Fine Wine – Value Investment or Speculation?
As fine wines show a steady gain in popularity in the financial arena, the question and concerns remain – is wine a value investment or pure speculation? To correctly determine the categorization of luxury wine as a financial instrument, one must define the aforementioned terms.
The difference between a value investment and speculative investment lies in the disparity of the variables; mainly, the reward/return on investment (ROI), the risk and the investment time period. Naturally there are exceptions like with any rule, and some investments cannot be clearly classified as one or the other, however in most cases the difference is quite distinct.
What is a Value Investment?
A value investment is made with an eye on long term gain. Even where day to day fluctuations can result in gain or loss, over the long run a solid investment will yield marginal yet consistent returns. A value investment may not return the astronomical profits possible through speculation, but the returns, however small, are steady and meant to yield an incremental gain over a longer time period.
Consequently, a value investment also carries less, or minimal risk. The risk is carefully managed and minimized with an eye on medium to long term gain, even if that means the rate of return is decreased. It is not unusual to hold on to value investments through financially uncertain times; if the investment fundamentals remain strong, short term market fluctuations cannot sour the value investment, which is geared for a longer time frame.
Value investments require thorough research and knowledge of business fundamentals; factors like market position and market strength, financial strength and history, future trend analyses and so forth. A value investment is managed with utmost care and understanding of the market and the investment itself, to maximize returns. A prime example would be Warren Buffet, who only invests in companies he fully understands – and has remained invested in some of his companies for over a decade.
What is a Speculative Investment?
A speculative investment is made with an eye on short term profits. Speculation investments are usually made to exploit market inefficiencies and fluctuations, with potentially staggering profits and an accordingly high risk factor.
Speculation investments are short term investments. The usual time frame for speculation investments are anywhere from a few minutes to a few months. For example, speculators will often bet on stock prices rising and falling; essentially the investor will speculate that the investment in question will double or triple or multiply in value in the short term, after which the investor will look to ‘cash in’ and move on. For example, day traders will make hundreds of trades a day, making sure to leverage risk for the short term reward.
Therefore, speculation investments also involve a high level of risk. With the potentially stunning profits achievable through speculation investments, comes a high level of risk, which is why many conservative investors will shy away from this form of investment. The “high risk – high reward” principle defines a speculative investment; the higher the risk, the higher the potential reward. The key to speculation investments is taking calculated, leveraged risks with potential for enormous rewards.
Speculating also requires an instinctive feel for the markets. Predicting market swings and fluctuations is key for a speculative investor. Understanding what might move the market over the short term is an important skill, as the speculator will need to act fast and base decisions not only on the knowledge of the market, but a ‘feel’ for how the market will develop.
Please note that in the financial world, nothing is for certain. The financial crisis of 2008 clearly demonstrated how not even the oldest, most elite financial institutions are immune, with many of the world’s most powerful banks crumbling under the pressure.
Fine Wine – Speculation or Value Investment?
In terms of wine – is it a value investment or speculation? Based on the aforementioned factors, fine wine is classified as a value investment, albeit an alternative one.
Fine wine has shown consistently high returns over the last 3 decades, and a staggering rate of capital appreciation. Luxury wine is a medium to long term investment, usually mapped out for a 3 -10 year period.
It is possible to speculate with wine investments; investing in En Primeur wines (not yet bottled and still in the barrel) with the assumption that the final wine upon release will be a winner.
Finally, investing in wine requires a thorough understanding of the market to reap the rewards. Not all wines show great investment potential, and choosing the right case of luxury wine is crucial.
In conclusion, although fine wine can be a speculative financial instrument, it is classified as a value investment. Like with stocks and shares, without knowledge of the market, it is pure speculation. However, by understanding the dynamics of the wine market, coupled with the right advice, qualified brokers and sound financial planning, fine wine is an alternative investment with staggering financial potential.
Bordeaux Traders - The Fine Wine Investment Brokerage GmbH
Mooslackengasse 17, 1190 Vienna
Phone: +43 676 490 51 19