In the stock market crash of 2008-09, devastated boomers were no doubt tempted to drown their sorrows by imbibing the expensive wines stored in their cellars during happier days.
That would have been a very bad idea, fresh investment evidence suggests.
Fine wine in an investment portfolio not only increases returns in good times, but reduces risk during financial distress, two Swiss economists conclude in a new paper, “Raise Your Glass: Wine Investment and the Financial Crisis.”
In economic downturns, such as in 2007-09, “the defensive characteristics of wine are most pronounced,” Philippe Masset and Jean-Philippe Weisskopf write.
“Wine's performance has declined less than other assets.”
Using price data from 144 U.S. auctions from 1996 to 2009, the two economists put together wine subindexes that tracked different price categories. They compared the performance of their broad wine index with the Russell 3000, a measure of 3,000 U.S. public companies.
It turns out that the various downward spikes in other asset categories did not pop the wine bubble.
“Neither the terrorist attacks in New York, nor the burst of the Internet bubble nor the [U.S.] boycott of French goods after the Iraq invasion have had much effect on wine prices,” says the paper published by the American Association of Wine Economists.
While the Russell index fell heavily during 2001-03, before recovering again, the general wine index grew steadily from 1998-2005, and actually doubled from 2005 to 2008.
The authors concede that from mid-2008 to early 2009, the wine index did decrease by 17 per cent, but other financial assets stumbled harder. The Russell index lost 47 per cent in that period.
The finer the wine, the stronger the performance in bull markets, with the index led by top vintages. The paper points out that in 2003, a bottle of 1982 Lafitte-Rothschild sold for an average $490 (U.S.) at auction. Six years later, it went for $2,586, for an average annual return of 70 per cent.
But these high-end vintages priced above $200 also fell more during crises, the paper says.
One might quibble with the study's provenance – after all, the authors are from the Lausanne Hotel School and University of Fribourg, not far from the hotbeds of French crus .
The authors emphasize wine is a diversification play, particularly for aggressive palates. But for another way to play this market, consider the man who, despite some rocky moments recently, is still the world's greatest investor.
Warren Buffett's Berkshire Hathaway Inc. recently disclosed that it has bought a regional distributor of wine and liquor in Georgia and North Carolina.
Mr. Buffett said it would be a platform for further acquisitions of high-end drink distributors.
And he probably didn't need an economists' report to make his move.
