AMERICAN ASSOCIATION COUNCIL FOR WINE economists determine the value of wine as a investment.
Abstract
This article presents three arguments for why the value of wine as an investment good usually has been underestimated and argues that wine investment is a good value proposition. It is argued that all public vintage wine index underestimate back the typical investor receives, the comparisons using pre-tax returns to overestimate the value of standard financial assets in relation to wine, and wine investment offers good value in term
1. INTRODUCTION
Broadly seen suggests a return to the wine literature that wine investment is not a
profitable activity. See Fogarty (2006, p. 544-5) for a summary table describing the functions of a return to the wine literature. The work presented in this article shows that the existing literature has underestimated the potential value of wine investment.
It argued here that the value of wine as an investment good has been underestimated for the following reasons. Firstly, because the quality of a certain vintage of wine is largely known in advance, the wine investors do not invest in poor-quality vintages. This represents an index of wine prices based on a return to all vintages of wine underestimate returns achieved by the typical wine investor.
As asset return comparisons are made in the literature are usually made with a return to a particular vintage index, these comparisons understate the returns achieved by the typical wine investor.
Secondly, in some countries, is the return to wine is generally not taxed, while the return to standard financial assets taxed.
As the comparisons of asset returns is usually done in the literature comparing of
pre-tax returns, these comparisons underestimate the value of wine
investment.
Thirdly, is an appropriate framework for assessing the value of wine as an investment class is not a comparison of risk and return profile of wine compared with other asset classes, but rather an assessment of the role wine can play in extending the Markowitz (1952) Investment Efficient Frontier .
Even if the return on wine are lower than the standard financial assets and the risk is higher if the particular wine in an investment portfolio reduces the portfolio’s risk, the wine is considered a good investment class.
This paper proceeds as follows. Section two explores and comments on some of the specific additional costs that are investing in wine. Section three discusses in detail the three proposed reasons to believe that the existing literature has underestimated the potential benefits of wine investment, and presents examples that illustrate points made.
2. A little wine SPECIAL COSTS
Those considering wine investment for a number of costs that are peculiar to wine
investment. The most obvious of these costs, storage costs, but transaction costs when
trading wine is also slightly higher than the transaction costs on trading standard financial assets:
Wine must be stored in a cool, moist, and preferably dark place where the daily temperature changes are minimal. For those who do not have a wine cellar, which is most people, there are several options: have one custom-built basement excavated, install one or more climate and humidity controlled wine cabinets, or use and pay for commercial storage in a purpose-built wine storage facility.
The best wine brokerages will offer an integrated investment in storage costs, which denies the biggest cost factor in relation to the overall investment package. Obviously these companies are dealing with rather than those that do not offer this, so clearly there is a higher ROI.
Yet despite these extra costs, this paper argues that the wine may still be a good, valuable addition to an investment portfolio. The reasons for this are explored in detail in the next section.
3. Three reasons to reconsider the increase in value INVESTMENT
Proposition A: The quality vintages can be identified in advance and people considering wine investment only have quality vintages.
Although work is presented in relatively recent times has formalized the relationship between weather and wine quality (Ashenfelter et al, 1995;. Byron and Ashenfelter, 1995, The Vittorioand Ginsburgh, 1996) in a way that the economy and health care professionals can understand, the basic weather conditions that lead to good wine has long been known to viticulturalists. See, for example, Gladstone (1992) of historical, technical and statistical data on wine and climate conditions.
Yet even those who have never picked up a vineyard or a textbook economics wine paper know the wine’s quality varies between vintages. For example it is inconceivable that anyone interested in wine investment would not be aware that 2005 was a great vintage in Bordeaux, just as it is equally impossible for anyone to not know 1998 was a great vintage in Australia’s Barossa Valley and Goonawarra region.
The popular press does not report on exceptional vintages, but more generally, they are interested in wine understand that the quality varies between vintages, and because they know quality varies each year, they use vintage charts to inform their wine purchases decisions.
For Australian wines are vintage charts and rated wines in the:
Langton’s – from the famous wine critic (s) Jeremy Oliver, author of Australia Wine Annual, and James Halliday, author of Australian Wine Companion.
Investors undoubtedly also consult a vintage chart before deciding to invest in a particular vintage. Transcripts and Australian critics are very regarded.
The existence of vintage chart alone does not justify moving away from a general price index for wine to one based on selected vintages. It is only fair to move to a select vintage wine vintage chart index because essential information is published in advance when the wine is available for sale. In this sense, the stock market and the wine market is basically different.
When a company lists on the stock exchange, there is much uncertainty about its future profitability. Whether management has the skills to generate above average earnings are largely unknown. When a wine first appears in the secondary market, there is very little uncertainty about whether the wine is above average, below average, or mediocre. The quality of the vintage is largely determined by prevailing weather conditions that year. Like fine wine, sold a few years after the grapes have been harvested, the wine in bottles, and vintage charts published, the quality of a certain vintage are known before purchase. All but the most determinedly ignorant about wine investors will not invest in poor vintages. As such, when it comes to wine, the return to a general underestimate the wine index returns the average investor is likely to receive.
It is worth noting that there is no wine investment advice in published or online sources to suggest holding an investment portfolio of all wine vintages. Wine and investment decisions or recommendations are always discussed with respect to each individual vintage. This feature of the wine market did not appear to be reflected in the return to wine literature.
For stocks and bonds, it is appropriate to use, for comparative purposes, a return to an appropriate broad market total return index. Ensure the above average performance in the longer term, for most investors, is simply not possible.
Were it possible to consistently achieve above average returns to active fund managers consistently outperform the market. But as Sharpe (1991, p. 7) explains is a return to the market, the weighted average of returns to the active and passive segments of the market, and that the passive return equal to the market return, the average return for an actively managed fund must also correspond to market return. Empirical work generally supports the view that a return to active management, once the charges taken into account, is not better than the market return, and may be noticeably worse. (Frino and Gallagher, 2001; Gallagher and Jarnecic, 2002).
Proposition Two: Investors are dealing with after-declarations are not pre-tax returns. In general, the return to wine is generally not taxed. Comparisons are made using pre-tax returns will therefore underestimate the interest in wine to potential investors.
If someone considered to be trade wine as an ongoing dedicated business
activity, revenue from capital gains on sale of wine is treated as income and taxed. For most people gain on the sale of wine will fall under the exemption from tax collectors on capital gains, and so gains on the sale of wine is not taxed.
This is not the case for a return to stocks and bonds. Dividends generally attract franking credits, depending on the marginal tax rate affects the investor to compensate all or part of the individual’s tax liability.
Capital gains on shareholdings, subject to capital gains tax. There is no tax associated with holding bonds, although the actual rates vary depending on the proportion of income and capital gains and the share that represents an income stream.
Although investors are primarily concerned with after-declarations, discussion of the return on investment in general takes place in the form of pre-tax return. That the fiscal conditions, individuals vary markedly, the probable cause debate is focused mainly on pre-tax returns.
Yet affect tax return for each asset class differently.
With relating to standard financial assets, reduce taxes substantially return to the investor. In comparison, the return to wine is generally not taxed. As such, it is important comparisons of risk and return profile of wine, compared to standard care financial assets, made using after-tax returns. Comparisons are made using pre-tax returns systematically underestimate the value of wine investment.
CONCLUSION
Ever ago Kraska (1979) first asked the question of whether wine should be saved and savored, the main theme of the return to the wine literature has to say wine should be enjoyed and will not be saved. This paper argues that the real value of wine as an investment good in general has been underestimated because: (i) the quality vintages are identified in advance and investors are just quality vintages, (ii) of wine investment is usually a special tax status in these countries and (iii) including wine in an investment portfolio can reduce portfolio risk. Wine should always enjoyed, but those who choose to both save and enjoy the wine may make a wise decision afterall.
Australian Wine Index (AWI) was opened to respond to the increased demand for fine wine in the Asia Pacific region. AWI is dedicated to sourcing the most sought after wines found in Singapore.