The Wine Collector

1. 1947 Cheval Blanc, 3L, $135,125
2. 1961 Latour, 4.5L, $135,125
3. 1978 DRC - Romanee Conti, 6L, $124,425
4. 1961 Petrus, 4.5L, $123,375
5. 1865 Lafite-Rothschild, 3L, $111,625

The two biggest factors affecting this decision are:

1. Your bank account – Financial resources are usually the biggest constraint. But if money isn’t an issue, do you really care if you buy too much when you can usually sell any “excess” later for a profit or at least get your money back?
2. Availability – No matter what you may want to buy, some wine is so scarce that what you can find becomes the limiting factor.

Assuming you have the money and the access, then other consideration come into play:

1. Diversity of tasting experiences – There are far more wines worthy of your attention than you’ll ever get a chance to try. Why load up on any one of them?
2. Learning through experimentation – Many wine collectors like to experience tasting a wine at various stages of its evolution (recommended).
3. The wine’s drinking window – The longer the wine is expected to develop or remain drinkable, the easier it is to “safely” buy more.
4. Your personal drinking window – The younger you are, the more you’ll likely be alive and healthy to drink the wine you’re buying.
5. Method of consumption – When you open fine wine, are you having friends over and drinking multiple bottles at a time? Is there a minimum quantity you’d like to have available when you serve it?
6. Corked bottle risk – It would be incredibly disappointing to cellar a wine for years only to find that it’s flawed upon opening one of a limited number of bottles.

My personal preferences

1. The maximum amount of any wine that I’ve ever purchased is 2-3 cases, usually of first-growth Bordeaux or Yquem which I felt safe buying for the long haul.
2. I was comfortable “buying a drinking option” that purchasing “excess” quantities provided me. I subsequently sold off the excess and made a nice profit but investment gain wasn’t my goal at the time of purchase.
3. Considering my strong desire to experience tasting a broad spectrum of wines together with my consumption profile, 6 bottles is now a normal purchase for me and a case is my upper limit.

Bottom line: Analyze your personal circumstances with the above framework and determine what makes sense for you.

1. Replacement value – This is what you’d use to establish the insurance value of your collection. Retail prices are the basis of valuation because they represent the most likely price you'd have to pay to replace a bottle.
2. Sales value – If you plan to sell part or all of your collection, this estimated value (excludes any third-party fees) uses auction prices as the basis of valuation because they represent actual transaction values (inclusive of buyer's premiums paid).

1. Recent results are more representative of current values than older results and are therefore weighted more heavily.
2. To ensure a representative value, we use a minimum number of auction results when available -- this may sometimes require using older results.
3. In the event that our minimum number of results is unavailable, we may base our estimated value on as few as one auction or auction results up to eight years old.

1. Retail prices plus – When there’s no retail price but there’s an auction value for a wine, we’ll estimate a retail price by using 125% of the auction value. This is consistent with an average higher price level achieved at retail for the more convenient method of buying.
2. Auction values plus - When there’s no auction value but there’s a retail price average for a wine, we will estimate an auction value by using 80% of the average retail price. This is the reciprocal of the rationale in the “Retail prices plus” scenario.

Establishing the current value of your wine collection is more difficult than valuing a public securities portfolio. Even relatively illiquid securities have a quoted bid-ask price which can be used as an “arms-length” fair market value. Valuing wine is more complicated because:

1. Every combination of a wine name, vintage, and bottle size represents a unique item to be valued (even if one ignores condition issues) which generates an enormous number of items.
2. The produced quantity of any item is often quite small, which limits the potential transactions which can be measured to benchmark a value.
   
3. Transaction data is not centralized in one place. The best sources are wine search engines like Winesearcher.com for retail asking prices and Vinfolio’s Wine Price File for major auction house transaction data.

The difference between transaction prices and asking prices

Normally, the basis for establishing fair market value for any item uses transaction data as this means that the buyer and seller ultimately agreed on a price. Retail prices shown on Winesearcher.com are asking prices and are usually higher than completed transaction values from auctions.

A retail asking price is not a confirmation that a wine is selling. Moreover, some retailers routinely start with a high price and then gradually reduce the price over time if a wine does not sell. Therefore, at any given time, one has no idea whether the retail prices quoted on Winesearcher actually represent prices at which a wine is being successfully sold (which is the true test of fair market value).

How does one reconcile these differences given that all wine is not sold at auction and retail data is more abundant? In part 2 of this topic, I’ll address how Vinfolio has tackled this issue in our free VinCellar online cellar management software.

Perhaps they think their homeowner’s policy already covers the risk (generally not the case) or that the risk of accidental loss is lower than other items they insure (it may be but so is the premium rate).

What wine insurance should cover

1. Damage/loss caused by power outage or mechanical breakdown of refrigeration equipment.
2. Accidental breakage
3. Theft, fire, and water-related damage – Read Alder Yarrow’s recent post at Vinography on a $500,000 wine theft a few days ago in the San Francisco Bay area.
4. Wine stored at multiple locations (including off-site storage facilities where industry practice is not to insure customer-owned wine)
5. Damage in transit
6. New purchases at full value (immediately)

Selecting a policy: what to look for?

1. No deductible
2. Blanket coverage instead of itemized
3. Premium rates in the 0.4%-0.5% per annum range with potential discounts for alarm systems etc.
4. A reputable insurance company – The big players are Fireman’s Fund, Chubb, and AIG.

Disclosure: Vinfolio has a cross-marketing agreement with Fireman’s Fund. If you’d like to find out more about Fireman’s Fund’s wine insurance offering, click here.

Risk factors

There’s nothing wrong with spending large sums of money on wine, either in large single purchases delivering an “instant” cellar or at a more measured pace. However, moving quickly and spending freely increases your risk of:

1. Being overcharged
2. Buying wines that are mismatched to your palate
3. Being duped into buying expensive fakes or poor condition wine

Everyone “backfills” their cellar to some degree

When I got the wine collecting bug over a decade ago, I was impatient and sought to “backfill” my cellar with mature vintages of “ready to drink” wine while simultaneously purchasing new releases to put away. While I probably spent more in any single year in that first year or two, I made individual wine decisions in conjunction with advice from my trusted retailer at the time.

The right way for new collectors to proceed

1. Get professional advice
1. Choose a retailer with whom you can develop a trusted relationship (see my post “Criteria for choosing a good wine retailer”), or
2. Hire a wine consultant. However, keep in mind that with fine wine, it’s all about access to supply which a retailer is more likely to have. Selecting a “dream list” of wine is meaningless unless the wine can be sourced on a cost effective basis.
2. Define your taste preferences - You need not be a wine expert to answer some basic questions about likes and dislikes. Or, if your base of wine knowledge is too narrow, ask your retailer/adviser to put together a mixed case or two of wine of the desired quality level from various regions and comprised of different varietals. Then open them all with your adviser at one sitting to generate feedback to drive more educated selections. (Schedule a party for your friends afterwards to finish off the wine.)
3. Provide budget guidance and ultimate goals – What’s your comfort zone on the price of a single bottle of wine? What’s your target average bottle cost? Do you have a bottle count objective (like filling the cellar of a newly purchased home)?
4. Set the pace – At what pace would you like to proceed? In general, better wine tends to sell quickly when it becomes available. Also, some wine may need to be sourced in Europe which will extend delivery times. Therefore, very short timelines may make it difficult to optimize selections and pricing. Allowing even six months is sufficient to accomplish most objectives but if you’re committed to wine collecting, make the advisory relationship a permanent one.
5. Authorize discretionary buying by your retailer/adviser – When desirable wine becomes available, permitting your retailer/adviser to make instant decisions on your behalf provides you with the highest chance of buying it before others. It’s also a lot more convenient than responding to frequent emails or phone calls.

Vinfolio’s free collection-building advisory service

Vinfolio offers its own collection-building service which assists wine collectors and enthusiasts through the process I have described above. By meeting certain initial; purchase minimums, our personalized planning services are free, including even face-to-face meetings in your home. Learn more about how we do it. Why not have your own “wine guy” to provide ongoing personalized advice?

Why you should care

If you want the freedom to buy wine from licensed parties in any state, with the associated convenience, greater selection and competitive pricing, then you need to pay attention. State-specific battles of one form or another (read Tom Wark’s Fermentation blog post titled “The Big Lie” about Virginia Wine) are occurring in many states including Texas, Illinois, and now Oregon. You are likely to be directly affected.

What you can do

Become vocal with your state legislators or let the battle be fought for you by supporting national efforts like the non-profit Specialty Wine Retailers Association (SWRA) whose goal is to create a national marketplace for direct-to-consumer wine sales.

For example, would you be prepared to make a small financial contribution to the SWRA (collected by your retailer) as part of the shipping charge for each case of wine shipped to you? I’d love to hear your thoughts in a comment.