Investment alternatives

Equities are expensive and you won’t earn much on bonds right now, so how are you supposed to generate returns these days?
Interest on the average internet account has fallen below 1%, 10-year bonds are generating just 0.6% annually, and for years stock prices have been rising faster than underlying earnings, so it was bound to go pear-shaped at some point. Where exactly are you supposed to find a decent investment return these days?

Personally I’m not so concerned about equites, but the question remains a topical one: where can you find even slightly respectable returns? Equities, real estate, perhaps a hedge fund, private banking or bank loans? For many people this is all far too abstract, which begs the question as to whether there are any good alternatives.

Enter today’s graph. Postage stamps, art and wine. No fancy terms there, so everyone understands what we’re talking about and it’s easy to invest in these things! Or at least, that’s what this graph appears to suggest. What it shows is how the value of each category moves in comparison to traditional investments like equities and bonds. But take note: the graph is expressed in real returns (measured in pounds), which explains why your bonds would have generated negative yields over the 1940–1980 period.

Meaning? Wine, postage stamps and art have generated higher real returns than bonds and cash! What’s more, investing in wine is a whole lot tastier than dumping your money in an internet savings account, right?

But before we all run off to the supermarket to stock up on wine, there are few things you should bear in mind. Firstly the line in the graph. According to the report I took the graph from, we’re talking about the price movements of five specific Bordeaux Premier Crus, for which prices have been recorded since 1900. So not exactly a wine you can just grab from your local supermarket shelves.

But of course that’s not the only problem. What this line shows is the price movements of those specific wines, but that is not the same as your returns. This might sound like word games so I’ll explain myself using another example. Suppose for argument’s sake that the red line shows the price of green beans, recorded since 1900. Obviously price movements are not equal to your returns: the green beans you bought in 1900 are long past their sell-by date in 1904, and you won’t be able to sell them at the same price as fresh beans. So the price movements tell us little about the returns that you might have enjoyed: you’d probably only have made a profit if you had continually sold old green beens and while buying back new one’s.

Even though wines have a longer shelf life, it’s not very likely that a 1900 Bordeaux is still drinkable today. Besides it’s seriously doubtful whether you could sell it at anywhere near the price suggested by the red line. And even if you could, that still doesn’t show your returns: you will have had to store the wine for 115 years in a perfect cellar and the costs of that cellar will have to be factored into the calculation.

Given the perishability of wine, the way its price moves is quite different to the returns that can be made. To some degree wine is similar to the commodities market: you can show price movements, but if you actually invest, you have to take the fact that you have to roll over positions into account. In other words, you sell older wines and buy newer ones to replace them. This rolling return may be positive, but it can also be negative. And this graph does not show that dynamic.

Now, I can understand that this is not sufficient to discourage the true wine enthusiast from investing in wine from now on. But it does require some effort: attending auctions, capital investment in a cellar, a steely self-control – not unimportant. However, the upside is that you’ve then managed to turn your hobby into a form of investment. Sounds good, doesn’t it? And I wouldn’t want to put anyone off, but I then came across the following bar chart:

Although wine is not at the bottom of this list, with an average negative ‘return’ of 2% over the last three years, it’s not exactly a top performer… I’ve placed the word return in quotation marks simply because it’s not entirely clear what I’m looking at here. We’re talking about the Liv-ex 100 index, which even has its own website. According to the description, it factors in not only five Grand Crus, but also the 100 ‘most sought-after’ wines. On Bloomberg, the index is described as a weighted combination of ‘price, production and scarcity’, which makes it even more obscure in my eyes. The graph of this index looks like this:


And indeed, if we are to believe this proxy, things aren’t going so well in the wine market at the moment. After its peak in 2011, the index has gone one way –down.

But not to worry, for as the bar chart suggests, there are plenty of other alternatives on offer. How about classic cars! Hmm, perhaps it’s a good time to get my mother’s old Peugeot valued…

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