Fine Wine: A Fine Goal-Based Investment? American Association of Wine Economists 10th Annual Conference University of Bordeaux, France Thursday, June 23, 2016 Fine Wine: A Fine Goal-Based Investment? Paul J. Merton President & Founder Ethos Wines Group, Inc. Email: pmerton@ethoswinesgroup.com

Introduction & Overview Past studies have suggested that fine-wine investing makes sense as a purely financial investment. Dimson, Rousseau, & Spaenjers (2015) calculate the real financial return (for UK investors) of Bordeaux Premier Cru at 4.1% net of storage costs, 5.2% for equities and 1.5% for Bonds, between 1900-2012. This extensive research is a proxy for “Fine Wine Investment” 6/23/16 ©Paul Merton

New View on Fine Wine Investing Consider three investors with different goals for investing in fine wines: 1. Pure Financial Investor’s goal is to maximize his financial return; focusing only on earning the highest expected return for a given risk exposure. 2. The Epicurean Investor’s goal is to maximize the likelihood of owning specific wines solely for his own consumption. 3. The Hybrid Investor’s goal is a mix of Epicurean consumption and the Financial’s highest expected return. 6/23/16 ©Paul Merton

1. The UK Financial Investor Searching for the highest Sharpe ratio ✗ Fine Wine is .21 and UK Equities are .30 However his goal is in £ not wine bottles ✗ The transaction cost of 15% reduces the expected financial return 6/23/16 ©Paul Merton

The Real Financial Return ✗ His goal has not been achieved 6/23/16 ©Paul Merton

2. The Epicurean Investor The Epicurean Investor who invests in wine is buying his risk–free asset. Everything ≠ Risk Free is a risky investment; including wines he does not want to consume. ✔His goal has been achieved. 6/23/16 ©Paul Merton

3. The Hybrid Investor Will receive the same poor financial return on wines, just as the Financial Investor Will invest the same risk free investment as the Epicurean Investor 6/23/16 ©Paul Merton

‘I DON’T WANT OUR WINE IN FUNDS’ “You can’t block that from happening but you can try to control where the wine gets sold. I want to do everything I can to discourage speculation and am trying to prevent our wines from ending up in investment funds.” “It’s important that our wines are opened and enjoyed rather than traded. Above all wine is about pleasure.” Stéphanie de Boüard, managing director of Château Angelus Shaw, Lucy. “DE BOÜARD: ‘I DON’T WANT OUR WINE IN FUNDS’” The Drinks Business. Web. 24 February, 2016. 6/23/16 ©Paul Merton

Wine Pooling Can take advantage of economies of scale & leverage expertise “Buy and Hold” transactions only; the drag from selling is too high. Minimal additional expenses, no fees Must be wary of diversification 6/23/16 ©Paul Merton

Conclusion Three investors, with different goals will have different outcomes by investing in the identical investment. Fine Wine is a poor investment for Financial Investors, a good investment for Epicurean Investors, and mixed for Hybrid investors. Wine Pooling is a possible alternative and perhaps a topic for the American Association of Wine Economists 11th Annual Conference in Padua, Italy 2017. 6/23/16 ©Paul Merton