Difficulties Valuing Fine Wine

Perceptive collectors possess an expert understanding of the market that interests them.  Others, however, form this impression founded on an unsure foundation.  One common mistake in understanding the market for fine wine is extrapolating from a given benchmark whose underlying data simply does not apply.  Merriam Webster defines benchmark as “something that serves as a standard by which others may be measured or judged.”  We submit that using existing benchmarks to value fine wine can easily mislead collectors.

In the fine wine trade, the UK trading platform Liv-ex is often used for a shorthand of where the market is going.  In fact, they bill their Fine Wine 100 Index as “…the industry’s leading benchmark.”  This is at best an exaggeration.  Repeat it often enough, however, and the public will believe you; today movement of this index is often cited as an indication of the state of the fine wine trade.  There are several problems, however, with taking this figure as a “benchmark”.

The Liv-ex Index measures changes in prices recorded in their private member-only trading exchange based in London.  The members of this exchange are largely U.K. traders – it is not an exchange that is open to the general public, and it is geographically skewed to give undue weight to the U.K. trade.  Once London was the center of the trade in fine wine.  While it is still important, it is slightly anachronistic to make this generalization today.

What is popular in London is not necessarily as sought-after in Hong Kong or in New York.  Specifically, Liv-ex gives great weight to changes in the prices of Bordeaux wine, a category that is deeply unfashionable among collectors in other parts of the globe.  Dig more deeply, however, and one sees that this effect is compounded by the Liv-ex way of counting “wines”: when they refer to the “Fine Wine 100” it takes different vintages as being distinct wines, thus ten vintages of Lafite-Rothschild and ten vintages of Mouton-Rothschild are taken as twenty wines.  If you’re not tracking Left Bank claret, those twenty wines won’t tell you very much.

It is also interesting to note that Liv-ex doesn’t track actual prices at all – it tracks the midpoint between the offer to sell and the offer to buy.  For heavily-traded wines, members doubtless transact at this price, but for less frequently-traded wines, it is a construct that may or may not reflect actual transactions.  At the end of the day, a collection of prices offered among merchants has little relation to the value of a given wine in the marketplace.  Since private clients cannot trade on Liv-ex, the only possibly valid valuation is based on historical auction prices.

Furthermore, the wines that compose the Liv-ex index are chosen predicated on two criteria – that there is a market for them (among the English trade), and that the “wines must have attracted critical acclaim from a leading critic (a 95-point score or above)”.  Both criteria distort the index to the extent that a market does not track with London or “a leading wine critic” such as Robert Parker.  In the secondary market for wine there are four drivers of value: quality, condition, provenance and rarity; this last is quite important.  Does the fact that it is very rare disqualify a wine such as Roumier Musigny from being important?  And why should anyone’s scores on a 100-point scale bear on questions of value at all?  No other alternative asset classes where aesthetic judgements come into play such as art or jewelry or collectible automobiles are subject to this stipulation.

Liv-ex is an important number, but it is far from being the “benchmark” that its creators believe that it is.  If not Liv-ex, then what?  Other indices such as those used on the website WineMarketJournal.com steer clear of the difficulties with Liv-ex, but in my view, because of the fragmented and regionalized fine wine market it is necessary to look at the secondary market in some depth in conjunction with the broad swings (and some specific examples) in the primary market in order to develop a robust idea of value.  There simply isn’t an algorithm that can give a quick up-or-down evaluation of where the market is or what a specific wine is worth.

Shortcuts to a full valuation can easily fail to tell the whole story.  Understanding the market means being able to integrate the implications of provenance, condition and rarity of a given wine, and the benefit of this perspective is precisely what constitutes a professional valuation.