As someone who enjoys investing in alternative assets, specifically wine, I like to think about what makes an alternative asset great and can this greatness be taken away from the asset class as a whole.
One of the main selling points on fine wine is that it is uncorrelated to the stock markets. What would need to happen for this to no longer be true?
Is there a scenario where wine is correlated to the stock market? Why are these assets non-correlated to begin with.
From what I can tell most assets that do not have correlation to the stock markets around the world tend to have two traits. One is that they are real assets that are not based upon revenues and instead based on their “collectors value” (how rare they are and the supply/demand for that item). The second is if the asset is difficult to trade, it must have very low liquidity.
Crypto falls into this category, and we can see that the easier access people have to buy and sell Bitcoin the more it seems to follow the market. At the moment of this writing, Bitcoin and other high market cap cryptos have had very high correlation with the US Stock Market. With crypto, it seems to follow markets just in a very extreme manor. Instead of going up 3% it goes up 25% and instead of going down 10% it crashes 70%.
There are times with there is almost zero correlation but the broad trend seems to be that it follows the bull and bear markets around world economies. As people start to understand the fundamentals of the asset, this may change, but the currently trend is pretty significant correlation.
With that said, wine tends to have very little correlation. Like any asset, prices tend to fall when the world is experiencing a recession, but this asset has dipped very little compared to stocks over the past couple bear markets, 2009 and 2020, as well as others across time.
But I wonder if that is because it is a fairly illiquid asset that takes significant time, energy, and resources to liquidate (sell). Another reason is that currently many wine investors are very wealthy individuals, so they don’t necessarily need to panic and sell their real assets if they need capital during hard times. They can instead take out bank loans or sell off much more liquid investments, like stocks, bonds, or even just use their cash.
With platforms like Vinovest implementing trading into the wine ecosystem, and the barrier to entry becoming much lower, allowing people with less than $100 to invest in wine, will this “illiquid asset” turn into a highly liquid asset? Will these non-millionaires start to panic sell their wine on platforms like this, causing wine to become more correlated with the broad trend of the world?
If this theory is true and people will buy and sell wine very easily along with their crypto and stocks, the fine wine market then has a very likely chance at no longer being a great “uncorrelated” asset and instead just becomes another asset that follows the typical market patterns.
With all that said THIS IS NOT A BAD THING. First off, if that ends up being right wine could have much better performance because of the easy access to invest in wine. As more and more investors get into the wine world we could see decades or centuries of unprecedented returns.
More correlation means more people are investing in wine, so there may be higher beta, but the returns will be better. Volatility isn’t a bad thing if it’s volatile upwards.
Warren Buffet talks about this often. You want your assets to have volatility because it allows you to find good deals as well as make high returns.
The last few years have been great for wine investing and I believe that is because young people are looking for other places to invest their money and because it is now easy to do, wine investing looks very compelling.
We could see many investors getting involved in wine, and because supply is limited there may be an absolute BOOM for fine wine. Returns may be absolutely insane for the next decade as people now have the option to invest 5% of their portfolio in this alternative asset, and actually have personal ownership of the bottles. You can get involved yourself without the help of a wine professional if that is your desire.
With ease of access and it being a “new” method of investing (many lower income people didn’t have access until recently) we should see a swarm of people coming into the wine world. With higher than average returns recently more people will be drawn.
Money speaks to people. Wine investing is currently making a lot of money.
Will it become more correlated over time to the traditional markets? Maybe.
Is this a problem in the long run? No! It should be great for investors who are deciding to get into wine investing.
These barriers to entry that are being desolved thanks to innovators like Vinovest should cause more people to buy fine wine, higher percentages of portfolios to be invested, and massive returns of the next few decades.
I believe we may be entering a WINE BOOM and I’m investing accordingly.
Just like with bitcoin, correlation and volatility isn’t bad if your returns are greater than the risk you are taking. Wine appears to have a very high Beta, just like BTC does and it couldn’t be more exciting.
It’s also important to note that there may not be more correlation even if all of this is true. If people start to panic sell certain bottles of wine, investors will jump on the opportunity to get a rare bottle for under market value. This could cause wine prices to stay relatively stable because wine cannot go out of business and more cannot be created.
When the stock market crashes, many companies go out of business and lose their job. Wine on the other hand will contain the exact same amount of liquid and their rarity will continue.
With that said there may also be jumps in wine price because people tend to want to get money out of the stock market and into alternative assets during times of uncertainty. Real estate, gold, bitcoin, wine, art, etc… are all compelling assets to own when you’re not sure which companies are going to survive a recession.
I’m investing in wine. I’m also investing in stocks and bitcoin.
I think wine will out perform the stock market with the primary reason of it being easy to access in 2022.
I also believe that it will stay uncorrelated, but I have had thoughts like the ones above and would love to know your opinion on this thought experiment.
I love uncorrelated assets. But even more so, I love making strong returns. I believe fine wine investing will contribute to those strong returns.
I’m confident that wine will stay uncorrelated, but it may not!
Thank you for reading!
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