How to Avoid Wine Investment Scams

With another story in the news of yet another fraudulent wine investment company disappearing without a trace, leaving customers high and dry, we thought it would be good to highlight the less savoury side of Wine Investment and provide some helpful pointers. More specifically, we’ll be addressing:
  1. The Wine Market.
  2. Market Members.
  3. Information is Key.
  4. Spurious Claims.
  5. Making the Most of Your Investment.

Bernie Madoff being led away by the authorities after being found guilty of a running a giant ponzi scheme. Wine scams are not as long lived or widely reported as Mr Madoff”s.

 The Wine Market – An Unregulated Market:

To recap, by unregulated market here, we’re following the FSA definition of an unregulated market, as one that is not covered by Financial Services and Markets Act 2000. The long and short of this is that, as wine is not a financial retail product, anyone can sell it or offer advice on it. However what one cannot explicitly do is offer specific investment advice on a particular wine, “this wine will make you X amount of money” or “investing in these wines will get you 300% returns” (which we look at in more detail below). Thus wine-investment is quite a grey area. For example we can recommend the 2001 Cos d’Estournel as an under-priced (v.s. its peers) vintage of Cos d’Estournel, and say that it’s price has risen from £650 two years ago to around £875 today, but we cannot recommend that it will continue this rise in price and be, say, £1095 in a further two years.

Market Members – From Funds to Fraudsters:

As we’ve briefly touched on before, the wine market has evolved from solely consisting of traditional merchants/negociants, to now include traders, brokers, funds and, to refer to them under their colloquial name, bucket-shops. Definitively a quick run-down of the distinctions between them for the uninitiated should show the differences, however the line between their distinct roles is blurred as many of the below trade and broker wines depending upon market conditions.

  • Traditional Merchants or Négociants have long established and storied histories, often with exclusive agency agreements with producers, usually making 10-40% margin in doing so.
  • Traders buy wine on the grey market, from other traders or brokers who have access to reserve stock, generally making 10-20% margin.
  • Brokers offer to place wines on their client’s behalf, taking a similar fee to the trader in doing so.
  • Funds buy wine from all of the above for a defined period of time and then have to sell the wine, sometimes at a loss.
  • Bucket-shops/Boiler-Rooms, such as the firm recently mentioned in the news, often don’t buy wine, offer imaginary stock to customers at 20-60% over the market price and then disappear with the proceeds. To avoid these two market members the key is information, and this is where Vinetrade can help.

Information is Key – Know your Wine Price:

As with everything in life, the more you know, the better position you’re in to make a decision. If someone calls you and offers you wine unsolicited at a certain price saying that this is a “one time opportunity”, the first thing you should do is check the “real” market price. Vinetrade tracks the real market price daily, on hundreds of investment-grade wines, and so will give you a clear indication if you’re likely to be paying more than you should. Secondly, check the company’s history, ignore testimonials on the website, and go straight to the official statistics provided by Companies House, or in an easier to read format, via Duedil. If the seller’s website states that they have years of experience and have been trading successfully for an equally long time, but the company was only incorporated last year, alarm bells should be ringing. A further check is to see what other companies the Director of your seller is also a director of. If they’ve been involved with either several dissolved companies, or offering land-banking schemes, you should likewise be wary.

Spurious Claims – A Case Study:

One of the most misleading themes that we often see on wine-investment guides or websites is the reference to the 2008 Bordeaux vintage, and particularly to the almost unbelievable price rises that occurred post En Primeur release. Often a website/guide will include a handy breakdown of the top wines of the 2008 vintage En Primeur release price, including Châteaux Lafite, Mouton, Carruades de Lafite and Pavillon Rouge, to name but a few and then their price in the following years.

Now, the key point is that these wines were all released mid-recession, when all of the financial markets were in turmoil, and the Bordelais and Chateaux owners were terrified that no one would buy their wines, especially from a less than stellar vintage. So as any distressed seller does when they have to sell their wines, they dropped the prices to pre-2005 levels and hoped that they would sell. Looking back at historic 2008 release prices from merchants, you could’ve bought a case of Mouton for £1950 and a case of Lafite for £3375; quite unsurprisingly the savy buyers out there snapped up these wines and made a killing as the markets recovered due to the stabilising effects of the G20 and QE. The other crucial point about 2008, specifically with regards to Château Lafite and Chateau Mouton was their decision to capitalise on the Chinese love of number 8, with both Châteaux adorning their bottles with Asian oriented designs. Wines that were released cheaply and then subsequently rose in price, spiked even further, Mouton 2008 rocketed almost over night from under £5000 to over £8000. The crucial point with all of this is that it was a one off event, driven by the economic turmoil and the huge rise in demand from the East.

Finally, concerning misleading claims revolving around the 2008 vintage, one often comes across handy price graphs showing the meteoric rise of the top 2008 releases inferring that all wine investment behaves like this. However, what they nearly all fail to show is the post April 2011 market correction – Mouton 2008 is currently trading at around £3600, and Lafite has fallen from its high of £15000~ to today’s £6100~.

 

Chateau Lafite 2008

The post April 2011 correction was not kind to those wines that had risen to previously unheard of prices: Lafite 2008 crashing back to earth with a bump.

 

Making the Most of Your Investment – due diligence, prudence and timing:

Clearly, if you bought wines from the 2008 vintage En Primeur, at release prices, and still haven’t sold your wines, you’re nonetheless in a better position than many who have invested in other assets. With the rate of inflation of under 5% average over the last 3 years and with only one year’s storage costs, the rate-of-return on your investment would be significantly pleasing. The gist of this, is that all investments merit prudent research and timing is crucial. Whilst I doubt we’ll see the likes of the 2008 vintage, and all it’s knock-on effects, for a while, stranger things have happened. Upon researching this post we came across a rather amusing post that in hindsight could not be more wrong.

Additionally, one should never forget the importance of context when looking at fine wine’s investment history/potential. Lafite 1982 has performed far better than anyone ever expected, least of all I suspect Chateau Lafite themselves,  but the fact that it would have offered 900% investment return in 2009, had one bought in 1983, does not mean that all Bordeaux performs in such a stellar way; to wit, such headlines are appallingly misleading.

Ultimately, wine is a proven asset class with regards to investment for reasons that we looked at in our previous series “Is Fine Wine A Good Investment”, either on its own or as part of a diversified portfolio. To avoid the dangers of companies like the one listed above the rule is simple: Do not buy from them – for if it sounds too good to be true it certainly is. If you like the idea of investing in wine Vinetrade is uniquely placed to help you, with regards to wine advice, storing your wines, supply at some of the keenest prices and helping you rationalise your investment without loosing a substantial amount in fees upon exit.