ADDING LIQUID ASSETS TO THE PORTFOLIO: ATTIBUTES OF INVESTMENT-QUALITY WINE

You've developed quite a love for wine. The initial casual curiosity has opened the door to a whole new world of varieties, vintages, flavor nuances, appellations and wine scores. You've discovered what people see in a $50 bottle of wine and why they drink that when there are plenty of good choices under $15. And you've watched wines that you picked up a couple years ago for (what seems now like) a song get really pricey. While you're not sure you're ready to move all your assets into wine (a fun thought actually) you'd like to know what to look for in wine so that your multi-hundred dollar wine purchases might actually go up in value over time. Well, let's enumerate the important properties of investment quality wine. At the most basic level, we're simply looking for a wine in which the demand/supply ratio will be higher in the future than it is when it is purchased, with some pretty high degree of certainty. But there a quite a few details that go into this seemingly simple formula. Factors to consider are what we'll be discussing in this article.

ABILITY TO IMPROVE WITH AGE
Any item that does not hold up over time is a lousy investment. After all, you never hear of someone investing in fresh produce or airline seats. But the fact remains that perhaps 97% of all wine made will not improve over time, and will begin declining, regardless of storage conditions, as soon as it leaves the store. Another 1-2% will improve somewhat for a year or two but will then begin to decline. That leaves right around 1% of all wine made as really having aging potential.

Which wines improve with age? All wines that age well have four important characteristics:

1. They are full of chemical compounds that have been shown to turn into other complex compounds with positive flavor and aroma characteristics over time. These are generally found in the skins of certain red grape varieties, most notably Cabernet Sauvignon, Syrah, Pinot Noir and to a lesser degree Merlot, Zinfandel, Nebbiolo and others. Some of these compounds are also found in the skins of a few white varieties, especially Chardonnay, Riesling and others.
2. They have one or more components that act as a preservative to slow the breakdown of the flavor/aroma-producing compounds. These components include especially acid, alcohol and sugar. In the acid department are both tannic acids (similar to those in tea) that come from the skin, seeds and stems of the grapes and oak barrels, and the fruit ("malic") acids that come from the grape juice itself. To further complicate the acid equation, some regions allow the addition of acid. A secondary fermentation stage called "maloactic" is sometimes used (but not often for investment wines) to turn the malic acid into the milder milk ("lactic") acid. Alcohol of course forms naturally during fermentation as the sugars in ripe grape juice are converted by yeast. The higher the initial sugar level, the higher the potential alcohol, up to a point dictated by the the type of yeast used. Alcohol is also added to fortified wines. In dry wines, all sugar is converted to alcohol during fermentation but grapes with extremely high sugar-to-water ratios (such as those that are partially dehydrated by drying, botrytis or freezing) will not ferment dry, the alcohol level rising high enough to kill the yeast before all of the sugar is consumed. Likewise, the addition of alcohol to fortified wines kills the yeast, leaving behind much of the sugar.
3. They have very intense fruit and flavor character. The flavor characteristics that we think of as "fruit" are delicate and deteriorate over time. Preservative compounds can slow, but not stop, this deterioration. In order for wine to retain these very pleasant and eminently "winey" characteristics over time, there must be a lot of them to begin with. These characteristics may be masked by tannins and other compounds when the wine is young, but they must be there if the wine is to be judged age worthy.
4. They must be balanced. Each of the characteristics listed above must be present in proper proportion to one another. Since aging wine is a giant (if very slow) conglomeration of chemical reactions, each of these reactions must be at a point where the result is judged pleasant by a human being for quite a period of time. Therefore, too much tannic acid relative to the fruit content will never result in a good wine, as by the time it has broken down the fruit will be gone. Too much acid relative to the sugar (in a sweet wine) will result in the wine always being judged "shrill" whereas too much sugar will create a heavy, "sticky" and overly cloying wine. Getting this balance just right is a great part of the winemaking art.

Many of the characteristics of an ageworthy wine are expensive to produce. For instance, oak barrels cost in the many hundreds of dollars each and really only add tannin to wine for two years or so. Likewise, getting a lot of fruit character into wine means limiting production of an acre of ground, often by discarding some grapes. High natural sugar means discarding some of the water, greatly reducing the amount of resultant wine. There are only limited places where the climate and soil conditions produce grapes with the best characteristics and most of these have been discovered and the prices bid up. Even with everything "chemically" perfect, a great wine still requires a lot of experience and "artistry" (we won't call it luck) on the part of the winemaker. And the best winemakers are in short supply and high demand and thus command decent salaries.

The characteristics of good aging wine often (but not always) reduce its short-term drinkability, the tannins that will produce a great older wine often overpowering it in youth, for instance. Thus a winemaker that sets out to make a great wine is looking at a very formidable investment, that might reduce his ability to sell the wine in the short term. He has no guarantee of producing the great wine in the long term in any case.

VISIBILITY IN THE WINE COMMUNITY
To be deemed investment grade, a wine needs to have a reputation before it ever goes into the bottle. The winery and the vineyard site are the primary two determinants of the fame that a wine commands, with the former carrying more weight in the New World and the latter being the more important consideration in the old. The reputation of the winemaker is the third major factor, and somewhat unfortunately, the least of the three. Only wines that come from a source that has developed a reputation for producing investment-quality wines is really an investment, regardless of the fundamental quality.

THE "EXPERTS'" OPINIONS
Let's look again at the last statement in the last section. At first blush, it sounds like a Catch-22 situation. If a wine is does not have a reputation for being an investment quality wine, it can't be an investment quality wine. That's not an absolute statement. There are of course mechanisms for heretofore unknown wines to work their way up to the pinnacle of fame and demand. After all, Petrus and Colgin were once relative nobodies in the wine investment world. By consistently producing wines of exceptional quality, a wine can gradually work its way up the ladder. A little help from the wine press is also needed. A few consecutive years of ratings in the "exceptional" range by the big names of the wine world can do wonders for a wine's collectibility. There is also something of a wine underground (okay, I'll call it a grapevine) which allows the word to spread about great low production-high quality wines.

This does mean that a wine investor needs to play the numbers game. For better or worse, a score in the mid-to-high-nineties (or especially that magical perfect 100 points) from Robert Parker instantly instills on a wine and a winery a tremendous amount of visibility and demand. A good example of this is Chateau Montrose 1990. A second growth Bordeaux with a good, but not top, reputation, Ch. Montrose commanded release retail prices around $40 back in the early nineties. The 1990, even with the vintage's early indications of greatness, was commanding a retail price not much above this until the release of Robert Parker's 100 point score. Within a couple weeks, the wine had jumped to prices double that or more and even so, was almost impossible to find. In the following five years it has appreciated by another factor of 3 or 4. While the 1989 (also a great vintage) is trading at around $100 a bottle, the 1990 is closer to $300. I would argue that Mr. Parker's rating is the major difference in the prices commanded. Don't believe me? Try to buy a 1994 Graham's Port. You'll find plenty of other Graham's vintages and plenty of other great 1994 Ports. But with that highly coveted 100 point score, the 1994 is double to triple the price, if you can find it.

Other experts play a part in the number's game, but to a much smaller degree. The Wine Spectator magazine, Wine Enthusiast, Wine & Spirits, Food & Wine, Stephen Tanzer and others all have an influence on wine prices. So do ratings at wine competitions like the Orange County Fair. But look to Mr. Parker (the other one - not me!) for the real "golden number". It may not make sense, but you can bank on it.

LIMITED, BUT SUFFICIENT PRODUCTION
Here is another conundrum of wine valuation. There needs to be enough, but not too much, of a wine for it to be a true investment.

If there is so much of a wine made that it will never be scarce, or at least considered scarce in its drinkable lifetime, it is not a good investment. A good example of this is Rosemount Shiraz or the upper end releases from Gallo (gasp!). Both are truly ageworthy, wonderfully well-made wines with plenty of recognition but neither will ever become an investment quality wine. Why? There is simply too much made. Now by too much I generally mean in 50,000+ cases, but the exact amount really has a lot to do with reputation and publicity. Certainly a first growth Bordeaux or Opus One can still be an investment at higher production levels than any Pinot Noir or Burgundy. So in general, less is more as investment, up to a point.

The other side of this equation is less intuitive. Too small a production of a wine also disqualifies it as an investment. It might still jump up in value, but its lack of "liquidity" prevents it from being a prudent buy. There are plenty of experimental wines made in tiny (sub 100 case) amounts by the top names in the industry of extraordinary quality. They sometimes gets lots of press and often command huge prices at release. There are also special bottlings with artistic etchings, special labels and signed bottles that carry initial values far beyond what they will carry in the future. Look at wines specially bottled for charity auctions, with themes like "James Bond" or celebrity labelings. Look also at individual barrels of wine that are auctioned off with the promise of custom labeling. If you like to invest in art or very thinly traded stocks these might be for you but there needs to be enough of a wine to have several change hands every year on the auction circuit for there to truly be a market.

REPUTATION OF THE VINTAGE
Just as the producer, vineyard and winemaker's reputation have direct bearing on the value of a wine as an investment, the reputation of the vintage as a whole has a tremendous effect. In fact, a poorly made wine from a great vintage often carries a higher value than an exceptionally well made wine from an otherwise poor vintage. Example? The 1983 Margaux is an exceptional wine that happens to be from an average ((or charitably "forgotten") vintage. Its value is a third to a half that of the 1982 Margaux, which it equals or evens surpasses in quality. The difference is that 1982 was a universally acclaimed vintage in which many other Bordeaux producers made extraordinary wines, whereas 1983 saw many mediocre wines. Margaux 1983 has suffered the reverse halo effect not through any inherent weakness in its composition, but in those from others. This is another of the unfortunate-but-true wine rules. It does leave the door open for latter-year bargain hunting. Just as fundamentally sound but forgotten stocks rise late in a market swing when all the better-known stocks have been bid up to impossible levels, there are cycles where neglected great wines get a late-in-life burst of value when everything else has been bought up. Now could well be one of those times.

DEMAND AS A "PRESTIGE" DRINK
Winemakers and winery owners try all kinds of tricks to instantly jump into the spotlight and create a collectible wine. The most tempting, and unfortunately often the most successful way to develop a reputation as the best is charge an outlandish amount for a wine. It gets press and gets people wondering what could possibly be worth so much. It becomes a self-fulfilling prophecy when that extremely high-priced wine becomes a status symbol. Ever run into someone who "only drinks Dom Perignon Mimosas"? How about all the fuss when U.S. wineries broke the $100/bottle price barrier for a new release Cabernet? It seems like only yesterday that Ridge Winery got all the press when they brought out the first $50 new release Cabernet (their Monte Bello). And remember how much that first case of Opus One got bid up to in the hoopla of "I can outspend you" at first release? This is a factor that someone investing in wine needs to take into account. When a very high price for a heretofore lesser known wine makes the headlines, does it herald a step into a higher tier of fashionability and collectibility or is it simply misguided grandstanding? Opus One overnight bought itself a place in the world's great "First Growths". The Ridge Monte Bello, also a consistently great wine, is at best "Second Tier". More on this later.

OTHER FACTORS
Many other factors effect the collectibility of wine. Let's briefly touch on a few.

Format - Bottle sizes other than the standard 750ml often have special collector's values. It is a fairly well-proven point that the wine in larger bottles ages more slowly, and thus has a longer "plateau of perfection", that smaller bottles. There are often very few made, as they require special handling in each step. Finally, large bottles, are the epitome of conspicuous consumption and the "there's plenty for everyone" mentality that really makes an upscale wine event. For all those reasons, "big bottles" usually command a very substantial premium (even measured per ounce) over standard bottles. Half bottles might also carry a premium (again per ounce) as they give someone the opportunity to taste a rare wine for less absolute dollars than opening a full bottle.

But beware. In some cases, unpopular sizes actually trade at deficit (in dollars per ounce) to standard "fifths". There are a few reasons for this. Some wines do not make for volume consumption. Sauternes and Ports, for example, are not something that one generally drinks in large quantities, so big bottles of these might go begging for buyers even as 750's (and even 375's) sell briskly. Likewise small bottles, especially of older Cabernet-based wines, may be suspect as having begun to decline earlier. A less frequently considered factor is that the corks for big bottles are usually hand made and the corking and sealing is often done by hand. Big bottles also tend to be more difficult to ship, store and pour properly. All of these factors could result in poorer quality wine coming from a big bottle. Not often - but it happens.

Condition - A major factor to consider in the valuation and collectibility of wine is condition. By far the most important determinant of value is whether or not there are signs that the wine has been damaged. Obvious leakage around the cork, a cork that protrudes above the neck of the bottle or a low fill level all greatly reduce the value of a bottle as they indicate that the bottle may have been heated or air has entered the bottle. Avoid these bottles if at all possible. If you find one in your collection - drink up!

A secondary concern in condition is esthetics. A clean, undamaged label and capsule are the ideal. Small nicks, marks or discoloration is to be expected with older bottles. Very damaged or mildewed labels or torn or corroded capsules reduce a wine's value. But if you're buying the wine to drink, and there is no sign of leakage, these can be a good buy. And there's nothing like a really old-looking bottle on the table to get people's attention.

History - A key determinant in a wine's perceived condition is its provenance - its ownership and storage history. Wine from special collections, be they a famous movie producer or a famous Scottish Castle, carry value beyond the mere bottle value. If you buy a wine like this, make sure you get written documentation of its provenance. Beyond this, knowing that a bottle was well cared for since production is the primary reason for finding out its history. Where possible, look for a wine that has come recently from the producer, or has a had one owner who kept it in temperature controlled storage. Where a wine has been imported, look for an import tag from a noted reputable importer to ensure that temperature controlled transport was used.

By the way, most wines auctioned by Brentwood Wine Company fall into these categories. If you'd like information on a specific bottle you've won, or are thinking of bidding on, let us know.

SOME COLLECTIBLE WINES - WE START OUR LIST
We've now categorized what makes a collectible wine. Can we start naming and placing them? Sure. People have been doing this for centuries, well before the famous Bordeaux ranking of 1855. The fame of certain producers and vineyard sites has a tradition going way back into the Middle Ages and the fame of the Roman's Falerian comes down to us in poetry and song.

Instead of belaboring selection criteria any more this month, I think I'll just start my list and ranking. Any way I do this will be controversial and I specifically plan to add and move wines around based on input and research. This then, is meant to be light, debatable and fluid. I've also decided to rate wines somewhat like the stock market, with the top tier wines equivalent to the Dow Jones Industrial Average Stocks (the ultimate blue chips), a second tier equivalent to the S&P 100 and a third tier equivalent to the MidCap 400. Finally, we'll have a group of hot, trendy wines (high tech stock equivalents?) and wines to watch. Yes, I will get specific with criteria for these different groups, but not this month.

So here is the start of

DAVE PARKER'S RANKING OF COLLECTIBLE WINES:

First Tier (Maximum 30)

Ch. Latour
Ch. Mouton-Rothschild
Ch. Margaux
Ch. Haut-Brion
Ch. Lafite Rothschild
Ch. Petrus
Ch. Cheval Blanc
Ch. Ausone
Ch. D'Yquem
Domaine Romanee Conte (all vineyards)
Domaine Leroy (Grand Cru vineyards)
Paul Jaboulet-Aine La Chapelle
Guigal (La Landonne, La Mouline, La Turque)
Opus One
Caymus Cabernet Sauvignon Special Selection
Heitz Cabernet Sauvignon Martha's Vineyard
Robert Mondavi Cabernet Sauvignon Reserve
Quinta do Noval Nacional
Penfolds Grange

Second Tier (Maximum 100)

Third Tier (Maximum 400)

Fourth Tier

Hot List - Trendy wines of the moment

Colgin-Schrader
Turley - Zinfandels and Petite Sirah

Wines to Watch

DAVE'S TOP 10 SIGNS THAT YOUR WINE WAS A GOOD INVESTMENT:
10. You can trade single bottles of wine you bought five years ago for full cases of the latest release of the same wine.
9. Your spouse is no longer allowed to "just grab a bottle" for dinner or a gift.
8. The wine steward at your favorite french restaurant always personally opens the bottles you bring from home and never refuses your offer of a taste. Oh, and he always seems to waive the corkage fee.
7. Recently you've been considering replacing the door of your wine cellar but the companies that make what you're looking for only sell to banks.
6. The number of bottles of wine that you can only justify drinking at special events outnumbers all the special events you're likely to have the rest of your life.
5. Your local charity wine auction coordinator has your phone number memorized.
4. Your favorite winery calls you to help fill in gaps in their wine library.
3. The insurance on your wine collection exceeds that of your house, cars and life combined.
2. You keep getting calls from some guy at Christies who wants to take you out to lunch. In London.
1. Wine doesn't stay around long enough to consider selling because you just can't help yourself when the urge strikes to drink some.

Do you have any questions or comments about wine collecting or investing? E-Mail us at dave@brentwoodwine.com.

May every drop of wine that touches your lips be great.

David Parker

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