And don't be conned
Investing in fine wine can be immensely profitable,
and this asset class deserves consideration for your portfolio. It is a more complex
market than some other types of liquid assets; however, there are pitfalls that
you need to avoid. Rather than risk buying cheap wine with no value, potential
investors should get to know
the business first. Here are some questions to
help you make a successful venture without getting conned.
Image credit: alphacell / 123RF Stock Photo
Is the
company legitimate?
Make sure that any company you’re considering
investing with is a legitimate operation. They should have a real physical
office address, not just a mail drop or call answering service. Visit the
office in person if you can reasonably do so.
The company’s legal structure
should be transparent, with names of officers, lawyers, and auditors. All
documentation should be issued by a firm authorized by the appropriate
government body (in the UK, the Financial Conduct Authority). If these pieces
are in place, you know you’re not dealing with a fly-by-night scam operation.
What’s
their management style?
Not every legitimate company turns a decent
profit, so you need to validate their management and performance before
investing. Look for a management team, to avoid the risks when just one or two
people run an operation. Look for a clearly delineated approach - what do they
invest in and why? They should have a strategy they can explain easily. Finally,
look for a track record of at least five years of acceptable returns.
Are
there any conflicts of interest?
Make sure that the interests of your investment manager
are fully aligned with your own interests. If they have other business
dealings, then it may create a conflict. If you’re considering purchasing
through a wine merchant, consider the fact that their interests may be diametrically
opposed to your own - they make more money by selling to you at inflated
prices.
What
and where is their portfolio?
Make sure that the company has physical possession
of all the wine in their portfolio, and find out where it is kept. All wine
should be stored in a bonded warehouse with proper temperature controls. If you
are able to visit the warehouse in person, that is ideal. The wines held should
fit with management’s investment approach. Less risky portfolios will contain
the top chateaux from Bordeaux, and wines less than 25 years old. Higher risk
portfolios will contain wines from other areas, or wines that are very young or
very old. All wines in the portfolio must be insured for full replacement
value.
How are
the holdings valued?
Incorrect or inconsistent wine valuations can
drastically impact your financial results, so it’s crucial that all valuations
be carried out by a recognized, independent authority. Liv-ex, an industry exchange for fine wines,
is a recommended source for reliable pricing. All wines held must be valued and
reported on regularly.
What
are the fees?
You can expect to see costs of buying and
selling fine wines as well as costs for managing the holdings. Your total costs
should not exceed industry norms for similar investments. A good rule of thumb
is that you should pay no more than 5 percent upfront fees and 1.5 percent
annual fee for management. There may also be a performance fee on returns over
a certain amount. All fees should be transparent,
and clearly explained before you make any investment.
If you're a rookie investor with little
experience in the field you are advised to invest in "liquids", sufficient
volumes of supply and liquidity wines are excellent choices. If you're choosing
to spend
money on wines with less financial liquidity
(en-primeur for examples) the risk of getting conned will increase, are you willing
to make a sensible investment? Although wine can often be a tricky business domain,
it's also an extremely rewarding one.
You don't have to be wine aficionado to make
money; you just have to know
people who speak the wine language. They
will help you learn the business, understand the market, and invest the smart
way. Never forget that in this industry seeing
believes, so the company you have chosen to do business with should have
enough palpable proof to convince you they're the real deal.
About the Author-
John Smith is the author of this article. He is a freelance writer
who likes to write about current investment trends and financial issues.
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