of women and asked readers to rank them according to their attractiveness — a classic “beauty contest.” Times were clearly different — I cannot imagine such a contest today, can you?

The winner of the reader contest wasn’t the entrant who got the answer right — because there was no right answer. Beauty is in the eye of the beholder or, as an economist would say, de gustibus non est disputandum. No, the winner was the person whose choices came closest to the choices of all who entered. The wisdom of crowds in action!

So, Keynes noted, while a naive person would just choose the photo that seemed the prettiest, a clever person would try to guess what others would do and rank them accordingly regardless of personal preference. And a strategic person would assume that others were clever and so take this into account.

The winner, according to Keynes, is the person who best guesses what other people will think other people will do. And that, my friends, was the foundation of Keynes’s investment strategy, or at least the part that he discussed in one of his books. You don’t buy shares in the company you think will be most successful, you look for the stock that other people (the ones who will buy the shares from you at a profit) will think other people (the ones who they hope will buy the shares from them) will favor.

Other People’s Money

Do you see how this analysis applies to fine wine investment? Wine drinkers buy what they like and so are likely to make wide-ranging purchases since wine offers such great variety.

Wine collectors sometimes buy what will impress their friends and try to guess what they might be and so their purchases are likely to have a much narrower range.  Wine investors, however, make purchases based on what they think other people will think other people will do with their money and so are likely to focus on a relatively small number of “blue chip” wines — those that are most likely to meet the “other people – other people” criterion.

Many have noted that the range of investment wines seems to have broadened to include some American and Italian wines in addition to top tier Bordeaux, Burgundy, and Champagne. That is a good thing, since investment markets should be broad and deep if they are to serve real investment needs by providing liquidity and the opportunity for diversification.

Otherwise investing in wine or anything else is a little bit like investing in emerging economy stock markets, which are often dominated by a small number of equities and experience boom-bust price behavior driven by liquidity dynamics.  If your 401K account includes investments on the Turkish stock market, you know what I am talking about.

Bottom line: I am not going to advise you whether to invest in fine wine or not or which bottles are most likely to pay off. But this advice I give freely: wine investor, know thyself!


Sue and I wish all Wine Economist readers a happy holiday season!

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